03-31-02 | Printable Version

Lee Poised for Additional Acquisitions

Lee Enterprises' acquisition of Howard Publications is what the Wall Street types like to call a "transforming event" for a company. In a single stroke, the transaction will increase the size of the company by nearly 50 percent and expand its presence into new regions of the country.

But the seeds of this transformation were sown two years ago when Lee's board made the decision to sell its broadcast television unit, focus on newspapers, and bring in a new management team following the retirement of longtime executive Richard Gottleib.

The new management team — many of them brought in from outside the company, even from outside of the industry — is now firmly in place, and the company is preparing to build on the larger platform that the Lee-Howard combination creates.

Its acquisition of the geographically diverse dailies owned by Howard Publications will provide Lee with opportunities to build clusters of publications in new areas of the country.

Despite the nearly $700 million price tag for the group, Lee’s leverage will be only slightly above average for publicly traded companies in the industry. Lee spent $440 million of its approximately $500 million in cash, with the rest coming in new bank financing. The cash had been generated by the sale of its broadcast television division.

Based on the latest balance sheets available for the public newspaper companies, Lee’s debt will represent approximately 2.5 times EBITDA, while the average for the rest of the industry is about 2.3 times EBITDA. This provides Lee with ample capacity for additional deals. Lee executives expect to work down this new debt quickly.

Already Lee, through its Madison Newspapers partnership, has agreed to buy the daily Beaver Dam (WI) Citizen and complementary non-daily publications. This acquisition increases the size of its south-central Wisconsin cluster, which includes the Madison daily, dailies in Portage and Baraboo, and a number of community weeklies and shoppers.

Investors like the strategy. After falling approximately 1.5 percent on the day of the announcement (February 12), the stock has rebounded and at press time was trading 4 percent to 5 percent higher than its pre-announcement price.

The new team at Lee is led by Mary E. Junck, who had been an executive and publisher with Times Mirror and Knight Ridder prior to joining Lee in 1999 as executive vice president, chief operating officer, and a member of the board of directors. She became president in 2000, chief executive officer in 2001, and chairman in January 2002. Her previous experience includes stints as publisher of the Baltimore Sun and the St. Paul Pioneer Press.

Junck brought in a new chief financial officer for the company, Carl G. Schmidt, who had been CFO at Johnson Outdoors, a publicly traded $400 million spin-off of SC Johnson and producer of branded outdoor recreational equipment. Schmidt joined Lee in May 2001 and has become a key player in determining the strategic direction of the company.

The top management team in Davenport is rounded out by Gregory P. Schermer and Michael E. Phelps. Schermer can’t be classified as a newcomer. He joined Lee as corporate counsel in 1989 after rising to junior partner in a Washington, D.C. law firm. He led Lee’s online expansion in 1998 and became a member of the board of directors in 2000.

Phelps, a former newspaper management consultant, joined Lee in 2000 as vice president for sales and marketing. He will have expanded duties as an operating vice president with the Howard acquisition.

About half of the Howard newspapers are in regions of the country where Lee already was doing business. The other half are in six states where Lee had no presence. Lee now publishes newspapers in 18 different states.

Most of the Howard newspapers are in stand-alone markets with an average of more than 22,000 daily circulation. (The average for Lee’s other 28 dailies is 23,000.) The two exceptions in the Howard portfolio are the Munster (IN) Times and the Oceanside-Escondido (CA) North County Times, both located in exurban markets with approximately 90,000 daily circulation.

These two operations are similar in size to Lee’s largest daily operation in Madison, Wisconsin, which it owns in partnership with Capital Times Co. Both the Munster and Oceanside newspapers are the end product of a consolidation of more than one community newspaper into a single regional daily newspaper.

Robert Howard began his ownership of newspapers as a partner in several of the Scripps League newspapers. His company’s ownership of its first daily newspaper dates back to 1961 when he acquired the Casper (WY) Star-Tribune. The acquisition of the Munster daily followed the next year. The rest of the company was assembled largely one at a time over the next 40 years, with no more than five years between purchases. The last daily acquired by Howard was the Longview (WA) Daily News in 1998.