Scripps Co.: Old Media Dog Full Of New Tricks

This year, the E.W. Scripps Co. will morph from a newspaper company that owns television stations to a broadcast company that owns some newspapers.

With this year’s addition of the McGraw-Hill station group, which Scripps purchased for $212 million, annual broadcast revenue will jump 50% to roughly $450 million. Publishing, by contrast, will contribute a just $400 million.

It’s a sea change for a company with a venerable 134-year history in print journalism. It also marks another negative turn for the newspaper business, which is dying the death of a thousand cuts.

Scripps top executives say the shift is anticlimactic, simply the footnote on a story of changes that stretches back years.

“I kind of think of us as having been a television and programming and content-driven company for a long, long time,” says CEO Rich Boehne.

In any event, it is certainly a television and programming company now.

“We made that decision going forward to tilt the dance floor more toward the TV and digital side,” he says. “That’s not a comment about newspapers. It just says that in this season that we’re in, television is a more robust business. And this gives our newspaper folks an opportunity to rebuild their business models.”

With Brian Lawlor, senior vice president-television, leading the charge, the near-term mission is to rebuild cash flow margins of the stations, no small task given that those properties lag industry leaders by 10 percentage points or more.

At the same time, Scripps is investing in homegrown programming to reduce its reliance on syndicated fare; bulking up investigative news efforts; reorganizing and centralizing digital operations to exploit growth on that platform; and even sticking its toes in the social gaming pool.

The five TV Azteca stations included in the McGraw-Hill deal move the company outside its historical comfort zone, but it’s acting quickly to tap the potential of the fast-growing Hispanic market.

“Scripps has methodically been redefining itself strategically over the past few years,” says Damian Riordan of the M&A advisory firm Peloton Media Advisors. “They’ve been trying to find their way through a difficult period in the newspaper segment. If they’re going to make changes, this is time to do it. It’s time to double down.”

The E.W. Scripps Co. is largely owned by Scripps family trusts. Those trusts, along with directors and management, hold 95% of common shares and a little over 36% of Class A shares.

Historically, that ownership structure contributed to the perception of Scripps as an Old School company with a traditional button-down corporate culture — risk averse, slow to change, a widows-and-orphans type investment vehicle.

Scripps’ entry into broadcasting dates back to the early days of the medium. It built and launched its first three stations in the 1940s: WEWS Cleveland in 1947, WMCT Memphis in 1948 and WCPO Cincinnati in 1949.

Scripps remained a three-station stable until the late ’60s when it started adding stations — slowly. Until last year’s McGraw-Hill deal, the last big addition was WMAR Baltimore, an ABC affiliate, in 1991.

The group now comprises 19 stations in 13 markets ranging from DMA 11 (WXYZ Detroit) to DMA 126 (KERO Bakersfield, Calif.), with the majority in top-50 markets.

But it was the early ‘90s push into cable programming that would redefine the company and elevate Ken Lowe, the architect of the cable strategy, to CEO of the company in 2000.

HGTV was the first of what would become a collection of highly successful cable channels, including Food Network, DIY Network, Cooking Channel, Travel Channel and Great American Country (GAC).

Ensuring the success of the cable operation meant robbing Peter to pay Paul. As Scripps was birthing the cable channels, it used the station group as a handy, efficient bootstrap, leveraging its retransmission consent rights to boost distribution of the cable nets instead of negotiating for fees.

“We had used the stations very aggressively to build the cable networks,” Boehne notes. “So some of that value has really gone to the cable networks instead of the local stations.”

The decision to spin off the cable nets in 2007 had a two-pronged rationale: Release some of the value that was trapped in the cable nets because they were part of a newspaper company, and free the station group from being the financial nursery for cable operations.

“Really what was behind that was we had two businesses that were starting to trip over each other and we said to the board if you really like the journalism business, if you really want to affect individual local communities, we need to separate the companies and have a vehicle through which we could do that as just primary strategy,” recalls Boehne, a leading proponent of the spin-off.

In the split, Lowe became chairman, president and CEO of Scripps Networks Interactive, where he could continue to grow the networks he had spawned.

Stepping up from COO to CEO of E.W. Scripps, Boehne took responsibility for the legacy media. “We came out of the gate with very little debt and good financial flexibility. The only thing we didn’t count on was the financial crisis.”

