Pulitzer's Gain

Some say Pulitzer Inc.'s sale to Lee Enterprises blew in quicker than a shotgun wedding. Others saw it coming a mile away.

Mar 9, 2005 at 4:00 am
When Michael Pulitzer announced that Pulitzer Inc. had been sold to Iowa-based Lee Enterprises, Inc., the news sounded more like a storybook wedding than a $1.46 billion business deal. "Lee and Pulitzer share similar cultures and values," Pulitzer stated in a January 30 press release. "[W]e couldn't have found a better steward to continue Pulitzer's 125-year legacy of journalistic excellence."

From that point of view, the marriage metaphor wasn't much of a stretch. Pulitzer brought to the chapel the name and storied past, while Lee was the quiet suitor, a product of good, responsible breeding. Both are newspaper-only operations whose publications concentrate heavily on local coverage. Both invest local editors with a lot of autonomy and believe the best way to grow a newspaper is to increase revenue, not starve the newsroom.

Still, news of the sale to Lee came as a shock to some, and left industry wonks scratching their heads. "So much for my prescience," marvels veteran newspaper analyst John Morton, founder of Morton Research. "Nowhere did Lee Enterprises figure."

Morton and his fellow industry-watchers could perhaps be forgiven their lack of foresight. Until the sale was announced, Lee Enterprises was a veritable unknown on the national stage, and Pulitzer brass were tight-lipped until the ink was drying on the deal. Privately, Pulitzer execs had known since at least September that a deal was in the works. But when Pulitzer president and chief executive Robert Woodworth announced to the Post-Dispatch newsroom last fall that the company had hired investment-banking firm Goldman Sachs & Co. to explore "strategic alternatives," he stopped short of saying the company was up for sale.

"[I]t is far from certain that any transaction will be reached or on what terms," Woodworth told the staff. "The company is simply exploring various possible options to enhance shareholder value."

Even if specifics were in short supply, to many outside observers the gist of Woodworth's tortured syntax was clear: He was writing the last chapter of Death of a Dynasty. Far from a fairy-tale romance, the roots of this narrative could be traced back to the 1993 death of Joseph Pulitzer III. The saga continues through the banishment of scion Joseph Pulitzer IV and reaches its denouement with the 1999 hire of Robert Woodworth, leading inexorably to the sale to Lee. (For more on the Pulitzer family, see "Pulitzer's Pain," published in last week's issue.)

"This thing was sealed up months and months before," speculates Roy Malone, who worked as an investigative reporter at the Post-Dispatch until retiring in 2000. "They knew Lee was going to buy it last fall."

In this version of Pulitzer Inc.'s final days, cash is king. Board members award executives sweetheart contracts and generous bonuses. While revenues climb, circulation drops. And amid it all, the Pulitzer family retreats from day-to-day operations, making room for outsiders to prep the company for sale.

"[Robert] Woodworth came in and did a number of things that resulted in him getting a lot of money. Then he turned around and sold the company, and the family was grateful!" says one newsroom source who asked not to be named in print. "This is a burden they no longer wanted to carry. The Pulitzers haven't for years now been players in their own organization."

Pulitzer Inc.'s final seven years have been an unalloyed economic success.

The triumph owes in no small part to a controversial move made by Michael Pulitzer in 1998. Just before stepping down as CEO, Pulitzer unloaded his company's nine television and five radio stations on Hearst-Argyle Television, Inc. The deal minted Pulitzer Inc., a pure-play newspaper chain. Equally significant, it left the company roughly $550 million in cash, and no debt.

Pulitzer then scaled back his corporate responsibilities, bringing aboard Robert Woodworth, the company's first president and CEO not to carry the family name.

"It was very smart to bring in Bob," says a former company executive who declined to be named in this story. "They wanted to bring in a professional CEO. Here's a guy who's going to run your company and make a lot of money for you.

Adds the former exec: "They definitely got what they paid for."

Woodworth had cut his teeth running papers for the Capital Cities/ABC chain. Most recently he'd worked as a vice president for newspaper giant Knight-Ridder Inc. But St. Louis was different. Woodworth now headed a company with no debt, a war chest of half a billion dollars and a clear mandate from the board of directors: Grow the company.

"When Michael Pulitzer sold his TV stations to Hearst-Argyle, we started focusing on the company," says Mario Gabelli, whose firm, Gabelli Asset Management Inc., holds an estimated 3.7 million shares of Pulitzer stock. "When Bob Woodworth came on board, it reconfirmed that this asset was not going to go down in value, but grow. That's when we started buying it."

