Nieman Foundation at Harvard
Tronc is getting smaller. Tronc is getting bigger. And some say Tronc may not be Tronc all that much longer.
Welcome to the odd world of newspaper economics. The question of who owns daily newspapers, especially chains, has moved to the forefront this year, as Alden Global Capital’s grip on The Denver Post has caused an unprecedented uproar.
Change, of course, is nothing new to Tronc. Born under some astrological sign of chaos two years ago, a morphed iteration of Tribune Publishing, the company is now looking at what would be its most significant changes yet — which could come as soon as in the next several weeks.
In that time period, we’ll likely see Patrick Soon-Shiong, the one-time Tronc vice chairman, finally close on his nearly $600 million buy of the Los Angeles Times and San Diego Union-Tribune. Expect that news — if all continues to go smoothly — on a pre-market-open Monday soon. It’s been technology transition issues that have held up the closing, and they’re now almost resolved.
While some have wondered if that deal would ever close — we’re now about two months past its first target date — not much attention has been focused on Tronc’s other big ongoing deal: the sale of Michael Ferro’s controlling stake in the company. Ferro’s Merrick Media had announced a deal to sell that stake on April 13. Purchase agreements, filed with the Securities and Exchange Commission, had set May 15 as the “end date” for the transaction.
In Tronc World, though, few things go as planned, on schedule, or as announced.
Though there’s been no public filing to mark an extension of that end date, sources indicate that the dealmaking time had been extended to May 30. With that date now passed and no announcement yet made, that deal could be done — or gone — in a Chicago minute. We should know sooner than later.
All of the parties to these transactions have declined comment.
Then there’s the buying. While Tronc bought BestReviews.com in February and lost a bid for the Palm Beach Post, it’s been actively assessing other digital and newspaper properties.
On Tuesday, it landed a new paper. It won’t come close to replacing the 50 percent of all revenue that its soon-to-be-gone California properties contributed, but Tronc’s $34 million purchase of the Virginian-Pilot in Norfolk indicates that the company is a buyer as well as a seller.
Those marketplace moves mark the external activities of Tronc. Internally, the company has moved into the post-Ferro era. Me-tooed in March by a Fortune article, Ferro has formally stepped away from the company. Meanwhile, Tronc CEO Justin Dearborn and CFO Terry Jimenez have recently had their contracts extended for three years — with well-tailored parachutes in case of “change of control” included, details below.
So in the short term, Tronc is both a buyer and a seller. How about the longer term? That’s more of a crapshoot. While Tronc has hired no banker to shop its new sleeker corporate portfolio, “bankers are eagerly shopping the company to possible buyers,” one financial insider tells me. The expectation: Tronc, as a whole or in pieces, will be sold sooner or later.
Why? Close company observers point to its unusual attractiveness. Once Tronc closes on the California sale to Soon-Shiong, it may have the prettiest balance sheet of any American newspaper chain. Much of Soon-Shiong’s cash will be used to pay down Tronc debt, which currently stands at $353 million. That clean balance sheet could mean that Tronc could become, say two confidential sources, an attractive takeover target itself — though others discount the idea.
A buyer — perhaps a private equity buyer — could buy the low-debt company and load it up with new debt. Tronc, which still produces somewhere in the neighborhood of $100 million in annual EBIDTA, would offer a new opportunity for leverage.
Others in the industry pooh-pooh the idea, wondering who, exactly, might want to buy Tronc, even with that attractive balance sheet. One big counterpoint to anyone eyeing such a buy: the shape of the business day-to-day. Though Tronc’s last reported quarterly financials are opaquely reported — and the company has so far refused to clarify them — they point to an apparent 9 percent revenue decline in the Q1 of 2018 compared to a year earlier. That’s on par with both Gannett and McClatchy — but it’s still treacherous territory, given the ongoing downward trajectory of print advertising.
Of course, Tronc being Tronc, there’s a twist on the cash. Michael Ferro — gone, but not completely gone — has advocated for a $2-a-share cash dividend to shareholders out of the Soon-Shiong proceeds. That would provide his group a windfall of about $17.5 million. (Ironically, Soon-Shiong would receive a nice check too, since he remains a Tronc shareholder.) Such a move, of course, would reduce Tronc’s cash holdings by about $70 million.
