Lee rumors swirl as $1 billion evaporates

Is there more going on at Lee Enterprises than meets the eye? Thursday's stock sell-off came at a time whispers about the newspaper chain's intentions -- especially regarding The Journal Times -- have been heard. Take the following rumors with a grain of salt -- they're totally unconfirmed (and unlikely to be confirmed at all until something happens -- or doesn't).

I first heard that The Journal Times -- which Lee bought in 1959 -- might be traded to another chain from a former Journal Times ad director. Later, an industry insider, who also used to work here, said he'd heard that much more than our newspaper may be involved. But both tipsters are dealing in second-hand, or worse, information.

I tried to check out the story through official sources, but got this response from Dan Hayes, Lee's vice president of communications, "Pete, as you’d expect, we never comment on speculation about possible acquisitions or divestitures, regardless of how off base it might be." Yup, just as expected. (And a sly dig as well; Dan's a sharp former Lee editor.)

The world of hurt at Lee came to the forefront Thursday when shares of the company stock (NYSE: LEE) closed at $11.78, down $2.69, or 18.59% in one day. "Lee in free-fall," headlined an industry story; it's a "mystery," said an analyst.

The high volume of Lee stock sales Thursday (four times the norm), and the sudden price drop are unexplained. Hayes, said, "We know of no news that would trigger this."

Um ... the fall came right after Lee CEO Mary Junck's New Year's Eve letter to shareholders, which attempted to put a good spin on the past year's results -- down in key categories (revenue, circulation) but less so than many other newspaper chains. The sentence that I think spooked the market warned that Lee's 1st Qtr. results would be down from an "exceptionally good" 2006 1st Qtr.

Whatever the reason, the outcome exacerbated the pain that's been present all year: Lee's value is down two-thirds since February. On Feb. 16, 2007, with Lee stock selling at $35.51, its 46.19 million shares had a total valuation of $1.64 billion. At Friday's close, Lee's market capitalization had dropped to $547 million -- ouch, if that missing $1.1 billion came from your 401k. Shareholders don't feel any better knowing that all newspaper chains are in the dumps -- Journal Register was down 75.9% for the year; McClatchy, 71%; misery really doesn't love company.

Lee has grown dramatically in the past few years. When I became a Lee editor in 1979, the chain had just 18 daily newspapers. Except for the addition of a miscellaneous daily or two, and scores of weeklies and shoppers around the country, it pretty much remained a mid-sized, Midwest newspaper chain (having sold off half a dozen TV stations) until 2005, when it bought -- for $1.46 billion -- the Pulitzer newspaper chain and its flagship, the St. Louis Post Dispatch.

Overnight, Lee became the 7th largest newspaper chain in the U.S., as measured by circulation (1.7 million daily; 2 million Sunday); or the 4th largest chain, as measured by the number of papers (56 dailies; hundreds of weeklies and shoppers). Lee's largest paper before the Pulitzer purchase, the 90,000-circulation Wisconsin State Journal in Madison, was displaced by The Post-Dispatch, then at 286,000, and the Arizona Star, at 100,000.

Lee's revenues more than doubled after the sale: from $518 million in 2002 to $1.12 billion in 2006. But high interest costs have kept net earnings unchanged in the past five years ($81 million in 2007).

So what are the rumors?

Simply this: that Gannett and Lee will swap a number of newspapers -- in theory to help both chains regionalize their holdings, allowing both to wring financial economies and operating efficiencies out of the process. Lee owns eight dailies in Wisconsin; Gannett owns 11.

The most intriguing speculation involves both The Journal Times and the Wisconsin State Journal going to Gannett, and Iowa's Des Moines Register, which Gannett bought for $195 million in 1985, going to Lee. Gannett also owns the Iowa City Press Citizen. Lee owns five Iowa papers; largest is Davenport's Quad-City Times.

The scuttlebutt also includes unspecified Gannett property in Arizona going to Lee. The Arizona Star, which Lee bought with the Pulitzer deal, competes with Gannett's (daily only) Tucson Citizen, 30,000 circulation. Gannett also owns the Arizona Republic in Phoenix.

This theoretical deal-making would be complicated by the fact that Madison's Wisconsin State Journal already has a complex operating arrangement with the shrinking Capital Times. Also, if Gannett were to acquire Madison, it would bring about, in one nay-sayer's words, "incredible ownership concentration" when paired with Gannett's other dailies in the state, which include Green Bay and Appleton. Not to mention the State Journal's ties to Portage, Baraboo, Beaver Dam and eight or so weeklies.

And finally, why would Gannett want Racine? It's isolated from the chain's other papers, negating savings through centralization. As to why Lee might want to get rid of Racine: Hard to say (despite shrinking profits here, as elsewhere). But in 1998 secret talks took place between Lee and Journal Communications. (I only heard of them after the fact.) Milwaukee was building its new printing plant, and clearly had designs on Racine County: it had opened up a bureau and distribution center and started a Sunday tabloid section of Racine news, all prelude to starting a regional edition to compete with The Journal Times (as it had done successfully against the Freeman in Waukesha). But discussions about swapping The Journal Times for some of Journal Communications' Community Newspapers came to naught -- and since then Milwaukee's own financial problems have starved its expansionist dreams.

Still, this is an industry in rapid upheaval; as if the dinosaurs disappeared over a long weekend. Landmark Communications put itself up for sale two days ago. Lee sold the DeKalb (IL) Daily Chronicle in December. Knight-Ridder, gone, and then McClatchy turns around and sells its new flagship, the Minneapolis Star-Tribune. Pulitzer, gone. Tribune, sold. Dow Jones and The Wall Street Journal, sold to Murdoch (and there's talk of removing 'Wall Street' from its name!). Ottaway papers for sale. There's even speculation about The New York Times Company merging with Bloomberg.

Very little should surprise us. The real question is not who might end up owning The Journal Times but rather this: What difference would it make?