Initially Woodworth looked outside St. Louis for acquisitions, plunking down $180 million for a group of seven Illinois community newspapers and The Pantagraph, a small daily based in Bloomington, Illinois. But he soon realized that Pulitzer's best growth opportunities were in its own backyard. When he arrived in 1999, the Post-Dispatch was generating roughly 60 percent of Pulitzer's revenue. But the paper was leaving massive advertising dollars on the table. To add insult to injury, the Post was handing over 50 cents out of every dollar of profit to the Newhouse family -- a pesky aftereffect of the company's St. Louis Agency Agreement with its old rival, the Globe-Democrat.

"As Woodworth analyzed that market, he realized the Post-Dispatch was never able to really exploit its market the way it should," explains Mark Fitzgerald, who covers media trends for the trade magazine Editor & Publisher. "They'd been losing whole [advertising] sectors to the Suburban Journals in the past. At one point they had hardly any grocery advertising -- it was all in the Journals."

To right the situation, Woodworth attacked on two crucial fronts. First, Pulitzer Inc. paid $306 million to buy the Newhouse family out of 95 percent of its stake in the Post. Second, Woodworth pounced when the Suburban Journals of Greater St. Louis, the Post's economic nemesis, was put up for sale. Within a month of buying out Newhouse, Pulitzer Inc. spent more than $165 million to purchase the group of 37 weeklies.

"For years the elephants in the room were the Suburban Journals' competition and the Newhouse interest," says Mark Contreras, who until recently headed up Pulitzer Newspapers Inc., a corporate subsidiary. "Woodworth was able to move those two icebergs and really set the stage for very strong growth in St. Louis."

In less than two months, Woodworth had spent more than $480 million. Factor in The Pantagraph purchase, and Pulitzer Inc.'s $550 million bankroll was gone. But with the addition of the Suburban Journals, the Post now had a veritable stranglehold on print advertising in greater St. Louis. The Newhouse deal was just as important. In its final four years, the 50-50 split cost Pulitzer more than $73 million in profit. In 1999 alone, according to filings with the U.S. Securities and Exchange Commission (SEC), Newhouse took a $25 million bite out of profits. With those two impediments gone, Pulitzer Inc. was poised to dig in to a mighty piece of the St. Louis pie.

"The purchase of the Newhouse interest, the Suburban Journals acquisitions and the purchase of The Pantagraph in Bloomington were major acquisitions," says Contreras, who now works for E.W. Scripps Co. as vice president for newspaper operations. "They signaled to the rest of the company that we were serious about making substantial acquisitions that would move the needle."

Woodworth's acquisitions didn't just move the needle, they made it dance. According to earnings reports filed with the SEC, between 1999 and 2000 Pulitzer Inc. saw a spike in total operating revenue of roughly $73 million. Most telling was the climb in St. Louis advertising revenue: In 1999 Pulitzer reported $190 million in St. Louis ad revenue. In 2000 that number jumped sixteen percentage points, to $225 million.

"Woodworth is one of the best newspaper operators in the country, if not the best," says the former Pulitzer exec who asked not to be identified. "He knows how to grow businesses. He knows what the benchmarks are and he goes after them. He's very aggressive."

Even as profits were climbing at Pulitzer Inc., circulation at the Post-Dispatch was trending downward. In 1994, the year after Joseph Pulitzer III died, Pulitzer Inc. pegged the Post's daily circulation just shy of 336,000. By 1999, one year into Robert Woodworth's tenure, that figure had dropped to about 307,000 -- a tumble of 8.6 percent. By 2003, the last year for which circulation numbers are available through the SEC, circulation had declined another 6.8 percent, to 286,000.

"The overall trend in the industry is a decline in circulation," notes Stephen Lacy, editor of the Journal of Media Economics. "It may very well be that the profits are going up and the circulation is going down in the short run. The issue becomes: What does that mean in the long run?"

Between 1999 and 2003, Pulitzer Inc. reported a $52 million increase in St. Louis advertising revenue, according to SEC filings. More telling, perhaps, are the SEC numbers that tally the paper's total advertising linage -- a number that reflects the total amount of advertising in terms of newsprint used. In 1999 the Post-Dispatch recorded a linage figure of 2,844,000. In 2003 that number dropped by more than 13 percent, to 2,464,000.

