24/7 Wall St. has prepared its list of the ten brands that will disappear in 2010. This list is based on a review of each firm’s financial situation and other operating data, the current and ongoing value of its brand, and whether the company that controls that brand can sell its assets.
This year a number of famous brands have closed or their parents have announced that they will be shut down shortly. This includes decades-old magazines like Gourmet and famous car brands like Pontiac. The recession took whatever economic value these brands had left and destroyed it.
The brands on the 24/7 list for 2010 include companies that have been in trouble for years. Some have been in slow decline and others were irreparably damaged by the credit crisis. Most of these companies will be bought and the rest will simply be closed.
Newsweek. The magazine already has slashed its rate base (circulation guaranteed to advertisers) from 3.1 million to 2.5 million. It has announced further cuts that will take this figure to 1.5 million early next year. The New York Times reported that Newsweek’s advertising fell 29.9% through the first three quarters of 2009. According to the 10-Q for The Washington Post Company (NYSE:WPO), Newsweek ad revenue plunged 47% in the third quarter from the year before. The magazine has lost almost $30 million so far this year. Newsweek had hoped to transform itself into a poor man’s version of the Economist and has largely dropped covering breaking news and reviews of the big stories of the week. The change in the editorial direction of Newsweek may have been the right thing to do, but it came much too late. Newsweek, like many other print products, hopes to rely on internet readership and advertising to improve its fortunes. Audience measurement firm Compete indicates that the audience of Newsweek.com has dropped 15% in the last year to 1.3 million unique visitors a month in October. Audience research firm comScore shows an even sharper decline. That is, by itself, an important indication that the public has not been attracted to the “new” Newsweek. The Washington Post has enough trouble with fixing problems at its flagship paper. Its online news and commentary magazine, Slate.com, had more than 3.8 million visitors in October. Slate has none of the legacy print costs of Newsweek.
Motorola. The handset and telecom infrastructure company may finally have a future three years after falling from the No.2 spot in global cell phone share to obscurity. The time has come for the company to break itself into pieces and allow buyers to scuttle a brand with a bad reputation. The firm has said it will seek a buyer for its cable and wireless equipment companies for a $4.5 billion price tag. Motorola has a market cap of $19 billion. Motorola has long-term debt of $3.9 billion and cash of about $3 billion. Motorola has three divisions. The one that created most of the company’s value until recently is its mobile devices operation. The revenue from that division fell by almost half in the last quarter from $3.1 billion to $1.7 billion. But the future for the division is brighter, primarily due to its new Droid phone which has sold remarkably well and is being heavily promoted by Verizon Wireless. Industry experts expect that one million of the handsets have been sold in the last month. The value of the Droid is not the Motorola brand but the brand of the Google (NASDAQ:GOOG) Android operating system that runs it. A more successful Motorola handset company would be attractive to Samsung or LG. The most likely buyer is Nokia (NYSE:NOK), which has a modest market share in the US. Motorola still does very well in its domestic market. Nokia does not need the Motorola brand, but it could use a successful Android handset.
Palm. The smart phone company had a modest success with the launch of its Pre. The follow-on product, the Pixi, is not doing as well. The Pre is facing renewed competition from the Motorola Droid and new high-end handsets from Nokia and Samsung. It competes with the two smart phone juggernauts the Apple (NASDAQ:AAPL) iPhone and RIM (NASDAQ:RIMM) Blackberry. In an effort to push sales, Amazon (NASDAQ:AMZN) dropped the price on the Pre to $79.99. Palm needs a deal with both AT&T Wireless (NYSE:T) and Verizon to supplement the one it has with Sprint (NYSE:S). It is not clear that those partnerships will be formed. Pre sales have fallen off, if a number of Wall St. analysts are correct. Many analysts have sharply dropped their stock price targets to $10 based on concerns that Palm will significantly miss its earnings targets. The firm’s stock has decreased from over $18 earlier this year to $11. Nokia has forecast that global handset sales will only rise 10% next year, which will make it nearly impossible for the market to support the number of manufacturers in the business today. Both LG and Samsung, the No.2 and No.3 handset companies, have weak smart phone lines. Each is jealous of its brand. With a market cap of $1.7 billion, Palm is a cheap way to move further into the high-end handset business.
