Is an end in sight?

The first half of 2020 “will be the final dance of the newspaper industry,” one of my savviest financial sources told me Thursday — someone who’s been right on the money for years. “Everything will get resolved in the first half of 2020.”

By “everything,” he means the consolidation of ownership and control of the United States’ major newspaper companies. What as recently as three weeks ago were five big chains — Gannett, GateHouse, McClatchy, Tribune, and Alden Global Capital’s MNG Enterprises — could well, by the middle of 2020, be two. In sight is the big industry-wide rollup I first pointed to way back in 2011.

Because of their origins in local communities, the newspaper business historically lacked the centralization and scale of other industries. Even the “big” chains that developed as family owners cashed out in the 1970s and 1980s weren’t really that big. When Al Neuharth — “the brash and blustery media mogul who built the Gannett Company into a communications Leviathan,” according to his New York Times obit — died in 2013, Gannett owned 93 daily newspapers. That was still less than 7 percent of the nation’s total.

Why rollup now? It’s just seems so logical to executives in other industries: McDonald’s can make burgers a lot more efficiently than mom-and-pop joints in every town can.

One acid-tongued analogy has stayed with me for years. “You guys think you’re special in the newspaper business — it’s just like any other industry,” one experienced financial analyst told me mid-decade. “But it’s a distressed industry, and distressed industries get consolidated. In that way, news is just like waste management.”

Another industry insider I spoke with recently pointed forward a few years, to the middle of the 2020s: “These guys look out at their revenue projections for the next three to four years and they know what they have do.” That means consolidation is now Job One. Newspapers have all been cutting expenses, including deeply into newsrooms, for more than a decade now, especially since The Great Recession wiped out 20 percent of their revenue and ushered in a decade of red numbers on their balance sheets.

Much of the industry’s attention this week, on Twitter and elsewhere, has focused on the rumors and then news of massive Gannett layoffs, coming weeks after Old Gannett was acquired by the then-rebranded GateHouse.

We’re hearing that “thousands” of Gannett employees will be getting pre-holiday pink slips — but that’s no surprise. With $400 million or more in cost reductions to deliver, it was clear that the company would be cutting more than 2,500 jobs — likely 3,500 or more. Reports also indicate that much of Old Gannett leadership in high-ranking sales position was surprised to get the quick axe this week. A crowdsourced Google Doc is tracking the layoffs by newspaper; it currently shows more than 160 jobs lost, 33 of them in the company’s newsrooms.

But there’s a lot happening deeper in the background too. Back in January, I called the coming year’s round of tie-ups and acquisitions the 2019 Consolidation Games, and now its sequel is coming into shape. GateHouse buying Gannett seemed like the big play — and in raw tonnage, it was, combining the No. 1 and No. 2 chains. But look farther ahead.

On Monday, Alden’s pursuit of Tribune Publishing became crystal clear. The two companies publicly entered into a “Cooperation Agreement.” Cooperation is too kumbaya of a word for it; it’s really a kind of non-aggression pact, and we all know those always work out great.

In corporate parlance, it’s called a standstill. In this case, the always aggressive Alden agreed to retract its fangs — for the time being.

Alden president Heath Freeman had surprised everyone (including Tribune’s board and execs) by buying a 25 percent stake of Tribune stock from the group led by one-time Tronc chairman Michael Ferro on November 19. Then, just six days later, Alden told the SEC it had upped its stake to 32 percent.

The standstill prevents Alden from increasing its stake past 33 percent until June 30, 2020. It also, for the same period, bans Alden from launching a proxy fight — an attempt to replace current Tribune board members with its own, a tactic it tried (unsuccessfully) in its own attempt to takeover Gannett in May.

In return for that pause, Tribune enlarged its board to eight from six, letting Alden handpick the two new directors. Crain’s Chicago Business columnist Joe Cahill decried the giveaway as indefensible. His indignation is well-placed; the hometown Chicago Tribune — which has found a little stability over the last year or so after the Ferro/Tronc years — could suddenly face the same fate as the Alden-eviscerated Denver Post or (formerly San Jose) Mercury News. For Tribune, though — with its corporate life suddenly upended — it seemed like the best deal possible at the moment.

Alden, the newspaper industry’s comic-book villain, is now firmly inside the tent of one of the few big public newspaper chains not yet controlled by financial players. Not coincidentally, Tribune also carries the least debt of those chains — making it ripe for the sort of debt-piling-on that is the M.O. of players like Alden.

The 2020 Consolidation Games

So what kind of scenarios are now likely, or at least imaginable, in 2020?

