Nieman Foundation at Harvard
Sometimes when you connect the dots, you just get more dots.
It looked like head-turning news: A Japanese company had taken control of one of America’s largest newspaper chains, New Media Investment Group, a.k.a. GateHouse Media. Tuesday’s headline: “Robotics and tech firm SoftBank Japan purchases newspaper company GateHouse Media”. As Softbank’s acquisition of New York City-based Fortress Investment Group was announced last week, it appeared, on the surface, as if the direction of more than 100 U.S. dailies would be in the hands of non-Americans.
Plus, as feels universally true in these bewildering times, there appeared to even be a link to Donald Trump. Softbank CEO Masayoshi Son had been one of the first chief executives to make the trek to Trump Tower in December, to pay fealty to the incoming president. His supposed promise, accompanied by the firm Trump hand on Son’s shoulder: $50 billion in U.S. investment, aiming to create 50,000 jobs. saying “The U.S. will become great again,” Son offered.
The reality of the Fortress sale, though, is both less sensational and more impactful. This little-talked-about, won’t-talk-to-the-press newspaper chain owns more daily newspapers than any other U.S. publisher — likely more than any other publisher in the world. And with a market value of $800 million, it stands second only to Gannett’s ($1 billion) among public newspaper firms. (Tronc stands at about $500 million, Lee Enterprises at $145 million, A.H. Belo at $135 million, and McClatchy at $89 million.) As New Media Investment announced its annual financials Tuesday, we now have a better view of the company and its plans — but before we get to that, let’s pick apart that Softbank news.
Softbank — the Tokyo-based company best known for its investments in Sprint, Alibaba, Yahoo Japan, and online lender SoFi — indeed will pay $3.2 billion for Fortress. But Fortress doesn’t own New Media; its actual holding of about 74,000 shares out of New Media’s 53 million amounts to less than 1 percent of the company. It does, however, manage and control New Media, an investment vehicle it created out of GateHouse Media’s 2013 $1.2 billion bankruptcy. For that work, it gets paid, and we’ll do that math below.
Consequently, we can discount the would-be dot-connecting from Trump to Softbank to Fortress to GateHouse and all the confusion about who owns what in this saga. Some SEC filings can help us find some clarity.
One takeaway: The greatest likelihood coming out of the Fortress sale, at least in the short term, is steady as she goes. Though GateHouse’s strategy makes a huge difference to the millions of people in the communities its newspapers serve, the likelihood of any new political, Trump-related pressure on this local press seems small. New Media, with assets of $1.3 billion, is a relative pimple on the body Fortress’ $70 billion in asset management. Now it becomes part of an even larger portfolio, as Softbank emerges, post-acquisition with about $170 billion in managed assets. In fact, with Softbank’s leading edge now becoming its $100 billion tech-future-oriented Vision Fund, this old-world management contract would seem to be something of a (profitable) anomaly.
It’s dailies like GateHouse’s — most of them in smaller cities of the country — that now demand new scrutiny out of this election. What do voting Americans know? What do they think they know? How much are their once-robust newspapers, especially across the kinds of heartlands that New Media serves, helping them separate fact from fiction?
Make no mistake: The New Media playbook has been executed well. As one savvy industry insider observed to me: “It’s the same plan as Tronc and Gannett — they are just far better and more disciplined at making it work.”
That fact shows up in the fact that on Tuesday, NEWM could report a 2016 overall revenue decline of only 2.5 percent for “same store” (that is, excluding the contribution of newspapers newly acquired) revenue. That’s a better performance than its peers.
It’s unclear how much stamina NEWM’s investors will have for the strategy, though. The company reported a more-than-50-percent drop in both net income and earnings-per-share for 2016. (CEO Mike Reed explained that drop by pointing to the outsized $43 million gain the company made on its Las Vegas sale in 2015.) Those numbers may have knocked about 4 percent off the share price this week. While the company’s $800 million market cap is impressive, with fewer newspaper properties, it could claim a $1.12 billion valuation in early 2015. Is the bloom off this fast-growing flower? In this ever-toughening local newspaper environment, even New Media Investment Group walks a thin tightrope, further proving that single-class public companies serve the needs of transitioning news efforts poorly.