Borders. Borders Group (NYSE:BGP) lost the online and brick-and-mortar bookstore war years ago to Barnes & Noble (NYSE:BKS) and Amazon.com (NYSE:BGP). The company’s stock is down to $1.20 from a 52-week high of $4.48 and its market value is less than $80 million. For the quarter ending in October, the company’s loss from continuing operations was $39.0 million,or $0.65 per share, compared to a loss of $39.0 million, or $0.64 per share, a year ago. Revenue was $595.5 million, down $86.6 million, or 12.7%. Border’s large Waldenbooks division has all but disappeared. That part of Border’s operations is down to 361 stores. With its debt net of cash at $375 million, a competitor like Barnes & Noble could buy $2 billion in annual revenue for a fraction of sales and cut general and administrative costs to improve margins. Borders has been dead for over two years, but no one has been able to dispose of the body.
Blockbuster. Blockbuster’s (NYSE:BBI) stock traded for $10 less than it did five years ago. Shares change hands for $.62 now. The video rental company had an awful third quarter. Revenue for this period of 2009 was $910.5 million, down from $1.16 billion for the same quarter a year ago. The 21% revenue decrease was mostly due to a 14% decline in same store sales. The firm’s net loss was $114 million compared to a $19 million loss in the same period in 2008. Blockbuster has only $141 million in cash and cash equivalents. No one has figured out what to do with Blockbuster. The company has 3,662 stores in the US and 1,703 overseas. Blockbuster has lease liabilities on a number of those stores, but ideally the company would be much smaller. It lost its chance to be in the online video rental business to NetFlix (NASDAQ:NFLX) and its chance at IP-based VOD to a number of internet streaming services and cable set-top box based products. The market value of the company is only $125 million. Blockbuster has bought itself some time by refinancing a large part of its debt and it has been aggressively closing stores. One of the things that Blockbuster mentions in its SEC filings is that its debt load and declining revenue could force it to seek a restructuring of its indebtedness or file for protection under the U.S. Bankruptcy Code. A bankruptcy will do almost nothing to improve Blockbuster’s prospects. Blockbuster does have over $1.7 billion in assets, not all of them saleable, but the firm will almost certainly face liquidation in the relatively near future.
Fannie Mae (FNM) and Freddie Mac (FRE) are intertwined closer than peanut butter and jelly. These two former government sponsored entities are now in government conservatorship. Their influence has largely disappeared. In the 1990’s it was believed that the government would never allow them to fold. It seems today that the GSEs are being kept afloat merely because it is cheaper and easier for the government to keep them in limbo than to repossess them and assume their liabilities. The sad thing is that even if the turnaround in housing lasts, it is just not enough to help Fannie and Freddie. Delinquencies keep rising and using traditional balance sheet analysis is nearly impossible. Whether these stay above $1.00 or not, it also seems that the NYSE keeps these listed because of the high amount of shares traded rather than on the merits of the future of these stocks. Alan Greenspan once said they should be nationalized and relaunched as eight entities that are privately owned. KBW went as far as to say the value of the common and preferred shares are worth zero. There will be some remnants left over in the operations, but these are being kept alive for appearance and convenience rather than because of their solid operating metrics.
