By Dead Tree Edition
USA,
Jan. 30, 2012 (RISI) -
Are things really so bad for print media that the companies we thought were victors of the competitive wars have now become victims? Dead Tree Edition isn't so sure, so we're turning to our readers to help us understand.
We have initiated a poll (on the Dead Tree Edition website, in the right column, just below the first ad and above the "Popular Posts" listing), asking which, if any, of these four companies will end up in bankruptcy court during 2012. You may vote for more than one, or for "None of the above." In the early balloting, only 30% of the voters thought none of the four would face bankruptcy this year, while Verso and USPS were in a tight battle for the title of most likely to succumb.
Here's a quick rundown of the candidates:
USPS
In just a few years, declining mail volumes and Congress' inability to make decisions have turned what was the federal government's cash cow into a multi-billion-dollar money loser. Gene Del Polito president of the Association for Postal Commerce, summed up the situation this week:
"The one significant challenge that's facing the U.S. Postal Service is a very simple to discern: Its costs outstrip by a significant margin its ability to cover those costs with postage-paid revenue. Set aside for a moment all the rationalizing as to why this is so. No matter the reasoning, the result is still the same. Too many costs; not enough revenue."
The agency met with restructuring (AKA bankruptcy) advisors last year, and the word "bankruptcy" keeps popping up in news reports. (See Could Forever Stamps Become Worthless? What Bankruptcy Might Mean for USPS.)
But what exactly would "bankruptcy" mean for the Postal Service? Its dominant creditor, the federal government, is required by the Constitution to provide postal service. If the feds shuts down USPS, who will carry out this duty? (And don't do a George Will and tell me it will be FedEx and UPS.)
Barnes & Noble
The big bookstore chain was supposed to feast on the ruins of its rival, Borders, because it moved to the web much quicker and has the growing Nook line of e-readers (and a significant cut of the sales of any Nook editions of books and magazines). But a research organization recently put it on a list of the companies most likely to run into financial distress, and it does appear headed for another money-losing year.
The revelation that it might spin off the Nook business fueled speculation that the company is in trouble. One theory was that, after the spin-off, B&N itself would go Chapter 11. But why would the bondholders allow a spinoff that would weaken the parent company that much?
I think the possible spin-off is about tapping into the kind of deep pockets needed for the Nook division to keep pace with the likes of Amazon and Apple.
Quad/Graphics
Quad's relatively high profitability enabled it to swallow a much larger competitor, Worldcolor, 18 months ago. With its investments in training and new technology, high level of employee ownership, and a "drink the Koolaid" culture, Quad has been a favorite of management gurus over the years.
But Quad appeared right behind Barnes & Noble on that list of high-risk companies. The Worldcolor acquisition left it with lots of debt, lots of excess capacity, and lots of integration headaches.
With the continuing rise of digital media and growing uncertainty about the Postal Service's fate, being the #1 or #2 printer in such fields as magazines, books, telephone directories, and catalogs doesn't seem like a particularly inviting position. And despite numerous plant closures since the acquisition, Quad still finds itself facing overcapacity and declining prices in many of its market segments.
Verso Paper
Verso was spun off from the mighty International Paper and has been a force in the North American publication-papers business ever since. Like its chief rival, NewPage, it was taken over by hedge funds. But it avoided the excesses (arrogance, bad customer relations, debt) that dragged NewPage into Chapter 11 four months ago.
NewPage's failure isn't necessarily Verso's gain. NewPage is still in business and is left with only low-cost mills. As long as it's in bankruptcy proceedings, it will run those mills to maximize short-term cash flow while ignoring market discipline.
Paper industry analyst Verle Sutton, writing in The Reel Time Report, recently summed up Verso's predicament this way:
"Numerous reports indicate that Verso will have a very difficult time staying out of bankruptcy during the next couple of years. The company expresses much more optimism than I am suggesting here, and I wish the company well, but the odds are against avoiding bankruptcy. Shutting down capacity (permanently) in an attempt to balance supply and demand would be very costly for Verso, and . . . would likely drive the company into bankruptcy even sooner."
This article originally appeared at Dead Tree Edition (http://deadtreeedition.blogspot.com/), which is written by a magazine-industry manager who goes by the pseudonym D. Eadward Tree. Comments made in this blog are the opinion of the author and do not necessarily reflect that of RISI, Inc., its parent company or sponsors.
