Nieman Foundation at Harvard
McClatchy’s bankruptcy is barreling to a conclusion. Tribune’s quietly trimming its board to prepare for a merger. Google and Facebook face unprecedented calls to pay up on at least three continents. And all the while — wait for it — Alden Global Capital’s Heath Freeman is joining the fray, demanding money.
The COVID-19 crisis both threatens and promises to reshuffle business and societal thinking about the role of local news in the 2020s. Call it pandemic panic. The crisis has clearly accelerated the known drivers of industry change worldwide. That could well lead to more consolidation of newspapers and more hedge fund and private equity control.
This earth-trembling change has also raised some new possibilities. What if the platforms finally do give in to decade-long pressures to pay publishers for news? What if governments, in one of the many ways being discussed, actually funneled funding to pay journalists to do local journalism? What if new and more public-spirited buyers/owners emerged, buying up papers that only bottom-feeding financial buyers have seen fit to acquire?
Keep those big-picture possibilities in mind as we first delve back into the important (but by now a little mundane) world of daily newspaper M&A.
First, let’s step into the hyper-real world of federal bankruptcy court.
There, in a speedy eight-minute hearing on Monday, Judge Michael E. Wiles heard from McClatchy that the company had reached an agreement with its “less-protected creditors” to allow a sales process to proceed. Those creditors, having looked at McClatchy’s deteriorating and COVID-accelerated financial state, realized there wasn’t as much blood to squeeze out of the turnip as they’d thought on Feb. 13, when the company filed for bankruptcy. They’ve decided to settle for whatever pennies on the dollar they can out of this process.
The impact: McClatchy will get a new controlling shareholder soon, probably within the next two months. Friday marks the final day for would-be buyers to take an initial look at the company’s financials. Some 20 companies have already done that; most, keen observers say, are sophisticated lookie-loos with no intention of bidding for the company as a whole or individual properties.
The court action hasn’t been without dark humor. “I cannot say strongly enough how crazy that seems to me,” Judge Wiles said last week as the company worked with its main shareholder and debtor, Chatham Asset Management, to put together a quick deal. “Maybe you don’t trust what I will do with a sale process?”
For his part, Chatham attorney Andrew Rosenberg summed up the state of newspaper ownership well. “We are happy to have someone outbid us,” he declared in a Henny Youngman-like, “Take my newspaper company, please” moment. Chatham would indeed like to get whole on its more than $300 million in top-level debt. The company had made a stalking horse bid “well in excess” of $300 million, hoping to attract higher ones.
(We should note that our public understanding of the court action has been provided by Kevin G. Hall, the chief economics correspondent for McClatchy’s Washington bureau. Hall has covered the bankruptcy assiduously and fairly — something that shouldn’t stand out among all the stories newspapers write about their own trials and tribulations. But it’s one more reminder that McClatchy, for all its cuts and woes, still distinguishes itself as a newspaper company that takes journalism seriously and values its civic mission. Among the many questions about McClatchy’s next owner: Will it keep its two-dozen-plus D.C. bureau, which has often zigged smartly where other bureaus have zagged, intact?)
Now that the process is winding towards a close, meaning it’ll soon be time for the lawyers to get paid. (The attorneys for the Official Committee of Unsecured Creditors alone are seeking a payout of $1,951,888.98 for their work on the case, at rates as high as $1,100 an hour. How many journalists could that money have paid? Someone should total up how much has been spent on lawyers and advisors in this decade-plus of newspaper ennui.) Soon, we’ll know who will own and control what is the second or third biggest newspaper chain in the country across 30 cities.
This will be McClatchy’s first new owner since 1857. Who’ll it be? Round up the usual financial suspects.
Most money is on Chatham to emerge with control of the company. The New Jersey-based private equity firm is an industry player. It owns about 80 percent of American Media and its National Enquirer (back in the news for seeking federal stimulus “small business” money) and a major stake in Postmedia, Canada’s coast-to-coast chain, though it doesn’t control the Postmedia board. Within the last two weeks, Postmedia has moved to layoff 80 employees and permanently close 15 newspapers. The company is among that country’s prime movers in a move to win government support for newspapers. (More on that below.)
