Shares of Lee Enterprises (NYSE: LEE) have climbed to a six-month high of 1.73 on Wednesday as investors continue to react to a Delaware court decision to approve the company’s bankruptcy restructuring plan, essentially providing Lee with, in the words of chairman and CEO Mary Junck, “a nearly four-year runway to continue improving our balance sheet.”
Last month LEE entered a pre-packaged Chapter 11 bankruptcy filing after finding resistance among some senior creditors who refused to back the Iowa-based publisher’s September plan for restructuring nearly $1 billion in long-term debt. Addressing that pre-packaged Chapter 11 filing Junck had stated “In our case, the process will simply provide a favorable legal framework for implementing the pre-negotiated refinancing on an expedited basis while business continues as usual with no impact on employees, vendors and customers. The refinancing, combined with our strong cash flow, will keep Lee on solid financial footing as we continue reshaping our company for long-term success by expanding our digital platforms, building audiences, driving sales and deleveraging to improve our balance sheet.”
Chief U.S. Bankruptcy Judge Kevin Gross in the District of Delaware approved the refinancing plan, putting LEE on track to exit bankruptcy on January, 30, 2012. The approved plan spares shareholders from being wiped out and ensuring equity holders retain their interest in the company while unsecured creditors remain unaffected by the restructuring process.
For her part, Junck has tried to reassure shareholders that the bankruptcy restructuring plan will allow them to “retain interest in the company with only modest dilution.” Prior to the December 12, 2011 filing Junck put a figure on that dilution, saying the pre-packaged Chapter 11 process will “preserve stockholders` interests in the company with only 13% dilution.”
With their refinancing agreements in place LEE extended the maturities of their borrowings to December 2015 and April 2017. Junck stated that the refinancing “along with our ongoing strong cash flow, will keep Lee on solid financial footing as we continue reshaping our company and building on our unique strengths. Because of our intensive sales culture and evolving array of products, Lee has outpaced the industry in advertising revenue performance for 33 quarters in a row. Even in a challenging economy, more than 80% percent of adults in our larger markets read or use our print and digital products each week, including two-thirds of 18- to 29-year-olds. All of this reinforces our optimism for the future.”
This is where investors have to decide whether or not to share LEE’s optimism. While receiving approval for their refinancing plan was certainly a win the fact remains LEE is operating in a very difficult climate. Looking at their first quarter operating results the company reported revenue of $199.6 million, a decline of 3.9% compared with a year ago. Combined print and digital advertising revenue decreased 6.1% to $142.5 million, with retail advertising down 5.4%, classified down 9.7% and national up 1.4%. Combined print and digital classified employment revenue decreased 0.3%, while automotive decreased 4.1%, real estate decreased 17.9% and other classified decreased 15.2%.
The main culprit in LEE’s losses has been print revenue, something just about every publisher has been forced to endure. On a stand-alone basis LEE saw print advertising revenue decrease 7.9% and what makes this hard to swallow for shareholders is the fact that this segment represents the bulk of the company’s revenue stream as evidenced by the fact that their digital advertising revenue on a stand-alone basis increased 10.4% to $16.2 million. That $16.2 million is a fraction of the $142.5 million in revenue brought in by both digital and print advertising.
So the question is whether or not LEE is capable of aggressive growth in the digital advertising segment. The company provided some strong figures in their first quarter results; showing their websites and mobile and tablet products attracted 21.8 million unique visitors in the month of December 2011, an increase of 10.4% from a year ago while mobile page views in December increased 179% to 28.3 million.
The obvious problem for LEE is that the bleeding from their print advertising revenue doesn’t appear to be stopping, meaning their digital advertising revenue will not only have to grow but essentially explode if they are to counter the print losses.
For their part LEE has recognized the importance of expanding their digital advertising revenue and they appear to be taking an active approach but to survive they may need to cut some of their losses in the print area. LEE has been around since 1890 and while they were among the most successful publishers at one time they have found themselves in the same position as many other publishers, struggling to adapt to a new environment, if they continue to hold on to what they once were then they could become a has been. The restructuring plan has bought them some time but it certainly hasn’t guaranteed them a long future.