Sunday, September 28, 1997

CEO leading company into Digital Age

By JAMES P. MILLER / The Wall Street Journal

CINCINNATI -- When William R. Burleigh was a reporter at the E.W. Scripps Co. newspaper in Evansville, Ind., in the 1950s he was required to turn in a used pencil stub in order to be issued a new pencil.

Scripps "was known by some as a cheap company," says Burleigh, who is now president and chief executive officer of the media concern. "Others called it fiscally prudent."

As he steers Scripps into the Digital Age, Burleigh, 62, has been putting more than pencil money on the line. The newspaper chain, accelerating a years-long strategic realignment of its assets, has recently made transactions totaling more than $2.5 billion.

After earlier shedding its radio stations and its book-publishing operations, Scripps has in the past 15 months sold its cable-TV distribution system for $1.6 billion, purchased a Vero Beach, Fla., daily newspaper for $120 million, agreed to pay $775 million for the newspaper and broadcast operations of Harte-Hanks Communications Inc. (including the <I>Abilene Reporter-News<I>) and swapped two California dailies for a Knight-Ridder Inc. daily in Colorado.

Earlier this month, management agreed to trade some broadcast operations for A.H. Belo Corp.'s controlling 56 percent stake in TV Food Network. That holding will complement Scripps's booming Home & Garden cable TV network. <B>Better positioned company<B>

Burleigh's office at Scripps's downtown headquarters here, decorated with front pages that came off Scripps presses in the 119-year-old company's earliest days, recalls the 19th century. But Burleigh, who became president in 1994 and chief executive in 1996, is looking forward: The recent deals, he says, have made Scripps "much better-positioned for success into the next century."

Indeed, with the newspaper industry now facing challenges on many fronts, Scripps and other chains are diversifying with the help of strong cash flow from their slow-growth newspaper operations.

Specifically, Scripps's strategy calls for the company to be a provider of information and entertainment to particular consumer categories. In part, that involves concentrating its media franchises geographically, as it has on Florida's east coast. The Scripps strategy also involves developing and expanding targeted cable-network offerings.

Scripps has "differentiated itself very well from more-traditional newspaper companies, by diversifying its asset base into higher-growth businesses," says Smith Barney Inc. analyst William G. Bird. "And," he adds, "they've been able to do so at reasonable prices." <B>Broadcast-cable deal<B>

The recent agreement with Belo calls for Scripps to trade a TV station and a radio station it is due to receive in the Harte-Hanks deal -- together valued at perhaps $200 million -- for the majority Food Channel stake and $75 million in cash.

Scripps currently operates 21 daily papers, as well as a number of weekly and twice-weekly community papers. In keeping with the company's preference for "clustering" media properties in midsize, high-growth Sun Belt markets, five of the six dailies Scripps is acquiring from Harte-Hanks are in Texas.

The transaction is expected to increase newspaper revenue by an estimated 20 percent for the publisher of such papers as the <I>Cincinnati Post<I>, the <I>Birmingham (Ala.) Post-Herald<I>, the <I>Naples (Fla.) Daily News<I>, the <I>Commercial Appeal<I> in Memphis and the <I>Rocky Mountain News<I> in Denver.

"The economics of the deal were attractive in their own right," Burleigh says. But in addition, he says, Scripps's almost-debt-free status meant the company wasn't fully exploiting its financial heft. "We needed some leverage on our books." After the Harte-Hanks and associated Belo transactions conclude, Scripps's debt-to-equity ratio is expected to be about 41 percent.

Last year, Scripps sold its 800,000-subscriber cable-TV operation to Comcast Corp. for $1.6 billion in Comcast shares, which were distributed directly to Scripps stockholders. The cable-distribution system, while profitable, was outside of Scripps's expertise, says Burleigh. "We're in the business of creating content," he says. <B>Homeowners and gardeners<B>

Precisely targeted content has been the key to the unexpectedly rapid success of Home & Garden TV, the cable-TV network Scripps launched in late 1994. HGTV, the centerpiece of Scripps's entertainment segment, carries 24-hour-a-day programming on crafts, gardening, interior decorating and other home-oriented themes. The network has jumped to about 30 million subscribers from an initial 6.5 million, and another five million households are due to be added in coming months.

Scripps holds the network's costs down by producing a substantial portion of HGTV's programming through Cinetel Productions, a Knoxville, Tenn., producer of cable-TV programming the company purchased in 1994.

While HGTV is poised to turn profitable a year ahead of original forecasts, the investment has been expensive. By the end of this year, the fledgling cable operation will have generated an estimated $65 million in pretax losses since its inception.

HGTV is expected to move into the black in 1998; by the year 2000, some analysts expect the network to have about 46 million subscribers, and to represent a major source of revenue and profit for the parent.

Some Wall Street observers figure the promising HGTV is worth about $8 of the current $40.375 at which Scripps shares are trading on the New York Stock Exchange, a calculation that values the still-unprofitable network at nearly $650 million. On Sept. 4 the company increased the size of its cable bet when it disclosed its plan to take a controlling position in the 25 million-subscriber TV Food Network. TVFN will make a "natural fit" with HGTV, Scripps says.

Like HGTV, TVFN has been eating up cash even as it enjoys rapid growth. Scripps said it expects its latest investment to cut $10 million from pretax operating earnings next year, and predicted it will take three or four years before the TVFN holding produces positive operating cash flow.

While the Scripps entertainment division rings up swift growth, the parent company continues to grapple with more-prosaic matters. Profit growth at its biggest paper, the Rocky Mountain News, has been slowed by a long-running competition with the closely held Denver Post. In addition, broadcast earnings have been under pressure because six of the nine TV stations Scripps owns are affiliates of ABC, the Walt Disney Co. unit that is trailing the other major networks in viewership.

Scripps, which owns comic-strip syndicator United Media, has been getting a moderate boost from licensing agreements covering the hugely popular Dilbert character. Dilbert and his colleagues appear throughout Scripps's latest annual report. On one page, his pointy-haired boss stands next to a graph that shows Scripps's cumulative five-year return bested the Standard & Poor's 500-stock index. "Lines going up are good," he says.