Conventional wisdom holds that the New Gannett can’t play. After all, it’s already burdened by the $1.8 billion in debt it took on to put together its GateHouse merger in November. But what about its lender, Apollo Global Management? Insiders have told me that Apollo has been talking with Gannett CEO Mike Reed about a structuring of their five-year deal, given the immense and immediate impact of the coronavirus crisis on cash flow.
One critical question for them: How do you value McClatchy’s cash flow over the next few years at a time when projections even six months out are deeply uncertain? Industry consultant FTI is now forecasting that 1 in 5 pre-COVID ad dollars might not come back to newspaper companies once this pandemic nightmare concludes. (Though annual ad revenue declines not much smaller than that have become numbingly common at newspaper companies in recent years.)
Another question: How much in the way of corporate overhead and general centralization synergies could be wrung by merging McClatchy into the new Gannett? Such a move would create a behemoth newspaper company (to the extent newspaper companies can be behemoths anymore), controlling about a third of U.S. daily print circulation in more than 160 cities. If the numbers add up, could Apollo end up owing that giant?
Given the many steps that would take and all the vagaries of future cash flow, most financial observers consider that unlikely — at least in the short term.
And then there’s Alden. As we’ve reported, Alden is on a trajectory to takeover/merge with Tribune Publishing this year. Our most recent datapoint:
Tucked inside the company’s April 8 notice of its annual meeting — which of course will be virtual — is this:
Nominees for Director: The Board of Directors has nominated the six individuals listed below for election as directors at the Annual Meeting. All nominees are currently serving as directors of the Company. Ms. [Dana Goldsmith] Needleman and Mr. [Christopher] Minnetian were both appointed to the Board of Directors pursuant to the Cooperation Agreement dated as of December 1, 2019 by and among the Company, Alden Global Opportunities Master Fund, L.P. and Alden Global Value Recovery Master Fund, L.P. (the “Cooperation Agreement”).
It sounds like the usual corporate filing-speak. But what’s omitted is the big story. The board currently has eight members, but it’s only nominating six.
David Dreier, who served as the board’s chairman until Alden’s rapid insertion into the company’s affairs six months ago, isn’t being re-nominated. Neither is Eddy Hartenstein, also a former board chair and long-serving board member, as well as former publisher and CEO of the Los Angeles Times Media Group. Both of them received criticism for their acquiescence to Michael Ferro’s Tronckist regime, but both have also been considered relative Tribune Publishing stalwarts, advocates of local journalism.
After Alden bought up Tribune stock late last year, one of its demands was that Tribune grow its board from six to eight members by adding the Alden-affiliated Minnetian and Needleman. Now it’s dropping back to six, with the two Alden picks sticking around.
The arithmetic is clear. Alden’s Heath Freeman — already exerting great influence at Tribune, which dispatched CEO Tim Knight and pushed forward with significant job cuts pre-COVID — is lining up the company for a merger with his own MNG Enterprises. Observers expect that the soon-to-be-reduced Tribune board will move to “explore the best use of its assets.” Then, most likely, would come the appointment of an “independent” board group (without the would-be-conflicted Alden 2), who would then lead a sales process. The likeliest result: a merger, in some form, between Tribune Publishing and Alden’s MNG Enterprises.
(The NewsGuild, which represents newsroom staff at the Chicago Tribune and several other Tribune Publishing papers, is promising a fight. This week, it announced a proxy fight aimed at getting the two Alden directors off the board, questioning whether “their interests are aligned with those of Tribune Publishing.”)
What might that increasingly likely deal mean for a possible further merger with McClatchy?
In its bankruptcy filings, McClatchy has acknowledged what I’ve reported over the past couple of years: multiple failed efforts to merge with Tribune. If Alden wasn’t circling around Chicago, those who know the companies well believe a Tribune/McClatchy combination would make a lot of sense. Both focus on larger metro markets, as opposed to the smaller towns at the core of Gannett. They’ve had similar editorial philosophies and business strategies over time.
The thinking now is that an Alden/Tribune tie-up would foreclose a merger with a post-bankrupt McClatchy. Maybe that’s true — maybe Chatham, if and when it becomes McClatchy’s controlling owner, will just operate it for a while.
Or maybe not. Too much is up the air here. But watch the timing.
An Alden/Tribune merger would likely be announced sometime after it slims its board — its annual meeting is May 21 — and goes through that “exploration” and “process.” That might mean a merger announcement in June or July — the same time when we expect McClatchy to emerge from bankruptcy.
