Judge rules newspaper must pay partner $129M
The family that controls the Daytona Beach News-Journal loses big in a buyout dispute with a minority owner.
By KRIS HUNDLEY
Published July 4, 2006
The big news last weekend in Daytona Beach was the Pepsi 400.
But the news with longer-lasting impact might be that a federal judge ordered the owners of the city's newspaper to pay $129.2-million to buy out their minority partners, dealing a powerful financial blow to one of the handful of major family-owned newspapers nationwide.
The Daytona Beach News-Journal has been controlled since 1927 by the Davidson family, now headed by company president and chief executive Herbert M. "Tippen" Davidson Jr.
Since 1969, Atlanta-based media giant Cox Enterprises Inc. has owned 47.5 percent of the paper, but it has no representation on the board or vote in News-Journal matters.
In May 2004, Cox sued the News-Journal and its family-controlled board in U.S. District Court in Orlando, accusing the Davidsons of misusing corporate funds to further their personal interests. At issue was the paper's decision to pay $13-million in cash for naming rights for a new arts center to house a theater group run by Davidson and his daughter.
The News-Journal Center opened on the Intracoastal Waterway in downtown Daytona Beach in January, with Tippen Davidson conducting the orchestra.
The Davidsons responded to Cox's lawsuit by asserting the family's right to buy out its disgruntled partner.
During an eight-day trial before U.S. District Judge John Antoon II in December, the two sides presented widely varying estimates of the News-Journal's value. Basing its estimates on the price the newspaper would command if sold, Cox argued that its shares were worth $145-million. The News-Journal's attorneys, meanwhile, said Cox's shares were worth only $29-million, assuming the newspaper would operate in the future as it had in the past.
In a ruling late Friday, Antoon firmly rejected the family's low-ball offer and blasted the owners' behavior, saying the $13-million naming rights agreement might have been the Davidsons' "worst abuse, but it was hardly their first."
"The record is replete with evidence of corporate waste and questionable conduct," Antoon wrote, noting that, against the advice of their own attorney, the Davidsons persisted in using the newspaper "as a means to indulge their personal interest in the arts."
The judge said the News-Journal had 58 people on its payroll who did no work for the paper but were tied to arts entities affiliated with Davidson. During the trial, a financial examiner for Cox said their salaries totaled almost $6-million.
In addition to setting the value of Cox's shares, Antoon ordered the newspaper to pay Cox's fees for its attorneys and experts.
Neither CEO Davidson nor the paper's general counsel, Jon Kaney, was available for comment Monday. Executive editor Don Lindley did not return a call seeking comment. But during the trial in December, Davidson said the owners had plans for every contingency.
In a letter to employees in December, Davidson said banking arrangements to buy the shares were complete, but there would probably be "belt-tightening and corner-cutting." The News-Journal is the 11th largest independently owned newspaper in the United States and the second largest in Florida. The largest independent newspaper in Florida is the St. Petersburg Times, which is owned by the nonprofit Poynter Institute.
Jay Smith, president of Cox's newspaper company, called the judge's decision a "welcome development," but said the next step is up to the Davidsons.
"This is a very important milestone in the case and the relationship," Smith said. "But it's not finished yet."
The judge gave both sides 20 days to present terms for the purchase. In January, general counsel Kaney had speculated that if the judge set an "extremely high" sales price, the newspaper would have to appeal.
Clark W. Furlow, an assistant professor at Stetson University College of Law who specializes in corporate takeovers, said such an appeal is highly likely.
Furlow, who had been following the News-Journal case, said the judge's method of valuation could be challenged because it set a price based on selling the company as a whole.
"And that's not the transaction here," Furlow said. "The transaction is buying up the minority shares, which are not worth as much as the company would be on the whole."
Jim Naughton, retired president of the Poynter Institute in St. Petersburg, said the News-Journal case should be a warning to privately held newspapers to be wary of outside investors who expect returns comparable to those of publicly traded papers.
"They will be looking for 20- to 30-percent margins," said Naughton, a former New York Times reporter and editor at the Philadelphia Inquirer. "Whereas you very often find independently owned, local newspapers that can make a very handsome living for their owners with margins in the high single digits, doing very fine things for their community."
During the News-Journal trial, Cox's expert had compared the Daytona paper's current margin of 9.3 percent to an average 28.3 percent return by 11 publicly traded newspaper companies.
The judge based his valuation on a margin of 24.8 percent.
Naughton said the News-Journal would be making a big mistake if it slashes its newsroom to finance its debt.
"I hope they're smart enough not to follow the lead of public companies, like Knight-Ridder, which tried to satisfy investors by degrading the quality of the investment," he said. "Doing a better job of covering the news, being more indispensable to the audience is the better way to go."
Information from Times wires was used in this report. Kris Hundley can be reached at email@example.com or (727) 892-2996.
[Last modified July 4, 2006, 01:14:41]
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