Newsweek Takes a Stand: Profits Are for Wimps

Mitt Romney suffers from The Wimp Factor, Newsweek’s oh-so-hip cover helpfully informs us philistines this week.

Of course: Romney started a company that is still profitable. Real men lose millions of dollars a year without any hint of a sustainable business model.

I’m no fan of Mitt Romney or the Republican Party, but I’m even less a fan of amateur psychoanalysis masquerading as journalism. To call the cover story “biased reporting” would be an insult to reporting. It’s all bias and no reporting -- and an insult to Newsweek’s heritage of great political reportage and investigative journalism.

And you thought only amateur bloggers could string together unrelated facts in support of their opinions without doing any real gum-shoeing?

I have a confession to make: I’m writing about the Michael Tomasky cover story without having read it all. I tried, I really did, but somehow I kept dozing off while laboring through this extended expose of the Mittster’s alleged lack of manliness and the insightful commentary about his being “kind of lame.”

Shocking revelation: Romney recently let his wife drive the Jet Ski while he rode on the back. (If Romney were a Democrat, do you suppose Newsweek would have reported that as a sign of an egalitarian marriage? And if Romney were driving the Jet Ski, wouldn’t that be proof that Mormons oppress women?)

Tomasky may have unwittingly helped Romney’s cause among voters like me who are not particularly in love with either candidate or party. (“A seasoned journalist set out to do a hatched job on Romney and this is all he got? Maybe Romney’s not such a bad guy after all.”)

Discussions of wimpiness in the White House do no favors to President Obama. He spent his first two years there as a non-factor until President Pelosi-Reid-Baucus nearly brought the Democratic Party to ruin.

Both men have demonstrated their capability to take decisive action and to lead in difficult situations. It’s their ideologies that concern me.

Related article: What Exactly Did Barry Diller Say About Newsweek's Future?

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What Exactly Did Barry Diller Say About Newsweek's Future?

Barry Diller's cryptic comments yesterday about Newsweek have led to much speculation, some misquoting and downright erroneous reporting by the media, and charges of "scaremongering" from editor Tina Brown.

To help clear the waters, here is exactly what Diller, chairman of IAC/InterActiveCorp (Newsweek's majority owner), said about the iconic but money-losing magazine during the company's quarterly earnings call. He was responding to an analyst's question about the expenses IAC took on in acquiring the brand and whether there was "a Plan B to make it perhaps a lighter asset like an online-only business."

Diller's response:

Yes, the consolidation does put us squarely on our heads. We knew this really shortly after Sidney Harmon died that the indication was -- though it wasn't any kind of absolute, nor is it an absolute today -- that the Harmon family didn’t think that they were going to contribute to the losses in the business.

And neither by the way are we going to contribute to the losses of the business as they have been this year. Or investment next year will be considerably less than it is this year. 

The brand Newsweek is much better, much stronger than it was when we acquired it, and, probably, over the last three or four years, there has been a true improvement in the book. Tina Brown and her editorial staff have done a superb job. And Newsweek around the world in terms of the events that we do for which we have quite large demand and events are a profitable business for us in many places in and outside the United States. So the brand is good. 

What is the problem? The problem is in manufacturing, producing a weekly news magazine, and that has to be solved. Everybody is going to face the same problem other than I think luxury brands over a period of time because advertising in this category is entirely elective, and the transition will happen, I believe. 

I'm not saying it will happen totally, but the transition to online from hard print will take place. We’re examining all of our options. Our plan is that by September or October and certainly firmly planned in place for next year is going to be different than it is this year. I can’t tell you in what ways it will be different, but it will be different.

Diller didn't say exactly what will happen to Newsweek or even whether a decision had been made, except that its manufacturing costs will be significantly lower next year. By "manufacturing", he almost certainly means not just printing but also freight, paper (probably costlier than printing for Newsweek), and postage (almost certainly more expensive for Newsweek than either paper or printing, and the only one of the Three Ps that keeps increasing).