Finally, Tronc could become more of an operating company, making more newspaper or digital media site purchases.
That’s really a dizzying set of possibilities for the future for a company that has turned so much conventional corporate newspaper industry wisdom — or least standard practice — on its head.
Whatever strategic path Tronc goes down, the most important impacts will be on its remaining nine newspaper companies — their staffs and readers.
Things are about to change at the L.A. Times. How and how much, though, remains an open question.
Soon-Shiong has worked the L.A. waterfront, talking to industry leaders in sessions at his home and elsewhere. All come away impressed with his intellect and graciousness — the latter especially compared to Ferro. His passion also shines through. “This is his legacy and his pride,” one person who had participated in the meetings told me, and it’s a sentiment I’ve heard echoed by several others.
They also note the curiousness of the conversations’ give and take. In at least some of the conversations, participants note that Soon-Shiong gives more than he takes — even though he’s a novice in this industry, having made his fortune as a med-tech entrepreneur.
Those skilled in Tronc trivia will recall that when Michael Ferro brought Soon-Shiong’s $70.5 million investment into Tronc in 2016, the announcement highlighted Soon-Shiong’s tech. His Nant Technologies tools — largely given the application of medtech-based artificial intelligence innovation — were supposed to help Tronc disrupt the too-often-innovation-averse newspaper industry. In fact, we were told, they would help Tribune Publishing become Tronckified.
They didn’t; Tronc’s transformational efforts sputtered, and it’s highly likely Soon-Shiong’s thinking never got a real test. Formally, a final reckoning as to the value of those Nant tools, related to their patents, was made in the purchase agreement filed by Merrick Media and Soon-Shiong.
Soon-Shiong’s quest for tech-led news publishing innovation seems at the forefront of his plans. He has told some that he’d like to create something “better than CNN.”
Which raises at least one big question for Soon-Shiong, post-closing: Who will he pick to lead the Times’ newsroom?
Everyone in the industry agrees the Times offers a unique opportunity at this moment. Despite all its travails, much chronicled here at the Lab, it’s not hard to see the great potential of the next Los Angeles Times. It still has the largest newsroom and highest circulation in the West, and even in this tough business environment, it oozes with possibility. Many observers have focused on who the paper’s next editor-in-chief will be. While that’s a fascinating question, it’s not the first one that one of Soon-Shiong’s new advisors is focusing on.
Longtime Wall Street Journal, Bloomberg, and Time Inc. executive Norm Pearlstine is working with Soon-Shiong first on the broad outlines of an editorial, audience, and market plan, sources tell me. The Times could be everything from an L.A.-centric media company to one serving California’s 40 million residents more generally — or the entire, progressive West Coast. It could reclaim the idea of becoming the paper — or digital news organization — of record for the enormous economic engine that is the Pacific Rim. None of these are new ideas — each has been espoused and tested, to at least some degree, over the past couple of decades — but now they move to the top of the new owner’s list. He’s got the financial capacity to provide the kind of “runway” Jeff Bezos has given The Washington Post. (Forbes estimates his net worth at over $7 billion.)
How will he choose to spend it? Expect Soon-Shiong and Pearlstine to try to answer that broad question, and then see how a new top editor could best align within it. It’s a bit of a chicken-and-egg situation, but clearly lots of time is being spent on the vision.
The delayed closing of the Times’ transaction has extended the long period of uncertainty experienced by the newly unionized Times newsroom. The accumulated turmoil has taken its toll. The Washington Post recently plucked highly regarded politics editor Cathy Decker, the latest in a series of talent raids by the Post and The New York Times. Whoever the new editor ends up being, she or he will face unusual pressures — both above and below — on the organizational chart.
Interestingly, Soon-Shiong has shown less interest in hiring a strong publisher to the lead. The suspicion: He may want to act — in name, in fact, or in part — as his own publisher, making comparatively unilateral decisions, like his already-announced one to move the company to the less-than-wilds of El Segundo.
What would that mean for the Times and its strategic direction? At this point, it’s a big unknown. Chris Argentieri, hired by one-time publisher Austin Beutner, has served as SVP/general manager. Argentieri, who is generally well regarded and has kept a low profile through the Times’ many recent melodramas, has participated in Soon-Shiong’s top-level meetings. In the new order, he could remain in place as Soon-Shiong’s inside business operator. (Beutner, who had brought his own L.A.-centric innovation to the company in his brief tenure, has moved on from what earlier had been the possibility of being part of Soon-Shiong’s Times. The L.A. Unified School District recently named the retired private equity executive as its superintendent.)