In other words, even though the Post-Dispatch was running fewer ads in terms of the space those ads took up, the addition of the Suburban Journals allowed the company to increase St. Louis advertising revenue by $52 million during that same period.

At the same time, the company was playing hardball with the union. During the arduous eighteen-month labor negotiations of 2003 and 2004, the St. Louis Newspaper Guild managed to secure salary increases for its 600-strong membership (which includes newsroom, advertising and circulation personnel, as well as other support staff) but was unable to prevent a hike in healthcare premiums.

Those were the marquee issues in the contract the guild approved in June 2004. But critics say the newsroom's makeup shifted as far back as 1994, a year after Joseph Pulitzer III died. That was the year management shifted the salary schedule for Post-Dispatch reporters. Previously, it took a junior reporter hired at the bottom of the totem pole five years to reach the top minimum pay. In 1994 management extended that period to eight years.

Some say the shift made the paper unattractive in the longer term to promising young reporters, who came increasingly to view the Post as no more than a career stepping stone. "It used to be that people wanted to spend their careers at the Post-Dispatch. The turnover is much higher now," says retired Post newsman Roy Malone.

"The management seems to like it," Malone adds. "That way they can keep paying lower wages to the people without many years of experience."

Which is not to say everyone on the news side is pining for the days when the Post was a "destination paper." To many, Woodworth's arrival was at the very least a mixed blessing. "The corporation as a whole became more focused on stockholders," says one former senior Post-Dispatch editor, declining to be identified in print. "Before Joseph Pulitzer [III] died, there was a sense that it was a private club in the newsroom. After he died there was some loss of that sense of specialness -- which is both good and bad. Bad because there is something sacred about what journalists do, but good because journalism is also a business and needs to recognize certain economic realities. For a while the newsroom was fairly tolerant of people who may not have contributed a whole lot to the enterprise."

There were other changes, as well. Before Pulitzer III died, he split his duties as editor and publisher of the Post and fashioned them into discrete positions. Under the new hierarchy, the editor and publisher were on equal footing: Both reported to the president.

"When I was hired, I reported directly to Michael [Pulitzer]," recalls Cole Campbell, editor of the Post from 1996 until 2000. "When Woodworth came, he put in place a different reporting structure: He decided that the editor would report to the publisher."

That aspect of Woodworth's modus operandi is more or less standard in the newspaper industry. But to many at the Post-Dispatch, the change in hierarchy signaled a profound shift in priorities. "It was a big change," asserts the former editor, who worked under both Pulitzer and Campbell. "I think that told people in the newsroom that while what you do is important, the most important thing is to make this a going concern."

After selling off the company's broadcast and radio divisions in 1998, Pulitzer executives cashed in millions of dollars' worth of stock options. According to statements filed with the SEC, then-executives Ken Elkins and Nicholas Penniman cashed out $8.7 million and $5 million, respectively. But the biggest winner that year was the company's financial vice president, Ronald Ridgway, who between salary, bonuses, stock option cash-outs and awards raked in more than $10.9 million, making him the second-highest-paid executive in St. Louis in 1999. (August Busch III topped that year's list at $15.6 million. Reached at home, Ridgway declined comment for this article.)

All told, the company reported more than $25 million in executive stock option cash-outs and bonuses in 1999. Add to that more than $7.7 million in transaction and retention bonuses -- ostensibly to ensure that the likes of Michael Pulitzer would stay on -- and the total income that year for top executives was roughly $32.7 million -- approximately 22 times greater than the company's recorded net income of $1.5 million.

"That's when it really started," says the unnamed newsroom source. "Historically they paid themselves good salaries, but 1999 was really the zenith of it. You can't have a year when you take out more in bonuses than you leave in profits."

But media analyst Frank Gristina of Avondale Partners cautions against drawing a direct line between the 1999 options cash-outs and the 2005 sale. "I don't pretend to understand if that was a harbinger of what was to come," says Gristina, who stopped covering Pulitzer Inc. in 2004. "People get compensated for all kinds of things, and many of those people did a tremendous amount in terms of restoring the company's profit margin."

Pulitzer Inc.'s director of shareholder relations, James Maloney, declines to comment on the 1999 options cash-outs.