If you've seen Newsweek lately, you'll know the cuts won't come from having fewer pages. One option is publishing less frequently. (Newsmonth, anyone?) Another is to provide incentives for people to switch to digital versions.

Jacking up print subscription prices, reducing efforts to attract or retain print subscribers, and even selling some of its subscriber list to another publisher are other ways of reducing postage, paper, and print costs.

Related articles:

• Tina Brown Follows Husband's Footsteps -- Sort Of 
• Newsweek Spending Millions in Paper Money  
• Giving BusinessWeek the Business

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Apple and Amazon Deliver Loophole To Consumer Magazines

Don't be surprised if you start seeing special offers soon for magazines' iPad or Kindle Fire versions of their back issues.

Sketchy sales data from Apple and Amazon have led to a new loophole for magazines whose circulation is checked by the Audit Bureau of Circulations. The loophole will enable them to bolster the reported circulation numbers of a weak-selling issue with single-copy sales of better-selling issues.

Erratic single-copy sales are the bane of many magazines that guarantee their advertisers a ratebase (a minimum number of copies that are purchased or delivered). By the time a publisher realizes an issue isn’t selling well on the newsstand, it’s too late to do much about it before the issue goes off sale. As a result, many publishers build in a cushion – often an unprofitable one, such as free copies sent to hair salons – to ensure that weak-selling issues don’t miss ratebase.

For printed magazines, ABC is accustomed to publishers providing elaborate reports that document exactly how many copies of an issue were sent to legitimate subscribers or sold to customers. Not so with Apple and Amazon, which don’t provide precise information about the number of paying customers (subscribers and single-copy buyers) per issue.

As a result, ABC has authorized new methods publishers can use when calculating the number of electronic copies served per issue. (No such
calculation is required for NOOK editions because Barnes & Noble provides exact numbers by issue.)

“As magazines increasingly incorporate digital editions into their brands, it’s important for these editions to be counted properly and verified with an audit,” ABC said in a recent communication with publishers. But that can be challenging in the “immature space” of digital magazines, it acknowledged, because data about sales of e-editions are “maintained outside of the publishers’ fulfillment systems.” That’s a polite way of saying that the sales and financial reports Apple and Amazon provide to publishers are an incomprehensible mess created by people who have never heard of audited circulation.

One option for publishers reporting e-edition sales is the “Summary Method”, which assumes that each single-copy sale of iPad or Kindle Fire editions is for the issue that was on newsstands when the sale occurred.

Here’s how the loophole works: Suppose a publisher realizes that one title’s August issue, scheduled to be on newsstands until August 7, will be a poor seller. (The publisher may be looking at actual sales data. Or perhaps events that have made the cover less appealing – like a feature on an actor whose new movie turns out to be a flop.)

The savvy publishing company will have a couple of weeks to put together a promotion for the title’s previous hot-selling issues. As long as the sales occur before August 7, they will be counted as being for the weak August issue rather than for a successful previous issue that has already met ratebase. And the brands that advertised in the August issue will be none the wiser.

In the print world, by contrast, only sales of the August issue count toward meeting that issue’s ratebase. And the publisher has to present reams of data, such as where a subscriber lives or where a copy was purchased, that Apple and Amazon simply do not provide.

Related articles:

• Printed Magazines or Digital Magazines: Do We Have To Choose? 
• For Most Publishers, Snail-Mail Editions Still Beat Apps
• Under Siege: The Outlook for Print Media Is Even Worse Than We Thought, Expert Says -- But Publishers May Prosper

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Did Verso Come To Purchase NewPage Or To Bury It?

Talk about the pot calling the kettle black: NewPage told a bankruptcy court this week it is reluctant to merge with Verso Paper because of its rival’s high risk of going bankrupt.

But it also revealed an even bigger reason to rebuff Verso’s advances: Rather than engaging in a good-faith effort to forge a union between North America’s two largest makers of magazine-quality paper, NewPage said, Verso’s owners are engaging in “tactics of holdup and delay” to weaken NewPage and hinder its emergence from bankruptcy protection.