My expectation requires a new metaphor. The Consolidation Games are adding a new event, musical chairs. The industry’s music has slowed, its cash flow down to an adagio. The number of chairs for CEOs decreases by the month, as mergers take what had been independent newspaper chains — most with long histories of civic mission — and turn them into tradable financial assets harvested for short-term gain.
Not long ago — like, last October — a list of the major American newspaper chains would have included Gannett, GateHouse, MediaNews (MNG), Tribune, McClatchy, Berkshire Hathaway Media, and Lee.
GateHouse bought Gannett and then took its name; Berkshire Hathaway loaned Lee the money to buy it out of the business. Depending on what happens with MNG, McClatchy, and Tribune, that list of 7 companies could be down to 4 or even 3 by year’s end. Collectively, the companies who remain would control well over 50% of daily circulation in the country.
Only one survivor, Lee, would still be controlled by “newspaper people,” and most of its papers are smaller; it has only four papers that sell more than 50,000 copies on weekdays (Buffalo, St. Louis, Omaha, and Richmond).
Of course it’s possible that new players might see this as the perfect time to enter the business. The price to buy a newspaper company has never been lower! Recession risk would scare away all but the deeply pocketed, deeply ambitious, and perhaps deeply political would-be acquirers away. It’s the Buffetts of the world who can afford to take a long-term view in such rough times — though even Buffett decries the current uncertainty and says he isn’t buying anything. (He wouldn’t be buying newspapers, anyway.)
“They’ve studied it,” says one source familiar with those conversations. “They believe that major cities will be served by a strong local news company — outputting to both video and text/print — and they believe that buying local newspapers is one way to get there.”
Google and Facebook hire some of the best legal talent in the western world, and they’ve been able to swat away, delay, and skirmish interminably with the forces that demand they pay up for their use of news content. For more than two decades, newspaper companies around the world have wanted platforms to pay a license fee — like the ones the music industry and local TV stations get, say — for the snippets of news content they publish. They’ve been largely unsuccessful.
As the Google/Facebook duopoly has come to dominate the digital advertising business, and as the ad revenues of news publishers have fallen off a cliff, the intermittent cries have grown. Now, they’re joining in unison. Will they be able to pry loose big new revenue streams now?
I wouldn’t bet against the platforms — it’s usually not a winning bet — but there’s no doubt that executives in Mountain View and Sunnyvale know they now have a bigger problem on their hands.
In the last month alone, Australia and France have demanded payment. Canada is getting a full-court press for help from its publishers, including imposing new pressure on the platforms. “An urgent message to the Government of Canada from the publishers of Canada’s major newspapers” went out across the nation on Saturday, Canada’s big weekend newspaper day.
Most notably, U.S. publishers are also working — more quietly, but more aggressively — to get what they believe has long been due them. They’ve appreciated what largesse has been provided by both Google and Facebook in their multi-hundred-million-dollar journalism support programs, and they’ve recognized the many earnest people inside those companies who aim to offer local news a lifeline. But no one believes those grants are — or promise to be — the game-changer that society and their businesses require.
“This could be the year,” says one executive involved in the U.S. movement. “The stars may have aligned.”
Among those stars: The platforms have achieved something few others have: bipartisan questioning of their activities. Both Republican and Democratic politicians love to rail against Big Tech, whether they’re citing the 2016 election, misinformation in general, company efforts against misinformation, growing privacy concerns, monopolistic behavior, or the platforms’ impact on the system that long provided Americans local news.
More people have looked into the Black Mirror and haven’t liked what they’ve seen. Techlash 2020 — still powerful despite (or perhaps because) it’s the platforms who will likely weather the coronavirus downturn best — could result in a new stream of revenue to news publishers.
As I wrote in January, the payment issues of who, how, when, and where are gnarly ones. The platform can fairly cite that gnarliness. They also like to cite the humorous algo blindness they like to claim (“How would we ever figure out how to fairly attribute value to news producers?”) while they dodge, weave, and aim to make separate deals with the largest national/global news producers. Separating out the Timeses, Posts, Journals, and Guardians from the larger, bedraggled news herd is an classic divide-and-conquer strategy that’s long been one facet of the game. (Note Facebook’s payments to publishers for its News Tab — individual deals primarily targeting the top of the industry.)