I asked New Media CEO Mike Reed and COO Kirk Davis for comment on the annual results and their 2017 plans, but received no response.
What’s clear, though, is that the company plans to extend its strategy — buy more papers, monetize those readers better through Propel and other initiatives, and continue to cut, cut, cut those newsroom staffs.
As recently, as three weeks ago, New Media bought five daily Dix newspaper properties in northeastern Ohio. Those add to its impressive reach: 19 million people through 564 community print publications, 489 websites, 476 mobile sites. Though its outdated site leaves out acquisitions made years ago, the company now owns more than 130 dailies. That’s about a tenth of all the 1,375 dailies in the country.
New Media has bought up larger papers in Providence, Columbus, Sarasota, and Worcester, plus chains of multiple dailies, including 24 from Halifax Media (the old New York Times Regional Newspaper Group), eight dailies from Dow Jones Local Media Group and six from Stephens Media.
Now, backed with a further $130 million in raised equity, CEO Mike Reed said Tuesday the company intends to buy more. “New Media is well positioned to take advantage of more great acquisition opportunities at attractive valuations in 2017.” It’s the remaining family newspaper companies, like the 119-year-old Dix Newspapers, that are taking the money and exiting the business. In some cases, GateHouse has encircled these family operations, and then offered just enough to close a sale. At best, GateHouse puts together a cluster of newspapers — best for cost-cutting efficiency and consolidation — and takes over a newer printing operation that it can use for centralized, again more cost-efficient, publishing.
Where does the acquisition money come from?
As Fortress restructured, it began put together its investment pools four years ago. That money, according to Fortress, has come from three sources: cash flow from operations, equity issued to NEWM public shareholders, and a regular term loan the company put in place with banks.
Institutional and mutual fund shareholders, including Vanguard, T. Rowe Price, Wells Fargo, and Black Rock Fund own at least 70 percent of the company. They find its dividend — just increased to 35 cents per quarter — attractive. There’s rich irony here: The retirement funds of those in the news industry, among many others, helps fund these New Media takeovers, which in turn result in more job cutbacks and the thinning of journalism in communities from coast to coast. Those nice dividend checks mean fewer journalist paychecks.
We can do the math on what the financialization of these community papers has meant, from Massachusetts to California.
By the terms of its agreement to manage the company, Fortress earned $19.4 million in compensation last year from New Media, based on the conventional private equity standards of a management fee of 1.5 percent of New Media’s total equity and “incentive compensation.” Each acquisition increases that total equity, providing a compelling rationale for more buying of newspapers.
In the company’s just-filed Securities and Exchange Commission 10-K, Fortress earned $9.8 million in management fees and $9.6 million in incentive compensation, amounting to that total of $19.4 million. Given a better 2015, it generated $39.7 million total in 2015 and only $5.7 million in 2014. Both CEO Mike Reed and CFO Greg Freiberg draw their compensation from Fortress; COO Kirk Davis is a New Media employee.
Critics of such management contracts point to the increased overhead they bring to news enterprises that badly need reinvestment. While New Media must allocate income to profit, as do its peers, it must also allocate money to Fortress — which, of course, would claim that it’s earning that payment.
Reed noted Tuesday that the company plans to cut an additional $27 million in 2017, an amount of money not far from Fortress’ annual payout.
Just since the beginning of the year, numerous GateHouse papers have cut more newsroom staff — in the single digits at smaller newsrooms as far-flung as the Springfield (Ill.) Register, Lakeland (Fla.) Ledger, Erie (Pa.) Times and Quincy (Mass.) Patriot Ledger. Those cuts follow more major cuts in the newsrooms of papers it’s acquired more recently — those papers have seen the bigger cuts, as reported to me by the NewsGuild/Communication Workers of America. That includes 40 jobs cut at the Providence Journal, a paper GateHouse bought from Belo in 2014.