The following year, net profits vaulted to $34.9 million. In 2001 and 2002, Pulitzer Inc. was in the black by net profits of $10.6 million and $34.7 million, respectively. The figure for 2003, the most recent reported to the SEC: a net profit of $42.2 million on operating revenue in excess of $422 million -- $300 million of which poured in from the company's St. Louis operations.

"One of the things you rarely hear about is just how deep of an impact Bob [Woodworth] had on the company in the last seven years," marvels former Pulitzer exec Mark Contreras. "It's extraordinary, if you stop and think about it."

Members of Pulitzer Inc.'s compensation committee (including Woodworth himself), appear to have been sufficiently grateful.

From 1999 to 2003, Woodworth earned more than $19 million in salary, stock awards, options and bonuses. According to Pulitzer's 2004 proxy statement filed with the SEC, he holds more than $25 million worth of stock in the company -- and that's to say nothing of stock awards, salary or bonuses he received last year and in relation to the company's sale. By comparison, Mary Junck, Woodworth's counterpart at Lee Enterprises, reported her total compensation for 2003 at roughly $4.4 million.

Woodworth did not respond to an interview request.

His fellow executives haven't fared poorly either. According to the most recent SEC filings, Post-Dispatch publisher Terrance C.Z. Egger owns $9.3 million in company stock. Former executive Mark Contreras owns more than $6 million, and company vice president Matthew Kraner holds just shy of $4 million in stock.

But the jackpot winners of Lee's $64-per-share buyout are members of the Pulitzer family -- minus, of course, the exiled Joe IV. According to the most recent SEC documents, Emily Pulitzer will reap more than $400 million from the sale, while Michael Pulitzer stands to collect more than $120 million. Pulitzer cousin David Moore will cash in more than $190 million. (Michael and Emily Pulitzer did not return phone calls seeking comment on the sale.)

"It's a business. People love to think of newspapers as not being businesses, but they are," says the former Pulitzer executive who spoke to the Riverfront Times. "You have to look at the bottom line; it's irresponsible not to: If you don't make money, then you can't afford editorial."

Pulitzer Inc.'s recent financial history has led many outside the company to suspect the family brought in Woodworth to ready the enterprise for sale. As evidence they point to small but significant stipulations recorded in SEC documents regarding Woodworth's terms of employment.

According to his contract, if Woodworth leaves the company within two years of a change in ownership, he is entitled to a severance package amounting to three times his salary plus bonus. Calculating on the basis of 2003 figures (the most recent available), Woodworth is in line for a severance package worth at least $4 million, plus an additional three years of medical benefits.

"I was never made aware of any of those plans to sell. All I knew was that we were going to grow the company," says Contreras. "The family controls the fate of the company so [the possibility of a sale] was always out there, but there was never any explicit discussion about that topic."

Contreras says he only learned that a deal was in the works in late September of last year -- roughly two months before Post employees were informed that Goldman Sachs had been brought onboard and four months before the sale to Lee was announced publicly.

Just one month after Woodworth delivered his "strategic alternatives" proclamation, Pulitzer Inc. earmarked $10.2 million in transaction and retention bonuses for company executives and management. This time Post-Dispatch publisher Egger and Pulitzer chief financial officer Alan Silverglat were the big winners, with bonuses of more than $900,000 apiece. Woodworth wasn't far behind, netting a shade under $800,000.

"Nobody has said anything about whether he's going to stay, but clearly he's not going to," the unnamed newsroom source says of Woodworth. "He's going to get the biggest boodle, and he's going to leave. Terry [Egger] is going to get the second-biggest boodle, and he's going to stay. They're both going to be extraordinarily well-off, financially."

At a certain point, the question of whether Woodworth was hired to groom Pulitzer for the auction block becomes moot. While he was at the helm, the company prospered in ways the family had previously only dreamed of.

"In a certain respect, if you do a good job, you're always readying a company for sale," says Editor & Publisher's Mark Fitzgerald. In other words: By resolving the Newhouse issue and ensuring dominance in the city's print advertising market, Woodworth was bound to make Pulitzer attractive to buyers.

Of the bonus payouts, Fitzgerald says: "These are top guys in the industry. That's their form of security, as opposed to longevity and the gold watch."

"[Y]ou can't save your way to good performance," Lee Enterprises chairman and chief executive officer Mary Junck said during her recent victory lap around the Post's headquarters at 900 North Tucker Boulevard. "You have to drive revenue."

It's a strategy that has served Lee well, allowing the company to reap a net income of $86 million from its combined operations this past fiscal year.