Ambac Financial Group, Inc. (ABK) is one of the former solid bond insurers that held the market together. The reality is that its peers may be in the same boat or close behind it, but Ambac is the one with the largest question mark associated with it today. Insuring municipal bonds become very difficult in 2008 and for much of 2009 and its structured finance guarantees brought up what could be an untenable situation. What is sad is that a month ago came the company’s earnings on items which reinvigorated buyers of penny stocks and speculative stocks. Then came the change of heart. It was questionable whether Ambac could stay above regulatory capital requirements, and that was after the company disclosed that it may be forced to file for bankruptcy protection if it was unable to improve its capital position. It did claim enough regulatory capital, but then the Chief Financial Officer Sean Leonard resigned after the company missed a regulatory filing deadline and that is often enough to spook any investor in a troubled company. Back-dated tax refunds may help the company stay afloat longer, as would a new capital raise if it is even possible. But for Ambac to continue to function under normal operations, it seems as though the capital markets would have to revert back to the boom days rather than the after-shock days.
Eastman Kodak Co. (EK) has been on a downward trajectory since even before the end of the last decade. CEO Antonio Perez has not been able to fix the company since he took over in 2005 and Kodak keeps its heavy project investing and has been in a restructuring state for about as long as memory can go back. How much this has recovered from its lows is probably irrelevant today. And the notion that Perez was re-signed through 2013 is almost baffling. This was one of the greatest American brands of the 20th century. But its entrance to digital printing was very late and too many little dot.com me-too companies were able to jump way in front of the company’s digital efforts. The latest financing deal with KKR was for $700 million, and this seemed more like KKR was getting itself into a position to make a run at the company with a seniority position in the credit structure. Kodak won’t cease to exit. It just may wind up in a private equity portfolio with a much leaner and meaner structure. And that might in fact be a take-under rather than by a traditional buyout. It seems as though Eastman Kodak is in the same or an even worse boat than newspapers, with the key difference being that newspapers still have a business if advertising from auto dealers and housing ever comes back.
Sun Microsystems Inc. (JAVA) may be headed into Oracle (ORCL) and it may not. Its fate as a standalone company is however looking more and more like an inevitable fate. IBM (IBM) was interested in Sun, but dropped out. And now the European Commission somehow is worried about too much control of open source in the hands of Oracle even though much of this stuff is free or has been given away by Sun for next to nothing. Maybe having a money-losing model is what the European regulators want. But if the Sun-Oracle merger is blocked, the Sun has to do something and in a hurry. It will be forced to go out and buy a revenue and earnings stream with the main criteria being earnings. The company’s loss history and awful internals (not excluding employee morale) will make this even more so the case. So even if Sun is not acquired, it has to go make a transformative deal and it needs a good economy for its core operations to run at profitable levels. If Sun exists a year out, it seems that it will be a very different company by force more than by choice.
E*Trade Financial Corporation (NASDAQ: ETFC) is a great company with a great client base. And it was run into the ground from giving risky loans and acting as the end-user banker. Then it got bailed out in a deal with Citadel which gave the firm an extra layer of trade executions and gave Citadel control over the company’s operations. The dominance of Citadel is not as much as it was in even just a few months ago, but the company is soon to be without its replacement CEO. Things have got better at E*TRADE on operations, and the company’s solid advertising campaign allowed the firm to keep growing at a time in 2008 when suddenly the company appeared to be at-risk. The at-risk issue is one that might not go away for some time because of its loan exposure that it is stuck with and because write downs kept coming. Now, it seems that the wagons may be circling around E*TRADE despite the notion that many dismiss TD AMERITRADE (AMTD) as a suitor. E*TRADE still has a difficult ride if it has to just whether the storm and it may not have the resources needed to ride it out. That will come up for more debate if write downs and charges keep continuing. But for a larger buyer, particularly the non-bank companies that claim to be bank holding companies, then its 2.7 million brokerage accounts and total accounts of more than 4.5 million will be much more valuable to a suitor than to see what is left of the company if the finances turn back south.
Disclosures: Newsweek and 24/7 Wall St. have a content licensing agreement. Douglas A. McIntyre and Strauss Zelnick, a Blockbuster board member, served together on the board of On2 Technologies from 2000 to 2004.30
Jon Ogg and Douglas A. McIntyre