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After the smoke clears.

After The Smoke Clears

In a recent skit for a United Way fund-raiser, Arkansas Democrat columnist John Robert Starr deviated from the script and, to the delight of the audience, planted a kiss on fellow actor John Brummett.

As it turns out, the scene held more significance than onlookers could know. A week or so later, Starr announced that Brummett - a long-time foe as former columnist for the Arkansas Gazette - would be joining him on the Democrat's editorial page.

While Starr and Brummett are healing old wounds, media observers believe that the last chapter of Little Rock's newspaper war is about to be written.

Brummett left the Gazette in October to work for Arkansas Writers' Project, where he writes a column for both Arkansas Business and Arkansas Times. Under an independent contract, he will write three columns a week for the Democrat and, in so doing, significantly shift the balance of the war.

The Democrat now will have both of the state's most prominent columnists. That fact, along with several economic factors, make for some interesting speculation about what will happen with the two newspapers.

Observers believe that the market simply is not large enough to support two daily newspapers. Also, newspaper readership continues to erode.

Before television came along in the 50s, the average American household subscribed to 1.5 newspapers. Today, the typical household subscribes to only 0.6 newspapers. This trend has reduced the growth of advertising rates which affect revenues and eventually profits.

Not Room For Both

Although Hussman has spent more than an estimated $100 million to fight the newspaper war, analysts have stated that there's simply not room for both in Little Rock. Instead, they say, the two should work out a joint operating agreement that would merge the papers' business operations while maintaining separate newsrooms. So far, neither side has budged, but both agree that if one paper came out on top, $20 million in profits could be reaped each year.

"Maybe it's irrational, maybe it isn't," Hussman said in recent Gazette account of the newspaper war. "Of course, a lot is at stake here other than just monetary amounts because a lot of it is the way the (Little Rock) newspaper market is going to be treated."

The Democrat's annual operating losses are a closely guarded secret, but estimates range from $2 to $5 million per year. In order to compete, the Gazette has changed senior management, promoted circulation and used selective advertising rate discounting and cost cutting. Despite these responses the Gazette's losses continue, and the paper is a strong candidate for sale.

Gannett Inc. the national media giant that owns the Gazette, operates each of its newspapers as a separate profit center. That is, each must earn a target rate of return, and the Gazette simply hasn't measured up.

Although a joint operating agreement between the two papers is a distinct possibility, Gannett might choose to sell the paper to a general investor. Under a JOA, the dominant paper can better control costs and set a standardized ad rate.

A more radical plan would involve Hussman trying to buy the paper even though he claims the idea is "farfetched."

"It's just not practical," says Hussman, who would have to gain justice department approval for such a transaction, particularly since it might violate antitrust laws on media monopolies.

"I don't have any idea what the resolution of this (war) can be," Hussman admits.

For the sake of speculation, however, we can assume that if the Gazette goes on the market, Hussman will be interested and the question will involve how her or a general investor might go about determining a sale price.

Gannett buys and sells newspapers using actual and expected rates of return as a guide. If a newspaper is for sale, its expected rate of return is compared to Gannett's desired return. A decision to buy is made if the acquired newspaper earns a return exceeding the targeted return.

There are two potential buyers - one will be the general investor and the other is Hussman. The interesting question here is how each will determine the sale price.

Paying the Price

The maximum price the general investor will pay is the discounted value of the Gazette's future earnings. This potential buyer will examine the historic operating revenues and expense, adjust both to reflect the reasonable expectation of what the future holds, estimate the future profits, and then discount these to arrive at a purchase price. This procedure is the same one use to value any operating business.

Hussman would duplicate those calculations, adding one significant adjustment to the expected future net revenue stream. At the present, the Democrat incurs large annual losses which would stop if the Gazette disappears.

Hussman would include the elimination of those losses when he values the Gazette's business operations. Hence, the price Hussman would pay would be higher than that of any general investor since he would gain a monopoly in the market.

Conversely, Gannett might offer the paper to an investor at a good price - one that would earn a reasonable return on investment while sentencing the Democrat to perpetual losses. Gannett also could include an incentive clause in the contract that would pay itself art of any future increase in Gazette profits should the Democrats ever fold.

Analyst, however, believe that a more likely out come is that the Gazette owner - whether it's Gannett or another entity - eventually will have to enter a JOA on Hussman's terms. If Gannett wants to be stubborn, however, it could force Hussman to decide finally how much is willing to pay to have an exclusive editorial presence in Little Rock. [Tabular Data Omitted]
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Title Annotation:newspaper wars in Little Rock, Arkansas
Author:Pickett, John C.
Publication:Arkansas Business
Date:Dec 17, 1990
Previous Article:"Arkansas Nickel" attracts cameras.
Next Article:Intuition is insurance enough.

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