Still, Pulitzer proved an expensive bride for the Davenport, Iowa-based chain. The company had to borrow $1.55 billion for the purchase, and will assume $306 million in Pulitzer debt.

Then again, Pulitzer was probably worth it. She brings with her a golden dowry, in the form of an annual operating revenue in excess of $400 million. The acquisition vaults Lee into the media big leagues, catapulting annual revenues to more than $1.1 billion. Once the deal closes sometime in the next few months, Lee will rank as the fourth-largest newspaper publisher in terms of dailies owned and seventh in combined daily circulation (1.7 million).

The Pulitzer purchase has the potential to deliver something else to Lee: Respect. The company may have a genius for turning a buck, but historically Lee's cupboard has been pretty bare when it comes to that other journalistic currency, the award.

"We don't know much about Lee Enterprises," understates newspaper analyst John Morton. "They don't stand out in any historical way."

So perhaps it is a marriage of equals: Lee brings the brawn, Pulitzer the brains. "Lee admires what the Pulitzer family has done for journalism in St. Louis and throughout the United States," Junck was quoted as saying in a February 1 Post article. The comment put a more genteel slant on her earlier, fresh-from-the-bargaining-table assessment: that Pulitzer was "another terrific acquisition for Lee...in both order of magnitude and revenue growth opportunities."

These days, of course, Post staffers don't have time to congratulate themselves for their paper's august past. More likely they're fretting at reports that while Junck was at the helm of the Baltimore Sun, she spiked a story critical of the relationship between a bank and a local official. The decision prompted a newsroom revolt, with the story's author threatening to quit and the home delivery of a 40-signature petition urging Junck to change her mind. The crisis was averted only after the paper's editor reportedly flew home from a Mexican vacation to resolve the dispute. In the end, the paper published a heavily edited version of the article.

"Worried?" muses a second current newsroom staffer who declined to be identified by name. "Depressed is more like it."

Junck did not return phone calls seeking comment.

There are other causes for concern among the staff. Under Pulitzer, domestic partners of Post employees received health insurance; Lee rarely extends benefits to unmarried partners. "We haven't made public what our plans are for Pulitzer employees," says the company's communications director, Dan Hayes. "[But] most of our newspapers do not offer domestic-partner benefits."

Another hand-wringer: employee pensions. Like many companies these days, Lee does not have a pension plan. Instead, it matches employee contributions to their 401(k) retirement plans. Pulitzer Inc. provides a pension plan for employees who have been with the company for five years or more.

Says retired Post reporter Roy Malone: "Through the guild contract, all employees get a healthcare plan, even the retirees. But we all expect to get a letter from Lee Enterprises saying they can't afford our healthcare any more."

Many current and former Lee employees have good things to say about the company -- though they're quick to point out the difference in size between their papers (which usually sport circulations under 100,000) and the Post.

"After Lee bought the paper, there were a lot more resources," says Ken Ma, who until recently worked as a reporter at the Lee-owned North County Times, which serves north San Diego County. "I wanted to write stories that were more readable. Lee wanted us to move in that direction."

Ma notes that under Lee's ownership, his paper sent a reporter and photographer to Iraq on three separate occasions -- quite a feat for a paper with a reported daily circulation of roughly 93,000.

Others at Lee-owned papers are less encouraging. At The Times in northwest Indiana, Ed Collier, a photographer, quit last year citing the paper's handling of a package that chronicled a woman's fight with cancer. "It was a great package, beautifully done," says Collier, who did not work on the package. "But in the last two pages there were funeral-home ads. I'm not sure it was a breakdown in the wall between advertising and editorial, but it just seemed to me to be in very poor taste. It was kind of like, 'Are you thinking about dying? Well, here's a good funeral home.'"

The paper's executive editor, William Nangle, declined to comment about the incident. Lee's vice president for news, David Stoeffler, says he was unaware of any issues about the cancer story. "It was very good work," he says. "Coincidentally I left a copy of it behind at the newsroom at the Post-Dispatch."

That coincidence aside, Stoeffler doubts Post readers will notice much of a difference when Junck and Co. take over later this year. "We're not going to tell them to change their editorial approach. That's their decision," says Stoeffler. "We have lots of papers we're proud of, but clearly the Post-Dispatch, because of its size and history, will be a hot paper for Lee."

This is part two of a two-part story. Last week: "Pulitzer's Pain."