Rebuilding margins

The cable spin-off came on July 1, 2008, just as the U.S. economy, and the newspaper business, were entering freefall. Good timing? Bad timing? Take your pick.

Had cable operations remained un-spun, the dramatic decline in newspapers likely would have depressed the combined companies’ stock price and acted as a governor on cable operations.

Maybe more important, the Scripps stations would have missed out on retrans just as it was beginning to bear fruit.

“On the television side, they have some pretty good assets,” says Barry Lucas, senior vice president of Gabelli & Co. “What’s been a powerhouse for a good long time, despite the travails of Detroit, WXYZ continues to be rock solid.

“They do a decent job but they haven’t brought it home on the margins and they’re well aware of that. A piece of that is retrans — they’re missing a significant amount that their peers get.”

(Disclosure: Lucas notes that he owns Scripps stock as does Gabelli affiliate GAMCO. Lucas and Kupinski both have buy recommendations on the stock.)

Just what are those margins? Boehne and Lawlor declined to disclose the numbers. Analysts project they’ll be in the mid- to upper-20% range this year, substantially below Scripps’ peer group, where they’re 30%-plus.

A couple of factors could help on the margin front.

First, retrans revenues. Michael Kupinski, director of research at Noble Financial Capital Markets, sees them rising as much as 30% this year to roughly $20 million. Longer range, Scripps retrans deals with key MPVDs, including Time Warner Cable and Comcast, begin coming due in 2015, presenting an opportunity for another boost.

Economies of scale also will assist. The four full-power McGraw-Hill stations, all ABC affiliates, will boost Scripps’ leverage in affiliate talks with the network and syndicators.

And while Scripps projects a 30% increase in first-quarter 2012 capital expenditures to start bringing the new stations up to snuff, even incremental improvement will have impact.

The upside potential is one of the reasons analysts and investors like the McGraw-Hill deal.

While Scripps’ legacy stations rank well in their markets — seven of nine stations ranked first or second in evening news in the May 2011 book — the McGraw-Hill stations in three markets (San Diego, Denver and Indianapolis) were third.

Reinventing broadcasting

The company is in year four of a long-range strategic plan aimed at making the stations more competitive by improving news operations, expanding stations’ Web presence and adding local programming, Lawlor says.

“It has not been an expense-driven, margin-driven focus, but it’s been a strategic plan to improve many aspects of our business, which is then creating more financial value for the company and thus driving margins,” he says. “I couldn’t be more pleased with the success we’re having, but it will remain a long-term goal for probably another decade.”

Improving news operations, particularly at the McGraw-Hill stations, is just one initiative.

In late February, the company announced it will expand its broadcast operations’ investigative reporting efforts at its Washington bureau. Those efforts will include teaming national and local coverage; scrutiny of government decisions and the impact on communities; and partnering with Scripps Howard News Service, digital reporters and newspapers to conduct in-depth investigations.

“Probably most important is to never think of it as a charity,” says Boehne. “We think journalism and public service create economic value. So when we put resources into these TV newsrooms, we do it based on a model that shows we can increase ratings and increase our profits. It’s all business. We just happen to believe that journalism is a very good business if done creatively and with great quality. We’re not doing it just to be nice people.

“We think it’s the road to long-term success.”

Exploring DYI programming

Scripps’ willingness to shake things up is evident on the entertainment programming side as well.

It’s dumping Jeopardy and Wheel of Fortune, which lead in or out of the evening news depending on time zone, in favor of some homegrown programming still in development.

“We looked at Wheel and Jeopardy — great shows that have been on our television stations for upwards of 30 years in some cases — but ultimately we thought we could innovate in that time period,” Lawlor says.

The replacement programming, he vows, “will look very different from anything else on television.”

“Rich [Boehne] defined our history for about 15 years as a kind of media programming company and so that DNA still absolutely exists within these offices.

“We’re the folks who started HGTV, you know. We feel like there’s some expertise there. We think our expertise is as good as many program developers or syndicators out there. There is a scalability now from us owning 19 stations in 13 markets to be able to find a cost efficiency to creating our own programming.”

While Lawlor is not ready to reveal details of its plans for prime access, Scripps’ partnership with Cox Media Group and Raycom Media on Right This Minute offers a hint.

The video-clip format uses footage gleaned from wherever producers find to prompt riffs and reporting from a panel including former TV anchor Beth Troutman and co-hosts, including TV news vets Gayle Bass, Nick Calderone and Steven Fabian, and one-time E! News Now reporter Christian Vera.