NewPage’s bankruptcy case presents Verso “with both significant opportunities and risks,” an attorney representing holders of first-lien debt wrote to the bankruptcy court today.

“On the one hand, Verso’s market position will be greatly improved if Verso is able to acquire NewPage’s assets at fire-sale prices, or if the Debtors fail to successfully reorganize [NewPage],” Dennis F. Dunne wrote.

“On the other hand, Verso is significantly threatened by the possibility
that NewPage will successfully reorganize under a stand alone plan and emerge from bankruptcy a stronger, healthier company with a deleveraged balance sheet.” [Editor’s note: In the declining, capital-intensive publication-papers industry, that’s known as the “He Who Gets To Bankruptcy First Wins” strategy. See for example Resolute Forest Products AKA Abitibi-Bowater.]

As NewPage veered toward insolvency last year, Verso’s primary owner, hedge fund Apollo Management, snapped up many of NewPage’s nearly worthless second-lien bonds.

NewPage is so heavily indebted that holders of those bonds will apparently end up with little compensation, if any at all, once the claims of first-lien debt are satisfied. But Apollo has found other value in the bonds, using them as leverage to gain a place at the table in bankruptcy-court discussions of NewPage’s future and to put forward various schemes to combine the two companies.

NewPage is eager to exit Chapter 11 and hopes to file a plan of reorganization within 30 days, but says a proposed merger with Verso would undergo an antitrust review of at least six months.

Both companies have bolstered their arguments to the court this week with the comments of stock analysts. Verso on Tuesday cited a recent J.P. Morgan report that called a Verso proposal “surprisingly reasonable” and “the best outcome for . . . NewPage bondholders.”

NewPage countered yesterday with a report from industry analyst Chip Dillon saying that if Verso’s CEO “is able to turn Verso’s fortunes around without a major financial restructuring, he will have pulled off the single hardest turnaround in the history of the paper industry.”

It also cited analyst Adam Gefvert: “NewPage is getting crushed with debt, and the first lien creditors are better off going through bankruptcy than merging with Verso. These creditors are just trying to dig themselves out of an unfortunate financial hole. They don’t want to dig themselves a deeper one by merging with Verso.”

Gefvert has shorted Verso stock because “long term investors have a better chance investing in a different kind of paper – lottery tickets.”

Also this week, Leon Black, Apollo’s lead partner, was revealed as the art collector who paid $120 million in May for Edvard Munch’s “The Scream”. Many people find the work haunting, even depressing, but compared with watching his investment in the paper business the past few years, the famous painting probably looks downright cheery to Black.

Moral of the story: The best way to make a small fortune in the paper business is to start with a large fortune.

Related articles:

• NewPage's Fraudulent Deals Started in 2007, Creditors Claim  
• A Major Print-Media Bankruptcy Is Likely in 2012, Voters Say  
• NewPage-Verso Merger Unlikely, 2 Experts Say 
• Leon Black’s Bid Entices NewPage Bondholders: Great Bloomberg piece on investors' excitement about the proposed marriage. Rarely will you see this much detail and insight about the paper industry in the mainstream media.

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NewPage's Fraudulent Deals Started in 2007, Creditors Claim

Four years before it went into bankruptcy protection, NewPage Corp. was essentially structured as a giant scheme to defraud suppliers and other creditors for the benefit of its owners, a creditors committee charges.

The creditors committee wants the bankruptcy court to declare as “fraudulent transfers” the highly leveraged 2007 transactions that enabled NewPage to become North America’s largest producer of magazine-quality papers and the 2009 refinancing of that massive debt.

The Official Committee of Unsecured Creditors is also trying to claw back millions of dollars in “excessively high” management fees paid to leveraged buyout firm Cerberus, NewPage’s primary owner, and millions more in bills paid to two suppliers that are subsidiaries of Stora Enso, a European paper company that owns 20% of NewPage.