As the Times waits in wonder, the Chicago Tribune’s newsroom — and those at Tronc’s other’s eight other titles — have their own questions about the future. Will the apparent Sargent McCormick-led buyout of Ferro’s Merrick Media shares go through? That question sets up its own round of additional queries. Among them:
That’s one corporate question. The other: Who will run the company? As I’ve reported, John Lynch — one of the three named buyer principals in the filed agreement — has told associates that he would. Would the new company be run by McCormick — a man profoundly committed to his family’s International Harvester legacy, but of unclear conviction about newspapers — or by Lynch? Or might CEO Justin Dearborn stay in place?
(Much was made on April 18 of a “McCormick” once again owning the Chicago Tribune. In curious timing, the would-be new Tronc owner formally filed with the SEC his own name change. “Effective June 11, 2018, Mr. McCormick-Collier is changing his name to Sargent M. McCormick.” McCormick declined comment on the change or the reasons for it, and on any other matters to do with the transaction.)
Merrick Media would then seek another buyer. It’s clear that Ferro’s partners in Merrick want out, especially after the sexual harassment charges against him surfaced. While they’d likely have to accept less than the $23 per share the McCormick group has offered — Tronc shares currently trade in the mid-$16 range — they’ll look for another buyer.
Put it all together and it’s a new world of uncertainty for a company whose short life has been defined by it. Meanwhile, Tronc’s newsroom transformation efforts appear to be in full swing.
Many of its cost-cutting, concentrate-resources-on-local-reporting tactics borrow from those used at other chains. For instance, the company has modernized its job classifications to reflect a digital-first reorg. It has reduced what had been as many as 194 print-legacy job classifications to just 9. Chicago has become the design hub for all Tronc titles, though copyediting continues to be done locally.
Somewhat quietly, Tronc’s (and what was once Tribune’s) Washington bureau is also facing profound change. Soon-Shiong had made a point of wanting a strong D.C. bureau, and he’s getting it: Tronc’s bureau will become the L.A. Times’ bureau when that deal is done. Apparently, only the Chicago Tribune among the other Tronc papers will maintain a small D.C. presence. In the new emerging Tronc world order, its New York Daily News becomes the company’s hub for national breaking news.
All of this transition coincides with other massive shifts. Tronc’s three biggest papers (including the L.A. Times) will have moved to The Washington Post’s Arc platform by midyear. Tronc intends to move the rest by the end of 2018.
And next week, the Chicago Tribune’s staff will move out of its Tribune Tower home — just another marker of the triumph of real estate value over downtown media branding, a precursor of that Times move out of downtown L.A.
And if all that weren’t enough, the forever-non-union Chicago Tribune has now accepted the inevitability of Guild representation, and the Guild aims to repeat its L.A. and Chicago triumphs in other Tronc cities.
Money is, of course, is tight all over. But somehow, there’s always room for more Tronc executive compensation.
This month, news outlets drew new attention to Michael Ferro’s $15 million-over-three-years consulting contract. Some reported that the payments — with the second and third due in January of the next two years — would be accelerated. In fact, the change appears to be more of an accounting matter than an actual change in payout schedule. But given that Tronc refuses to explain the change, suspicion of Ferro’s self-dealing has only grown further.
Even more notable: In early April, Tronc extended the contract of CFO Terry Jimenez for three years, after doing the same for CEO Justin Dearborn two months earlier. Both received raises. In that April 6 SEC filing, the company also offered an updated “Estimated Payments Upon Termination or Change in Control at Year End Table.” That table (page 42) itemizes what five top Tronc execs will get if the company is sold or otherwise experiences a “change of control”. The potential total: $23.5 million, a combination of “severance” and accelerated contractually owned compensation. Ross Levinsohn, who served briefly as L.A. Times publisher and remains a Tronc executive, would get $10.4 million by himself; Dearborn and Jimenez would get $4.8 million and $2.8 million, respectively.
It’s more than ironic. For a handful of people, a “change of control” would mean new riches. For most other Tronc employees, it would only mean, at best, uncertainty about — and at worst, loss of — their jobs.
