Copyright 2015

The Arizona Daily Star has become the thinnest of newspaper gruel.

It seems readers have noticed. In 2006, the Star’s weekday circulation was 103,708. It’s Sunday circulation was 161,975. In 2014, the Star’s daily circulation was 77,528, 25 percent drop. It’s Sunday distribution decreased to 124,007, 23.4 percent less. These numbers are from documents filed by Lee Enterprises with the Securities Exchange Commission. Lee owns the Star and many other newspaper properties.

The circulation decreases are happening as the area grows. Pima County’s population in 2006 was 981,110. In 2014 it was estimated at a shade over a million. The message is pretty much the same all over the country: As the population increases, newspaper circulation falls. In Tucson, the trend is a bit more pronounced.

Since 2005, when Lee purchased Pulitzer Newspapers, Lee has struggled to manage its enormous debt. The company purchased Pulitzer at the zenith of the market, just before it suffered losses from Internet inroads and a severe economic downturn. The decline started in 2006. Lee and all other newspapers have not fully recovered. The days of cheerful 33-percent profit margins seem long gone.

Here’s what the company said in last year’s 10K SEC filing: “At September 28, 2014, the principal amount of our outstanding debt totals $804,750,000. At September 28, 2014, our debt, net of cash, is 4.7 times our 2014 adjusted EBITDA, compared to a ratio of 4.8 at September 29, 2013.” (EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation . It is a measure of operating income. It does not include debt service, of which Lee has in abundance. Last year’s 10K said the company spent more than $30 million to service its debt.

A recent company news release said Lee had paid off a portion of debt from the Pulitzer purchase two years early. The balance of the payment was made to BH Finance LLC, a subsidiary of Berkshire Hathaway Inc., which is controlled in large part by Warren Buffett, the investment genius and of late a fan of Lee Enterprises. There was a balance of $9 million left on the loan. Mary Junck, chairman and chief executive officer, according to the release, said the reason for the early pay-off was “the company’s strong performance and substantial cash flows.”

The value of Berkshire Hathaway’s 88,863 shares of Lee stock is about $270,000, a modest investment for a company whose shares sell for more than $214,000 each. Thus Berkshire Hathaway’s investment in Lee is equal to fewer than two of its own shares.

Lee’s 10k makes no other mention of debt held by Buffett & Co. It reported that three banks hold the paper: Deutsche Bank ($400 million), JP Morgan ($250 million) and Wilmington Trust ($150 million).

On Februrary 1, 2005, The Associated Press reported this badly written story:

“Lee Enterprises Inc. is buying Pulitzer Inc. — publisher of the St. Louis Post-Dispatch founded by famed newspaperman Joseph Pulitzer — in a $1.46-billion deal that Lee says would give it the nation’s fourth-biggest roster of daily newspapers.

“Davenport, Iowa-based Lee said the acquisition would make the company fourth in numbers of U.S. daily newspapers with 58 dailies in 23 states. Lee has 44 daily newspapers in 19 states.

“Lee will pay $64 a share in cash for Pulitzer, which owns more than 100 weekly newspapers, shoppers and niche publications.

“Pulitzer shares rose 56 cents to $63.46 on the NYSE. Lee shares rose 64 cents to $44.55 on the NYSE.”

Today, Lee’s share price is a bit over $3.

In 10 years, Lee has managed to retire around $600 million in debt. I can only guess how much it has cost to service and renegotiate the debt. It appears in bits and pieces amid the rubble of its 10K filings.

Obviously, the company is struggling. It’s market cap is but $186 million. This means that the company owes about four times more money than it’s worth. According to Yahoo Finance the stock’s short ratio is about 9 percent. This means about 9 percent of its shareholders are betting the stock will drop.

After years — make that decades — of speculation, Gannett — Lee’s partner in Tucson — shuttered the Tucson Citizen in May 2009. The two companies benefitted by eliminating Citizen newsroom and newsprint expenses.

Speculation on the Star’s fate today is sparse if not absent. So allow me to fill the void. There is an economic argument for Gannett to buy out its Tucson partner. Gannett’s Phoenix operation includes the huge Arizona Republic and a TV station. If it were to acquire the Star, it could reduce Tucson production costs by printing the Star in Phoenix. It could consolidate newsroom and advertising expenses.

The Republic’s other — and perhaps more appealing — choice would be to buy the Star and kill it. That would permit it to publish a Tucson edition of the Arizona Republic. Its statewide dominance would be nearly complete.

If that seems a bit cynical, consider what Hearst did when it owned the San Antonio Light and bought the San Antonio News-Express. Hearst killed the Light. No sense publishing two papers when one will make more money.

While we’re on the topic, there once was a time when idealism had a role in newspapers. There was much to be said about the nobility of the free press, the First Amendment and (quoting Joseph Pulitzer) “comforting the afflicted and afflicting the comfortable.” But the good intentions and idealism have gone the way of the buggy whip, yielding without much of a peep to the ways of the balance sheet and the vagaries of profit and loss.

Nowhere is this picture more vivid that in Lee’s depressing predicament. It is the squeeze mode, coaxing every penny from the expense column. It has put the historic Post-Dispatch property in downtown St. Louis up for sale. Lee announced a round of cutbacks in St. Louis as well. Seems the new squeeze is on in anticipation of huge debt payments due in 2017.

It may come to pass that the company can pay its debt only by selling some newspapers — even at bargain prices. The Star might be one of the more valuable properties, and go a long way toward retiring its great debt. It would be preferable. The Star has been squeezed so much that it is barely alive.