The U.S. Bankruptcy Court appointed the committee to advocate for the interests of companies that were left holding accounts receivable but no collateral when NewPage filed for Chapter 11 bankruptcy protection on Sept. 7, 2011. The committee consists of representatives of organizations that stand to lose millions of dollars resulting from NewPage’s insolvency, including the Pension Benefit Guaranty Corporation, Deutsche Bank, OMNOVA Solutions (a major supplier of specialty chemicals to the paper industry), and United Steelworkers.

NewPage’s owners have challenged whether the committee has the right to press its claims in bankruptcy court. The court has not ruled on that question yet.

Among the creditors’ claims are:

Destined to fail
NewPage’s 2007 acquisition of Stora’s North American paper mills left it “with a crippling amount of new debt, but without any new value to show for it. No new equity was injected whatsoever. The target Debtors [the various NewPage subsidiaries] simply had new owners. Hobbled by this
massive, incremental debt, the enlarged and highly leveraged NewPage never had any realistic hope of sustaining its operations or paying its debts as they came due.”

Offloaded
"None of the parties to the [2007] deal cared [about NewPage's shaky finances] – the risk of the transaction was entirely offloaded to unsecured creditors. Because no party at the table was injecting any new equity, and no lender was extending loans that were not secured by the company’s most valuable assets, no party at the table had anything significant to lose (unlike unsecured creditors, who became involuntary investors in the new enterprise). The lenders were to be granted first and second lien security interests. The advisors were to take more than a hundred million in fees and transaction costs. Stora was going to be paid more than $1.5 billion in cash. And Cerberus was extending its 'runway' to recover its equity investment, an extension funded by unsecured creditors’ money as opposed to its own.

Manipulated numbers
"In order to justify the incurrence of an excessive amount of incremental debt, and to avoid tripping pre-existing debt covenants designed to guard against such scenarios, the parties to the [2007] transaction manipulated forecasted EBITDA [operating cash flow] to reach a pre-ordained level. The forecasts, accordingly, were anything but reasonable.”

Debt laundering
“The Committee also seeks to avoid obligations incurred in 2009 to ‘refinance’ or effectively ‘launder’ the avoidable debt from 2007. The Debtors [NewPage subsidiaries] did not receive fair value in 2007, and they could not cure this defect by attempting to ‘white wash’ it in 2009 when the 2007 debt inevitably defaulted.”

“The Debtors thereafter kept the ball in the air for another two years, aided by a more than $320 million windfall in the form of unanticipated tax credits, but ultimately had no choice but to file for bankruptcy in 2011.” [The tax-credit windfall was from Alternative Fuel Mixture Tax Credits, better known as black liquor tax credits. See"Black Liquor" Credits Are Helping Paper Buyers for an explanation.]

Preferential transfers
“… on the eve of bankruptcy, NewPage paid to Cerberus more than $2 million, representing approximately one year’s worth of fees and expenses accrued under an advisory agreement. In addition, during the year prior to the bankruptcy filing, NewPage paid approximately another $1 million to Cerberus for purported management fees without receiving reasonably equivalent value in return.” The creditors committee claims the payments by an "insolvent" NewPage are improper “preferential transfers” that should be disallowed.

Expensive advice
“ . . . during the twelve months leading up to the [Chapter 11] Petition Date, COAC [Cerberus] charged NewPage for the services of one of its consultants in an amount that exceeds the annual base salary of NewPage’s President & Chief Executive Officer.”

Questionable advice
“ . . . in the months leading up the chapter 11 filing, NewPage was seeking to divest itself of NPPH [its Port Hawkesbury paper mill in Nova Scotia], purportedly negotiating a settlement of issues between NewPage and NPPH prior to launching their respective chapter 11 and CCAA [Canadian bankruptcy protection] cases. One consultant, in particular, was deeply involved on both sides of the transaction, notwithstanding that the interests of NewPage, NPPH and Cerberus (as controlling shareholder of NewPage) were very much in conflict. Indeed, any ‘advice’ that NewPage received from Cerberus employees likely served only Cerberus’ interests and did not benefit NewPage or its stakeholders.”

