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Throwing off the chains in Peoria.

The commonly accepted notion that almost all U.S. dailies will eventually be owned by chains - as three-quarters of them already are - does not play well in Peoria.

The Peoria Journal Star is being taken over, but not by a chain. Currently its employees own 85 percent of the company, and in four or five years they will have bought the rest.

How this came to be, and how it has worked out for the Journal Star's employees, offers a lesson for the dwindling roster of about 375 independent newspapers in how to stay locally owned and successful. That lesson might be instructive, too, for the 100 or so small newspaper chains that are essentially still family-owned enterprises.

The Journal Star is not the first newspaper to become employee-owned, of course. Employees own the Milwaukee Journal and Milwaukee Sentinel, and a majority of the stock at the Omaha World-Herald. The Kansas City Star was employee-owned until it was acquired by Capital Cities Communications (now Capital Cities/ABC) in 1977.

But the Journal Star is the first newspaper to sell out to an Employee Stock Ownership Plan (ESOP) created under legislation passed by Congress in the late 1970s that confers special tax advantages to encourage employee ownership.

The key to the Peoria story was the determination of the patriarch of the Journal Star's owning family, Henry Slane, to keep his newspaper locally owned. Even though the Journal Star had had its share of fractious dealings with its five unions (the pressmen, printers, drivers, mailers and the Newspaper Guild), Slane wanted his employees to wind up as owners and set in motion the legal and financial steps necessary. (For the record, I was retained to perform the appraisal of the company required to establish the ESOP and to perform continuing annual appraisals.)

The ESOP legislation makes employee purchases of companies possible by giving banks a tax break on interest earned on money loaned to an ESOP. Since the bank has to pay tax on only half the interest income, it can grant the ESOP a favorable rate. Thus the Peoria ESOP pays less than the prime rate for its money.

The ESOP uses the money to buy stock from the owners. In effect, it becomes a stock fund. Employees buy shares in the fund with payroll contributions and with contributions made on their behalf by the company. Each employee has an account in the fund reflecting the stock's appreciation (determined by annual appraisal) and annual contributions. When an employee quits or retires, he or she sells the stock back to the fund at the current appraisal price. Employees cannot sell their stock until they leave.

At the Journal Star, the company determines each year what percentage of its employees' compensation it will contribute to the ESOP (in effect, this is an untaxed dividend). In addition, each year the company matches dollar for dollar up to 5 percent of each employee's compensation that the employee chooses to contribute to the find to buy stock. Also, each year the company sets a dividend on its stock. Since the contributions and dividends are paid into the ESOP, they remain untaxed until the employee quits or retires and withdraws his or her assets from the ESOP.

How have the Journal Star employees fared? Since the plan began in 1984, the value of their stock has risen nearly 280 percent. The average account balance at the end of 1992 was $147,491.

Now, this kind of performance would not be possible if the Peoria Journal Star were not efficiently run and prosperous. And achieving this in a market beset by population losses (down nearly 7 percent over the last five years), factory closings, and lengthy strikes and huge layoffs at Caterpillar, the major employer in the area, has been a formidable task.

Despite the market problems, the Journal Star ranks fourth among 39 media companies surveyed by Veronis, Suhler and Associates in operating profit margin at 19.9 percent and in operating cash flow margin (operating income plus depreciation charges) at 24.9 percent. Indeed, if the extra expenses the Journal Star faces because of its ESOP are removed, the newspaper's cash flow margin last year topped 33 percent.

Nor was this performance achieved at the cost of a diminished editorial product. The Journal Star spends 14 percent of its revenues on the editorial department, well above the 12.4 percent average for newspapers its size (85,000 weekdays, 111,000 Sundays), according to studies by the Inland Press Association.

Steven Koch, vice president of the Journal Star, is convinced the newspaper has prospered precisely because it is employee-owned - the employees know they are the owners and they go about their work like owners. "When the ad salesmen go out on the street in a difficult economic climate, they know they are not selling to benefit a family - they're selling for themselves," he says. "This place is not operated like a commune - it's run like a business. We're all in the boat together, and the proof of that is in the results."
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:employee buyout of the Peoria, Illinois Journal Star
Author:Morton, John
Publication:American Journalism Review
Article Type:Column
Date:Mar 1, 1993
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