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North-of-the-Border Publishing Giants Getting Cold Feet

Derek Moscato

VANCOUVER -- Evolution is never a pretty affair. In the world of media Darwinism, it can be particularly harsh.

The recent trend toward mass consolidation of media outlets, brought on chiefly by the advent of the Internet, has left a number of victims in its wake. In North America, the beaten-up now include readers of small-town newspapers.

That's because two of Canada's leading national publishers, Hollinger International (HLR Quote) and Thomson, have ruffled feathers again by announcing they'll be divesting themselves of a significant amount of their community newspaper assets.

Investors, including owners of Hollinger-invested mutual funds, have fared about as well as readers. (SSHAX Quote)State Street Research High-Income, which has Hollinger as its No. 1 holding, is off 5% in the year to date. Morale among stakeholders is low and investors have become increasingly frustrated with management in recent months. The earnings picture for the next two years is anything but rosy: The company is expected to show an earnings decrease of 76.1% in 2000. Excluding non-recurring revenue from the sale of assets, the company's earnings are expected to decrease by 6% in 2000.

Hollinger has tried to address its problems. The company, whose stable of publications also includes The Chicago Sun-Times, The Jerusalem Post and Britain's Daily Telegraph, said in April it would be willing to sell large chunks of its empire, mostly in the way of newspapers with circulations of less than 100,000. Its new direction also calls for a sharp reduction in debt and a planned share buyback. It is aggressively pursuing Internet expansion.

And yet the company is apparently valued as a newspaper company first and foremost. Hollinger stock has been an underachiever for most of the past year, and it currently trades at about 12 1/2, off 2.2% this year. That's a far cry from its value of 19 less than two years ago.

To be fair, Thomson suffers from a similar plight. It is restructuring and announced it would be divesting itself of all of its 55 daily newspapers and more than 75 nondaily newspapers -- excluding the flagship The Globe and Mail in Toronto. And yet it still trades in the narrow range it's been in for the past two years.

Instead of lighting a fire under the industry, the rash of change in publishing circles seems to be triggering cases of anxiety, apprehension and confusion among the investor set. For an industry steeped in tradition, the transition has come as somewhat startling, and, for some, downright puzzling. Observers have wondered aloud whether the glut of "for sale" signs on North America's community newspaper landscape might push down the going value of these properties.

"Investor speculation regarding the possible sale of numerous assets, particularly the community newspapers, will likely fuel share performance rather than fundamentals," said Merrill Lynch analyst Lauren Fine in a May 1 report. Fine has a neutral recommendation on Hollinger. Merrill Lynch has managed Hollinger public offerings in the past.

Hollinger declined to comment directly, but did provide comments from Conrad Black at the company's annual meeting last week:

"Analysts' reactions to our announcement, though generally positive, have varied from suspicion that this is essentially a scam to maintain some temporary speculative support for the stock price to a professed belief that we are on our way out of this business and that everything is for sale," said Black. "Both of these interpretations are equally wildly inaccurate."

At least shareholders can take heart in the interim. The stock has come to life somewhat during May, and now trades about 22% higher than its 52-week low of 9 11/16.

Still, support from Wall Street wavers. Hollinger's foray into new media has been unfocused, and its range of Internet products includes everything from national news site Canada.com to hockey site Faceoff.com (jointly owned with hockey legend Wayne Gretzky). The company also has large stakes in upstarts like e-marketing firm FreeSamples.com and online auctioneer Bidhit.com. Hollinger reports that it is still ahead on every Internet investment it has made to date, but confused investors have yet to gravitate toward the company as a New Economy play.

"If you want a better distribution, the Internet could be one point, but it won't be 95% of the business over the next five years," said Ben Dube, a Montreal-based analyst with brokerage Canaccord Capital. The brokerage has no underwriting relationship with Hollinger.

Thomson, observers said, has a more deliberate strategy. It is setting up sites geared toward professionals and that piggyback off the strength of the Globe's history and tradition. "Finance, careers and news are the center core of our strategy," said Globe Interactive's president and CEO Lib Gibson. "We're really springboarding off the strengths that the Globe and Mail company has had for the past 100 years."

According to Dube, the two companies are now moving in separate directions. Hollinger is remaining in the newspaper space, while Thomson moves into information and database distribution. "At Thomson, the object is specialized information," he said. "They're getting revenues, and profit is focusing more on the Internet."

In an interesting twist, a report in the latest edition of International Financing Review -- a Thomson publication -- prompted speculation that Thomson was about to buy Dow Jones & Co.(DJ Quote), publisher of The Wall Street Journal. Thomson declined to comment on the rumors.

If anything, the gossip underscores the nature of the media-ownership game these days. Just about everything -- from small-town weeklies to metropolitan and national dailies -- is up for grabs, and the uncertainty surrounding the business is reflected in the valuations of both companies. Investors should tread lightly.