Super-Voting Shares Hobble Newspaper Publisher

Founded in 1882, Journal Communications publishes Milwaukee's only major newspaper, the Journal Sentinel, along with a stable of community papers and shoppers. It also owns radio and television stations. Publishing brings in 46% of sales and broadcasting, 37%. The rest comes from commercial printing and junk mailing.

Sales are on pace to total $590 million this year. That's a decline of more than $200 million from 2003, before the company's newspaper revenues began to decline in earnest, and before management unloaded struggling units like Norlight, a telecom. That year Journal issued shares to the public at $15 apiece. Those shares now fetch $8 and change. The company has turned keen on buying them back, reducing its outstanding count by 6% during its most recent quarter alone.

Next year might bring modest improvement. Wall Street sees sales for the company increasing a fraction of a percent and earnings per share climbing 18%. Election-year advertising will help. So will continued growth in online media. Journal has a relatively unencumbered balance sheet; debt is less than a quarter of capital. It produces more than $70 million a year in operating cash. That funds a 3.5% dividend. In 2007 spending on share repurchases will outpace dividend spending more than 4-to-1. Milwaukee investment bank Robert W. Baird & Co. expects a ratio of about 2-to-1 next year.

Shares are heavily discounted. They trade now at 11 times forecast 2008 earnings, about a third below the S&P 500 index median. And they turned up recently on a search for Takeover Targets, thanks to a low EV/Ebitda ratio.

EV is a company's enterprise value: the cost to buy all of its shares and pay off its debt, while applying its cash to the purchase. Ebitda stands for earnings before interest, taxes, depreciation and amortization. It's used to gauge a company's underlying profit potential, while ignoring certain ongoing charges related to past investments. A company with a low EV/Ebitda ratio, then, has a modest takeover price relative to the profits it might one day produce. I screened for those, and looked also for positive free cash flow and subpar operating margins — a sign of improvements waiting to be made by a purchaser. Eight companies met all of my demands. Pull up your own list anytime using SmartMoney's stock screener.

Journal has an EV/Ebitda ratio of just over 6, based on 2007 forecasts. The average for diversified media companies is 9. Newspapers and television and radio broadcasters carry average EV/Ebitda ratios of 8, 11 and 10, respectively. And so despite Journal's uninspiring growth prospects, its shares come with an ample dividend, low expectations on Wall Street and the possibility of gains if improvements are made. They might warrant a purchase, but for two things.

First, the company's chief executive is also chairman of the board of directors. That's unacceptable for any company that can afford an independent chair, since the board is meant to oversee managers on behalf of shareholders. Second, Journal has a rich history of employee ownership of its shares, which is good, but many of those shares have 10 times the voting power of ordinary shares, which is problematic. It means that outside share buyers have little say in how the company is run, making them mere profit participants, and not true owners. Super-voting shares are common in the newspaper business. They're meant to thwart takeover attempts, thereby safeguarding editorial control. During less challenging times for the industry, ordinary share owners might not have griped much about not having a full say in how papers are run, and whether they are sold. Today, that's something of a deal breaker.