Word of an overall 4.6 percent budget cut across the chain is rifling through company.
It’s the cutbacks at the smaller papers — the roots of the pre-Fortress GateHouse chain — that may be most telling.
“All of the papers the Guild represents that are owned by GateHouse have not had their wages increased in 8 to 10 years,” says Melissa Nelson, director of collective bargaining for the NewsGuild-Communication Workers of America. In Illinois, she says, the company “added to the financial misery. GateHouse made a contract proposal for retroactive medical and dental increases or a corresponding pay reduction, if the employee so chooses. The math adds up to about a $9,000 cut” for some employees.
The specter of Trump-related foreign ownership may be a misplaced apparition — but it shouldn’t obscure the real specter of a faster chain roll-up of newspaper ownership in America.
While Fortress doesn’t own NEWM, its management drove the company’s astounding growth after the GateHouse bankruptcy in 2013. With tough, disciplined management, it worked the littered newspaper landscape with great financial acumen, acting on the too-familiar story of excessive newspaper debt and finding the attractive availability of discounted newspaper bonds. It believed in its methods to cut costs by replacing inconsistent management. And, like other buyers, it recognized that so much of newspapers’ remaining trade value is in their tangible real estate. For Fortress, newspapers — now a classic distressed industry — offered a chance for good profit, using the reliable roll-up-and-cut methodology at the root of its industry.
That’s a good business story. More importantly, though, for the story of flagging local American journalism in a time of great societal stress, it’s a triumph of capital over community. The managers and the investors are the victors, the readers and the journalists the losers.
Let’s be clear: Management determines how much journalism their journalism companies actually produce. As with Reed’s twin announcements Tuesday — more acquisitions, but also more reductions in staff — we see the GateHouse/Digital First Media playbook in its full application. It’s not the only playbook out there, but it’s the most used.
Over the weekend, Knight Foundation veteran Eric Newton asked a profound question on Twitter: “Have news media CEOs said anything about a president who loudly accuses their people and companies of dishonesty?”
Have news media CEOs said anything about a president who loudly accuses their people and companies of dishonesty?
— Eric Newton (@EricNewton1) February 18, 2017
It’s a hell of a question. New York Times CEO Mark Thompson sparred with Trump on his year-end call, but Newton’s point is right on: “There are CEOs of major media companies (and companies that own media companies) employing many tens of thousands of workers who are being called dishonest. If the president attacked any other industry, what would the response be?”
The answer, of course, isn’t singular. To be sure, there’s a chill in the air, and courage isn’t easy to come by. It’s more than that though.
As 12-decade-old newspaper companies get sucked up and shrunken by financial managers sending what seem to be outrageous profits as far off as Tokyo, the whole notion of newspaper executive leadership has ebbed away. “Publishers” may have to run two to three (or more) newspaper titles, and they’re judged not by their community participation but by the monthly revenue totals. A world of community leadership — as uneven as it really was over the decades — has been quickly eroded.
And if you’re the CEO of one of the chains, you’re probably far more interested in the increased chances of “cross-ownership.” In the laissez-faire regulation environment taking shape under Trump, newspaper publishers and local broadcasters may well — for the first time — be able to combine their enterprises. That’s a lot of new potential profit — and another potential reason for news industry leaders to keep their mouths shut.
For those searching out nefarious conspiracy in the news media ownership world, this initial GateHouse conspiracy story may be a disappointment. They can, instead though, turn their eyes to another visitor to Trump’s tower, one month after Softbank’s Masayoshi Son.
On Jan. 12, Randall Stephenson, CEO of AT&T and would-be acquirer of CNN through its in-progress Time Warner purchase, paid a visit. Given the president’s promotion of CNN into the ranks of “very fake” news and his senior advisor Jared Kushner’s recent brash critique of the station to Time Warner execs, that’s a different sort of handshake to watch.