Right This Minute will launch on 12 Scripps stations in September.

As Lawlor concedes, a grow-your-own programming strategy isn’t without risks. Ratings likely will suffer, at least initially. But there may be a net gain in revenues, as well as margin improvement.

“The syndicated stuff gets huge ratings but costs enormous amounts of money,” says one industry veteran. “It’s a risk to take something proven off the track. We haven’t had many stations doing syndication on their own for a very long time.… It’s a real risk that they’re going to get much lower audience. But if they can build a local franchise, terrific.”

According to Lawlor, it is not Scripps’ intention to create programming that can be syndicated nationally. It’s simply to create programming that works well in Scripps’ 13 markets.

“Obviously, if we do a good job and create some great programming that attracts an audience, I would tend to think other broadcast companies or syndicators or other distribution platforms may be interested in some of that programming and what we’re doing.”

The move doesn’t mean the company is walking away from syndicated programming. In fact, it will put Katie Couric’s new talker Katie, the priciest of this fall’s new syndie fare, on nine of its ABC stations.

Embracing new opportunities

Digital initiatives loom large in Scripps’ push to capitalize on new platforms. Some of the company’s cash reserves will be pressed into service on that front.

“We look at expanding [our brand] where we already do business,” Boehne says. “Obviously we’re going to continue to be an aggressive investor and builder of digital businesses.”

The company’s key move there came last year when it consolidated all television and newspaper digital efforts into a single department under the direction of Adam Symson.

One of Symson’s first moves: Offering live-streaming via mobile apps for the entire station group. Symson intends to leverage content from TV stations and newspapers alike to enhance the digital drive.

“We developed digital products across all of our markets, newspaper and TV, so instead of trying to recreate these in 30 or 40 different places, we develop them at scale then deploy across all the markets,” Boehne says.

“We are very committed to watching and experimenting and trying and failing and trying again because we really do believe this is a moment of opportunity on the digital side.”

The five low-power TV Azteca stations that were part of the McGraw-Hill deal represent another kind of challenge — one that Scripps management is still assessing.

“We’ll be spending a fair amount of time in the first six months of this year really understanding that ecosystem, that business model, looking at each of the markets in which we’re operating Spanish language television stations to better understand those markets and ultimately to build out a plan to maximize the value of those stations,” Lawlor says.

To make sure the Hispanic market gets sufficient attention, Scripps last week announced that Ed Fernandez, general manager of WXYZ Detroit, will oversee the TV Azteca affiliates as well as KSHB-KMCI Kansas City.

That move was one of three that will give the group a new layer of management. Lawlor gave Sam Rosenwasser, GM of WEWS Cleveland, the additional duty of overseeing KJRH Tulsa, Okla., and WMAR Baltimore, as well as the LiveWell affiliates. Steve Wasserman, GM of WPTV West Palm Beach, Fla., will also oversee KNXV Phoenix, WCPO Cincinnati and WFTS Tampa-St. Petersburg, Fla.

Another iron in the fire: Scripps recently announced a partnership with Raleigh, N.C.-based Capitol Broadcasting in a venture called fiveonenine games. Fiveonenine’s website boldly claims it will be one of the top five social gaming companies by year-end.

Fiveonenine games will feature nonfiction social games including Real Politics, Political Rampage, Campaign Story and Real Mystery.

“There will versions for mobile and the Web,” Boehne says. “It’s a very different kind of platform from [broadcast] or print but we think it can be a fascinating platform for news and information categories. Like what we’ve done in the past, we thought we’d put a little money to work and see if we can do something different.”

Keeping an eye on the station market

Financially, Scripps is well situated. Its only debt is the $212 million borrowed for the McGraw-Hill purchase and following the 2010 sale of its United Media arm for $175 million, it has a solid supply of dry powder.

Some of that may well go to continue the expansion into broadcasting.

“I’d say yes; you’d definitely consider Scripps an investor going forward,” Boehne says. “As investors, we’re real fundamentalists and we look for a real cash-on-cash return when we spend money.

“We don’t acquire based on that it might change our market multiples or things like that.… We’ll be very opportunistic. McGraw-Hill does not suggest that we’re the next big … [station consolidator] because we’ll put money into programming, new platforms, digital, expanding where we already do business.”