Then, of course, there’s the irony that it’s the very financialization of the industry — the hedge funds and PE firms who stand to benefit directly from any aid to newspaper companies — may be the platforms’ best argument for opposing payments for content.
Alden president Heath Freeman’s recent “Dear Colleagues” letter, circulated by new New York Times media columnist Ben Smith, offers the perfect foil. “Fund vulture journalism?” the platforms can cry. “They’re worse than us!”
Indeed, look at the blowback big corporate players have faced if it comes out that they’ve taken bailout money. While this sort of platform payout wouldn’t quite be characterized as “bailout money,” the optics are less favorable for a news industry that is — at least in the U.S., and Canada — dominated by financial players.
We’re in this pandemic moment in which COVID-19 fears have unexpectedly revalued the sort of experienced, balanced reporting a good local news outlet can provide. And yet we’re stuck talking about the interaction of a few hedge funds, focused on little else beyond profit, and a few tech companies with unprecedented dominance.
Then there’s this to ponder: If Google and Facebook finally began paying for the supply chain of news — something akin to the retransmission-fee revenue stream that revolutionized the local TV business model — what would be the new value of these news companies? Pouring hundreds of millions, if not billions, into their revenue streams would have a real and significant effect. It could offset the profound loss of advertising and semi-stabilize companies that haven’t felt stable since 2007 or so. If that happened, how much more market-valuable would newspaper titles and newspaper companies become?
Factor that into your crystal ball and the “multiples” that newspaper companies might be “worth” produce a few new swirls of possibility. If cash flow were no longer projected to decline inexorably — if they were at least stable —would these old “newspaper” assets, their blackletter flags mostly digitized, become more valued businesses?
That is a big “if.” But it’s one more plausible than a year ago.
Finally, the will-platforms-pay-up question has at least two big implications. First, the money guys — the would-be buyers and consolidators like Alden, Apollo, or Chatham. Heath Freeman’s letter shows he sees the potential for major value creation if the platforms can be pushed to a deal. How does even the possibility of a big platform settlement figure into the immediate questions of consolidation — the ones that’ll be answered within just a few months?
Second, what about all the next-gen thinking in the local-news-revival world? Major foundations, the American Journalism Project, news entrepreneur Steve Waldman, and others advocate a reordering of local news. Among the prevailing ideas is one that Waldman has dubbed “replanting”: buying out and replacing the financially driven owners of the daily press, through something like a “deconsolidation fund.” A couple of billion could do that, and that’s not completely impossible money to ponder. The perhaps bigger question: Where does the money come from to operate a resurgent local news operation — and hopefully to make it grow?
That platform “retransmission” money could be part of a big new idea. By itself, platform money would be meaningful. But combine it with some of the newer proposals now being advanced and an updated financial business model may be possible for the local press of the 2020s.
Part of that is government, government-funneled, or government-incentivized funding. Most immediately, there’s the federal COVID-related bailout money. Some mostly smaller newspapers have been able to take advantage of that short-term loan-turned-to-grant aid; bigger ones are too big or too debt-encumbered to make use of them. Gannett’s Mike Reed has told employees the company benefits from federal programs that allow the postponing of both FICA and pension plan payments; he’s estimated as much as $150 million in delayable bills, according to Gannett sources.
There’s a push to expand coronavirus-related government ad programs, directed toward local newspapers. There are also several proposals to use the tax system to incentivize publishers, investors, and/or consumers to provide more money to pay journalists.
The big national responses, led by the News Media Alliance, could break something loose. It’s asking Congress to give it an anti-trust exemption so its members can negotiate as one with the platforms, as well as pushing forward on multiple industry aid programs.
And in some communities facing financialized ownership, journalists and their supporters aim to separate out once-robust titles from the hedge fund herd. They look to cities like Minneapolis, Seattle, L.A., Charleston, Philadelphia, and Boston for inspiration, hoping to find civic-minded wealthy people to revive a paper. The Save Our Sun movement is trying in Baltimore; it joins other recent efforts in Chicago and Sacramento. All of these efforts have now been made more complicated, at least in the short-term, by COVID-driven uncertainty.
Depending on how you look at it, this virus has changed everything — radically changed what 2020 will look like for local news — or simply accelerated the industry down the path it was pointed toward before all this. Wealthy saviors, platform complaints, nonprofit dreams, hedge fund nightmares — those themes have all been with us for quite some time.
