Another 'writedown' by the Seattle Times Co. minority owner

According to McClatchy, its 49.5 percent stake in the Washington and Maine newspaper company is worth a mere $9.9 million. While that figure signifies little, the fact it keeps shrinking is a bad sign.
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According to McClatchy, its 49.5 percent stake in the Washington and Maine newspaper company is worth a mere $9.9 million. While that figure signifies little, the fact it keeps shrinking is a bad sign.

The latest bit of bad news for the struggling Seattle Times Co. was another "writedown" of the value of the stock held by the company's minority shareholder, Sacramento-based McClatchy Co. McClatchy, which holds 49.5 percent of Times Co. voting stock, valued the investment at $102.3 million when it acquired it in 2006 as part of an acquisition of Knight Ridder. Since then, it has regularly lowered that valuation, pegging it at $9.9 million in the latest Securities and Exchange Commission filing, on Aug. 8. Gary Pruitt, McClatchy's chairman and chief executive, told shareholders in May he was open to selling the Times Co. stake if he could find a buyer.

So why do companies "write down" assets like the Seattle Times Co., and what does that mean? How, for example, can McClatchy's half of the Times Co. be worth only $9.9 million when just the five acres of downtown Seattle real estate the Times Co. is planning to sell is assessed at more than $32 million? What about the rest of the company, an amalgam of business assets ranging from The Seattle Times newspaper and five other dailies in Washington and Maine to additional real estate, a commercial printing business, and Web sites? And how would McClatchy's writedown affect the sale price if Pruitt ever finds a buyer for McClatchy's minority stake?

The Seattle Times Co. is privately held, with 50.5 percent of the stock owned by the Seattle-area Blethen family. It owns The Seattle Times, the Yakima Herald-Republic, the Walla Walla Union-Bulletin, and, in Maine, the Portland Press-Herald and Sunday Maine Telegram, the Kennebec Journal in Augusta, the Morning Sentinel in Waterville — plus three weeklies, Web sites and, real estate, and Rotary Offset Press in Kent, Wash.

Times Co. spokeswoman Jill Mackie referred Crosscut's questions to McClatchy but noted that the value of the whole company "is only marginally related to the value placed on shares by a minority owner with no control over operations."

McClatchy's treasurer and spokesperson, Elaine Lintecum, didn't offer much more explanation about the writedowns. In an e-mail, Lintecum said the drop in McClatchy's valuation of the Times Co. was based on "complicated accounting requirements" related to "comprehensive income."

Still puzzled, Crosscut took these questions to David Burgstahler, the Garhard G. Mueller professor of accounting at the University of Washington's Foster School of Business.

Businesses write down assets, Burgstahler said, to reflect changing fair value. Traditionally, that meant buying an asset — a truck, say — putting the market value on the books, then depreciating, or "writing down," the truck's value over time as it wears out. But in the last five to 10 years, Burgstahler said, the accounting profession's approach to writedowns has changed dramatically. Where once the Financial Accounting Standards Board (FASB), the industry's rulemaking body, simply required writedowns on assets with known market value, now FASB wants companies to review and revise the value of assets for which the market value is less clear, including intangible assets. McClatchy's valuation of its Seattle Times Co. stake, for example, includes items like "good will," which may involve anything from the value it puts on the Times subscriber lists to an estimate of how popular the Times' sports columnists will be with advertisers.

"The problem," Burgstahler said, "is that it's hard to put market value on something for which there is no clearly established market."

So when McClatchy attempts to assign value to its share of the Seattle Times Co., whose far-flung, intangible parts operate in a vague and fluctuating marketplace, it is essentially working with corporate Jell-O. Or, as Burgstahler puts it: "They're kind of guessing."

Still, what the FASB wants, the FASB gets, and auditors routinely certify corporate guesses on the valuation of writedowns. McClatchy started with an independent appraiser's valuation that the Times Co. minority share was worth $102.3 million in 2006. (Knight Ridder's appraiser, viewing the Times Co. stake through the seller's eyes, valued it at $283 million.) Then, using what is known as the "equity accounting method," McClatchy subtracted its 49.5 percent share of the Times Co.'s losses over the next 18 months, plus whatever dividends the Blethen-controlled Times Co. board elected to give McClatchy, and came up with the $9.9 million valuation.

Because the Times Co. is not publicly traded and does not have to disclose finances, this oblique glimpse — through the eyes of McClatchy's SEC reports — is the only way to peek inside. But that can distort things, as Times Co. spokeswoman Mackie notes. For example, one possible writedown strategy McClatchy may be using is commonly referred to in accounting parlance as "the big bath."

"When things are going bad, companies sometimes suddenly get incredibly conservative in their accounting," Burgstahler said. By painting the worst possible financial picture now, a company's executives can later claim managerial wizardry if the business stabilizes. If McClatchy's accountants write down their Times Co. stake from $102.3 million to $9.9 million, but McClatchy sells the minority share a year later for $20 million, Pruitt can tell shareholders: "Look, we made $10 million on the deal."

Of course, Burgstahler points out, there are dangers to this strategy. "First," he says, "you have to tell your stockholders, 'We had to lose $90 million to book that $10 million sale gain.'"

Is McClatchy drawing a 'big bath' scenario to prep its Seattle Times Co. stake for an eventual sale? Probably not, Burgstahler said. For one thing, the big bath works if you can sell the asset, and potential buyers aren't lining up to grab Pruitt's offer of McClatchy's Times Co. stake. "If I had to guess," Burgstahler said, "I'd say McClatchy's auditors had questions about the value of the Times Co.'s business and made them write it down to more accurately reflect the true picture."

So what does McClatchy's valuation of the Times Co. mean? For McClatchy, probably not a lot. The plunging valuation of the Seattle Times Co. is only a small part of the California company's much larger financial problems as a newspaper company. But it does underscore the Times Co.'s claim that over the past 18 months it has been losing money — lots of money. It also means that even if the Times Co. sells assets like its Maine papers and Seattle real estate to fend off banks that hold its debt, the core print newspaper business is steadily deteriorating, promising further devaluation. And it suggests that one potential buyer of McClatchy's stake in the Times Co. — perhaps the only one, namely the Blethen family — probably can't afford it, leaving McClatchy with little choice but to hold its nose and keep writing down the investment.


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