Belo plans newspaper business spinoff

Belo Corp. said Monday it plans to spin off its newspapers, which have been struggling to keep readers and advertising dollars, into a new company that will operate separately from its 20 television stations.

Shares of Belo Corp. surged nearly 19 percent.

Investors had pressed Belo to consider splitting up the company, arguing that the struggling newspaper business was a drag on the stock price. The TV stations accounted for half of Belo's revenue but two-thirds of its gross earnings.

Chairman and Chief Executive Robert Decherd had resisted, however, saying the newspaper side of the company was too small to stand on its own. But the company had quietly explored a split since April, and on Monday, Decherd said the move recognized the "profound" changes in both businesses and was good for shareholders.

The move underscored investor disdain for newspaper stocks. Shares of Belo, The New York Times Co., The Washington Post Co., Tribune Co., and Gannett Co., owner of USA Today, have lost about half their value since early 2004.

Some companies with holdings in both newspapers and TV may face similar pressure to break up, analysts said.

"Belo's stock was at $17 a share and not going anywhere," said Edward Atorino, an analyst with The Benchmark Co. "If I were Gannett, and my stock were down to $44 (from $90 in 2004), I'd call in my investment bankers and see if this works for us."

John Morton, a newspaper analyst and appraiser, said profit margins at publicly traded newspaper companies in the first half of this year averaged 16 percent _ better than many other industries, but down nearly one-third from five years ago. Profit margins will probably keep shrinking as readers and advertisers shift to the Internet, he said.

"Newspapers are going through a bad patch, and it's not clear how they'll come out of it when the auto and real estate industries recover," he said. Morton said he doubts either will become a huge source of advertising again.

Speculation about other diversified media companies that might follow Belo's lead focused on Media General Inc. _ its shares rose 9 percent on the Belo news _ and The E.W. Scripps Co., which has said it will close The Cincinnati Post and The Kentucky Post.

Tribune, which owns the Los Angeles Times, the Chicago Tribune and about two dozen TV stations, considered selling its broadcast operations but rejected the idea. Putative buyer Sam Zell has indicated he will keep both parts of the business.

Analysts said the Belo spinoff could make it easier to sell the Dallas-based company's four newspapers to private investors. Asked how long he would wait before exploring such a sale, Decherd first joked "five days," then declared: "There is no Plan B. ... We're in the business to stay."

Decherd said he would run the newspaper business, which will be called A.H. Belo Corp., the company's name from 1865 until 2001.

It will own the company's flagship paper, The Dallas Morning News, and The Providence (R.I.) Journal, The Press-Enterprise of Riverside, Calif., and the Denton (Texas) Record-Chronicle. It also will own the newspapers' Web sites, direct mail and commercial printing businesses.

Those operations have about 3,800 workers and annual revenue of about $750 million.

Decherd said the newspapers business would get a fresh start and would not inherit Belo's $1.2 billion debt.

The remaining television company will have stations in fast-growing markets including Dallas, Houston, Seattle and Phoenix, as well as Belo's two regional cable news channels. It will have about 3,200 employees and current revenue of more than $750 million.

Belo President and Chief Operating Officer Dunia Shive will become president and CEO of the TV business, and Decherd plans to serve as non-executive chairman.

By spinning off the newspapers instead of the TV stations, the standalone TV company won't have to reapply for its TV licenses.

The spinoff would be made through a tax-free distribution of A.H. Belo shares to current Belo shareholders and is expected to occur in the first quarter of 2008.

Fitch Ratings immediately downgraded Belo's debt to junk status, and Moody's Investors Service hinted it may do the same. The ratings firms are concerned that the deal will increase Belo Corp. debt while subtracting the revenue and gross earnings from the newspapers.

In the second quarter of this year, revenue at Belo's TV stations rose 2.5 percent from a year earlier, but the newspapers' revenue fell 8.5 percent on weak advertising conditions. The housing slump in Southern California has hurt the Press-Enterprise, and the Dallas paper is still digging out from overstating circulation figures several years ago.

Decherd said the spinoff should improve investors' view of the financial health of Belo because, "We're taking the assets that are perceived as being most challenged, and moving them out."

Both A.H. Belo and Belo Corp. will have two voting classes of common stock after the spinoff _ a structure used by Belo and many other media companies to fend off hostile takeovers.

The ticker symbol for A.H. Belo has yet to be determined.

Belo shares rose $3.25, or 18.7 percent, to $20.61 Monday after peaking at $21.99. In the past 52 weeks, the shares have traded between $15.61 and $22.94.