June 09, 2009

The Most Dangerous Game

TWENTY THREE PERCENT. That's how much the workers affiliated with the Boston Newspaper Guild will have their pay cut, now that they've rejected a proposal from The New York Times Co. to cut their wages, implement furloughs, cut their benefits and make other changes to their contract. If there's one word that sums up the reaction from my colleagues in the newspaper business, it is: "Wow" -- and for a variety of reasons!

But after looking into it, I can't say the result surprises me all that much.

For one thing, Guild members were essentially asked to pick their poison during the most recent round of negotiations. A 23 pc wage cut, although stunning on its face, may for many members be preferable to the entire package presented them, which involved an 8.3 pc cut in wages, five days of unpaid time off, and changes to health and pension benefits. Add everything together in that proposal, and it doesn't take much to see the cuts inherent in that would also be dire.

As it happens, you can run the numbers and see for yourself, thanks to the Boston Newspaper Guild's handy calculator. In my case, I used the Guild's top-scale for a reporter at the Globe, which is $1,387.15 a week, or roughly $72,133 per annum. Losing 23 pc of that works out to an annual cash loss of $16,590. But when you add in all the benefit changes the New York Times had proposed, the annual cash loss was still $15,639 for a worker with a family!

Among those changes was a proposed pension freeze -- and it's no wonder many members said no, given the math. A pension freeze is a killer, as anyone who benefits from such a plan knows. The reason, of course, has to do with the eventual payout. As the Guild's calculator showed, a freeze would over time cost each worker well into the six figures. Using my example above, a worker with ten years in the plan would have his benefit frozen at about $1,100 a month. With a maximum payout of about $3,300 if the worker made it to 30 years, that works out to leaving $2,200 a month on the table. Over 20 years, that's roughly $529,000.

Yes, that's right. $529,000.

Also, for those wags wondering how much said worker could get if he got a 100 pc cut in his wages, think about how long it might take to get to that point. If the worker survives just one more year, he increases his monthly pension benefit by about $110 a month. Over 20 years, that's $26,400. So if you figure the ship's going to sink anyway, and you're going to sink along with it (or get thrown overboard prior to hitting the iceberg), voting to accept the Globe's plan makes even less sense. If I was in the Globe's unit, I'd take the pay cut and find a way to make it work.

So after looking at it, I can't say I would blame anyone in the Boston Guild for voting one way or the other on the contract proposal. I only hope the Boston local can convince its members of that -- because the margin of the vote was so close: 277-265. (Wow).

I mean, I've been involved in similar situations, in which everyone argues passionately about how to vote on a contract proposal. But in the arguments I've been involved in, the argument has usually been a way for everyone to let off steam. Then, when the vote comes in, it's usually something like 123-3 one way or the other. This vote was so close, and the stakes were so high, that it has the potential to make for a lot of angry members. I do hope, however, that's not the case in Boston.

So, to sum up for all of you wondering why the Guild voted the way it did, think of it this way. Basically, the Guild's members had a choice. They could get their crap sandwich on a sub roll or a trendy flatbread.

Of course, the real question remains unanswered -- just what will come down the pike.

Supposedly, the Globe lost $50 million last year and was on track to lose $85 million this year prior to the cuts, according to the Times. But I'd love a bit more elaboration from the company about this. Certainly, in looking through the Times' financial reports, there's no real breakout just for the Globe itself -- most of its results are reported on a consolidated basis among all of its newspaper operations. Go look for yourself if you don't believe me.

That said, there's no denying the Times' overall financial picture has worsened -- and to my mind, is actually pretty dire. Consider the following comparison of key statistics from the Times' '08 annual report:

Goodwill: $661.2m
Stockholders' equity: $504.0m

Now consider the reasonable reaction to this news:

BUTTHEAD: "He said goodwill." Uh huh huh huh huh huh!
BEAVIS: Yeah! Heh heh hrmmm heh heh! Goodwill sucks!

This basically explains, to my mind, why the New York Times won't close the Globe anytime soon. After all, how much of that goodwill -- an accounting term to describe the premium inherent in overpaying for an asset in order to acquire it -- is wrapped up in the Boston Globe, for which the Times paid $1.1 billion back in the day? I'm guessing it's still rather a lot, despite recent impairments. Plus, if the Times suddenly had to close the Globe, how much would the Times have to writedown or expense as a result -- not just in terms of goodwill, but in PP&E, severance costs, and so on? It's not like they can just close the place and have done with it.

Also, what's interesting in the Times' reports is that stockholder equity is a key metric for evaluating the various loans extended to it. That's not an issue now because of how those metrics are calculated -- for one of its big loans, the Times had about $568m in breathing room at the end of the first quarter. But again, if the Times suddenly decided the Globe had to go, just how much breathing room would the Times have after all was said and done?

Oh, and what happens if things get worse? In 2011, the Times will have one of its revolving credit lines -- which now has $287 million outstanding in borrowings and letters of credit -- expire. Unless everybody gets well really soon, I can't believe their lenders would keep the terms as generous as they are now. Already, the Times' debt is below investment-grade. Oh, and remember that big $250 million loan from Carlos Slim Helu? It's got an effective interest rate of 17 percent -- and a whole bunch of covenants that restrict the company's capacity to take on additional debt. (They also prove Mr Slim is a financial genius, but that's neither here nor there).

So if you ask me, what the Times really could use right now is cash.

There are three ways to get cash. First, you can borrow it, but the Times probably would like to avoid that. Second, you can earn more and stop spending as much of it, which the Times is naturally trying to do. Lastly, you can sell assets to raise it. If you ask me, Door Number Three is probably becoming more palatable all the time to the suits in New York. As with all companies, they know full well their lenders will have no compunction about slamming them to the wall if the lenders think it will serve their interests.

And the Times has plenty of things it can sell. Like a roughly one-sixth stake in the Boston Red Sox, for instance. It could sell some of its papers elsewhere in the country, of which it has 15 or so. It could even sell the Globe itself -- and I'd be stunned if the Times wasn't actively considering just how to do that. Besides, think of the savings on aspirin alone. Could be in the millions.

Posted by Benjamin Kepple at June 9, 2009 01:12 PM | TrackBack
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