Is smaller bigger at CL?
So, let’s say the flagship weekly of your newspaper company lost around 30 percent of its print advertising in three months, suffered similar results at its other papers, threw its scarce cash at bankruptcy lawyers and financial advisers, and was spanked with unceasingly bad publicity during that time. Oh, yeah: You’re also in the midst of the worst recession in at least 27 years.
How could you come up with an argument that the company actually gained value over that time?
That’s the challenge facing Creative Loafing Inc. CEO Ben Eason in U.S. Bankruptcy Court in Tampa this afternoon.
Eason fired me as CL/Atlanta’s editor in November for arguing that he should cut administrative costs a little before hatcheting editorial and sales yet again, so you can take what I write about this subject with a grain of salt. But, honestly, my interest in writing about this isn’t vengeance: My heart is breaking over what’s happening to CL, and I desperately want to see the media organization I helped build survive — and thrive.
Eason took company into Chapter 11 bankruptcy protection on Sept. 29, two days before his main lender might have held him in default over taken control of the company from him for defaulting on a $30 million loan. At the time, CL/Atlanta was running around 100 pages. By the week I was canned, it had dropped to 80 or 88 pages. Then, each week in December, it ran either 64 or 72 pages.
Things appear to have gotten worse since December. I peak into the CL box with mixed feelings each Tuesday night to find a disturbingly thin publication. In January — always a slow month — the Atlanta paper was regularly down to 64 pages. But in February, when ad lineage usually ramps up, the paper got down to 56 pages — a size I’m told it hasn’t been since the mid-1980s. I think it’s been above 64 pages only once this year. Who would’ve guessed that CL — an established brand with award-winning coverage — would so suddenly fall that it now produces a smaller paper each week than the upstart Sunday Paper?
I’d be lying if I didn’t admit a sense of vindication — that Ben, with whom I disagreed so often over the eight years I worked for him, reaped what he sowed. But my more potent emotion is fear: A fear that something we that we grunts in Atlanta had built into a significant media organization (in spite of Ben’s misguidance, rather than thanks to it) was being driven into the ground.
Today’s Bankruptcy Court hearing isn’t about such grand issues as justice or, say, about the ideal that a newspaper belongs, in some sense, to its community as much as to its shareholders. The hearing is a bit more technical than that. It doesn’t even cover what’s happening on the ground right now. It stems from a November motion by Atalaya Capital, Creative Loafing’s $30-million creditor, requesting that the court give Atalaya control of the company — in part because the longer Eason controls it, the more CLI’s value drops. A couple of months ago, the judge scheduled this week’s hearing to determine whether the Creative Loafing Inc.’s value had dropped from the Sept. 29 bankruptcy filing through Dec. 31.
If the value did drop during that time, Atalaya would be able to back up its argument that CLI needs to be taken out of Eason’s hands for its very survival. If the value was low to start with and had risen since, Eason could claim he was righting the ship and should be given a chance to manage the company out of bankruptcy.
Not surprisingly, Atalaya’s expert argued yesterday that the company’s overall value dropped from $19 million to $11.4 million. Given the shrinking page-count of CLI’s newspapers (while other cities’ papers haven’t shrunk as dramatically as Atlanta’s has, they’ve declined pretty steeply as well) and the documents showing lower and lower revenue numbers that Ben’s gang has filed to the Bankruptcy Court, it seems likely that CLI would fetch less (if it were for sale) after three months of Chapter 11 than before.
So, how will Eason argue this afternoon that the company’s somehow gaining value? I suspect the trick will lie in trying to convince the Court not that he’s getting more revenue, but that he’s getting more revenue of the right kind. Specifically, he’ll claim that more revenue is coming from online ads. From the standpoint of a company’s valuation, the argument goes, money that comes from online ads promises more revenue for the future (because it’s likely to grow), while money that comes from print ads doesn’t raise the value as much (because you can expect that number to shrink over time).
There’s some validity to the argument. Current employees confirm that online audience in Atlanta is continuing to grow — just as it was growing during the months before I left (except for that last point, I’m not going to share in this article any information that I learned as editor in Atlanta). Whether the increased audience brings in enough revenue to offset Creative Loafing’s shrinking position in the print market is another question. For one thing, online ads are notoriously cheap, so the amount of traffic you’d need to cancel out disappearing print ad revenue is enormous.
Of course, it would be pretty easy for a print publisher to make it look as if he was getting more revenue from online than he really was getting. All he’d have to do is weight the revenue coming from clients who were buying both print and online ads, more heavily toward online. Let’s say the client was spending $1,000 on print and $100 on online. Change the way that money is booked to $800 for print and $300 for online. Voila! Your company is suddenly more valuable. Even if the advertiser was spending less money with you — say $700 print and $300 online — the valuation expert you hired to testify for you might claim the company’s value had risen.
I’m not saying that’s what Eason’s doing, mind you. The point is that the more I’ve watched this drama unfold, the more I am amazed that decisions are made by the way things look on spreadsheets and by narrow legalistic arguments rather than on what is going on in the real world. Maybe, that’s the way bankruptcy cases have to role. And maybe the consequence won’t end up jeopardizing the jobs of 240 or so people who still work for Creative Loafing Inc.
But it is pretty evident that Eason is caught in the cycle of doing more to impress the Bankruptcy Court than he is in doing what needs to be done to build the company’s future. Can you blame him? It’s not surprising, for example, that he made sure that a long-awaited Atlanta homepage redesign and Charlotte food blog went up this week — just before the hearing. (For the record, I’m in awe of what my former staff, as well as Atlanta Online Producer Alejandro Leal, have been able to achieve in the midst of the company’s mess!)
Still the hard facts on the ground are that Creative Loafing has been shrinking for sometime, and at least physically right now, this once-promising media institution appears to be taking a nosedive. All you have to do is pick up the paper and weight it in your hands to figure that out. I worry, though, that what happens in the world of financiers and courtrooms reflects the reality of Creative Loafing about as well as mortgage-based securities reflected the reality of real estate.
The question is: Will the the Bankruptcy Court figure out what’s going on on the ground before it’s too late?
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Comments
2 Comments on Is smaller bigger at CL?
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uh huh on
Thu, 12th Mar 2009 4:59 pm
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Not easy on Eason | Atlanta Unsheltered on
Fri, 13th Mar 2009 8:11 am
It seems like you’ve really moved on to better things. Congratulations.
[...] led a transformation over the last few months to a web-first-print-second company (as predicted here), Eason had to endure a “withering cross-examination” by Tyler Brown, attorney for [...]
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