Relevant documents in the bankruptcy case include:

• Creditors' committee motion challenging the 2007 and 2009 financing deals.
• Committee's motion challenging NewPage payments to Cerberus and Stora.
• Agenda for court hearing Thursday (July 12) on various matters related to the committees' motions.
• Home page for NewPage's Chapter 11 case.

Related articles:

• The latest on Pacific West's plan to buy the idled Port Hawkesbury mill from NewPage. 
• Seven Losers and Four Winners in the NewPage Bankruptcy 
• NewPage Files Chapter 11, Seeks Buyer for Canadian Mill 
• NewPage Inc. 5000 Ranking Seems Like a Cruel Joke 
• NewPage Finally Says the B Word

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Postal Workers Are Putting Off Retirement

Note: PostalNews Blog has a different interpretation of the recent USPS employment statistics that is worth noting. It points out that thousands of employees have gone from part-time to full-time. The number of part-timers, meanwhile, is decreasing faster than the number of full-timers. So much for the goal of having a more flexible USPS workforce.

Talk of early-retirement incentives for U.S. Postal Service employees may have temporarily backfired: Career employees of the U.S. Postal Service have apparently been retiring in record low numbers

The number of full-time employees shrank by only 1.6% in the past year, according to a statistical report USPS released Friday. That’s a minuscule net attrition rate in an organization that is hardly hiring any new full-time employees, where half the employees are 50 or older, and where nearly half the employees are eligible to retire.

The net loss of only 8,141 full-timers between June 2011 and June 2012 is a far cry from the decrease of nearly 22,000 the previous year and more than 38,000 the year before that. The irony is that the Postal Service has placed increased emphasis on downsizing its workforce to cope with declining revenues.

The low attrition numbers back up what many USPS employees have been saying for more than a year: They are delaying retirement in hopes of bagging some incentive money.

Perhaps the pent-up interest in retiring is why nearly one in five eligible postmasters recently signed up for a $20,000 buyout incentive at a time when the job market for older workers is especially discouraging.

Because of no-layoff clauses and low employee turnover, the Postal Service has often resorted to targeted early-retirement incentives to thin its ranks.

Such buyouts end up saving the Postal Service far more money than they cost, an Office of Inspector General study concluded a year ago. But USPS’s cash crunch may hinder its ability to offer buyouts even if they will clearly save money down the road, the study noted.

Related articles:

• The Downsizing of the Postal Workforce Slows  
• USPS Planning Retirement Incentives To Help Downsizing, Donahoe Testifies
• Postal Service Can No Longer Afford Money-Saving Tactics, Study Says
• How Does the Postal Service Discourage Early Retirement? Let Me Count the Ways 
• Do We Really Need New Laws To Get More Postal Employees To Retire?

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USPS' 'Safeguards' Have Been Running Amok For 3 Decades

The more things change at the U.S. Postal Service, the more they stay the same.

Consider this statement written 31 years ago by then-Postmaster General William F. Bolger:

"The main disadvantage of the Postal Service's present status is that the 'safeguards' that accompanied independence have tended to grow to the point that new fetters have been substituted in part for the former ones. The Postal Service continues to be overregulated, and its managers continue to have difficulty finding the authority to execute certain decisions that are necessary to modernize the service and operate the postal system efficiently."

Bolger's reference to "safeguards" came from a 1970 Congressional report that called for making the Post Office Department an independent agency, which happened the next year. Bolger quoted the committee as writing that the only way to fix the Post Office was "fundamental reform that puts complete responsibility in a single place, with appropriate safeguards. . . . Top management must be given authority, consistent with its responsibilities, to provide an efficient and economical postal system."

The overregulation of the U.S. Postal Service has become even more apparent and more damaging today. Congress demands that the agency break even yet hamstrings its efforts to reduce costs and mostly prevents it from building new sources of revenue. For too many Congress members, "appropriate safeguards" mean preventing any changes that would hurt anyone in their district regardless of the greater harm to mailers, employees, and the Postal Service from doing nothing.

Bolger's letter in answer to a questionnaire from the National Academy of Public Administration provides quite a lesson on the history and legal standing of USPS. I have posted the entire letter on Scribd.

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