While none of the companies involved in all of this intrigue will comment on the record, there’s broad agreement about what the would-be deal landscape of early 2020 looks like.

The most salient facts: Two standstills and that June 30 date.

We know about Alden’s standstill. What’s the other? Patrick Soon-Shiong, who bought the L.A. Times and San Diego Union-Tribune from Tribune in February 2018, is also standing still. Like Ferro’s bunch, he also owns about a quarter of Tribune — a stake he initially took when he was interested in acquiring the Times, but which he held onto even after he did. Back in January, he agreed to a standstill that prevents him from acting independently of Tribune’s board in most ways.

That standstill expires…on June 30, 2020, same as Alden’s.

So when the clock hits midnight, both Alden, with its 32 or 33 percent, and Soon-Shiong, with his 24 percent, will be free to vote their holdings as they wish, as well as to buy or sell more. Even the most math-averse journalist can see that, combined, Alden and Soon-Shiong will hold a majority of Tribune shares. That’s real control.

Is Alden, then, lying in wait for June 30?

It might not even have to wait that long. While its two new directors would have to recuse themselves from any Tribune/MNG merger negotiations, the Tribune board doesn’t have to wait for mid-year. Its board could appoint a special committee made up of its independent directors. That committee could then assess what’s in the best interest of Tribune’s shareholders and move to join the rollup party sooner rather than later.

In fact, don’t think of that June 30 date as the starting gun for M&A — think of it as the finish line. Or, in more newspaper-appropriate terms, a deadline. If Tribune can strike a deal with a merger partner before then, it can do so on whatever terms that it sees as most favorable. If it can’t, well, all bets are off on what happens when those standstills expire.

Who might that merger partner be? Two recent events have rearranged that chessboard.

New Gannett, absorbed into GateHouse, is fully occupied with its own big lifts: integrating two big companies, cutting everything that can be cut, and paying down the $1.8 billion in high-interest debt it took on to do the deal. New Gannett is off the rollup board — for now.

Then Tribune’s likeliest dance partner, McClatchy, stepped off the board, at least for the time being. As it focuses its attention on the financial reorganization of its capital structure and negotiates with the feds for a takeover of its pension plan, McClatchy’s appeal as a merger partner has greatly diminished. It sees the same logic in the large-scale cost-cutting a merger could provide. But it can’t do much until its own reorg is done.

How long might that take? Well, McClatchy will likely need most of the first half of the year to clear its position through voluntary reorg or bankruptcy. So, say, maybe sometime around June 30? That date will be circled on every newspaper exec’s calendar before long.

Add it up and the first two quarters of 2020 could mark the major reordering of newspaper ownership, control and management that’s been in the cards for years.

What’s likeliest? Observers put a Tribune/MNG deal at the top of the list. The biggest reason? Just the big cost cutting allowed by putting two big companies together. In recent years, there have been various non-financial roadblocks getting in the way of various tie-ups. (Do the geographic footprints fit together? How about the corporate cultures? Do they agree on strategy going forward?) But now, the imperative is cost-cutting, and that trumps all else.

A combined Tribune/MNG would become the No. 2 U.S. newspaper chain, behind Gannett. It would include Tribune’s small-in-number but metro-heavy roster, which includes the Chicago Tribune, The Baltimore Sun, the Orlando Sentinel, the South Florida Sun-Sentinel, the New York Daily News, and the Hartford Courant. MNG would add bulk, with 97 dailies and weeklies in total, including such once major properties as The Mercury News, The Denver Post and the St. Paul Pioneer Press. It has big footprints in both northern and southern California.

Most important: Who would control that combined company?

That begins a parlor game. What does Alden’s Heath Freeman really want at this point? He has milked and milked MNG through its Digital First years, making sure that when it comes to investment in the product, it’s Digital Last. Does he see a Tribune merger as a way to cash out, as further profits became harder to obtain? Or does he smell even more dairy refreshment in subjecting Tribune — already drained, yes, but not yet emaciated to Alden’s standards — to his cost-cutting discipline?

That’s one big question. Another is valuation, the fundamental question of most mergers. We know what the market thinks the publicly traded Tribune is worth — its current market cap is $444 million. MNG is a private company controlled by Alden, its majority shareholder. Observers guesstimate its value somewhere around $300 million, but it’s truly impossible to know from the outside.

A number of those who’ve been able to looked at Digital First/MNG books over the years have found some of the accounting questionable. Further, Alden has shown itself able to shift and move money between its various affiliates with the skill of a veteran three-card monte dealer — and has been sued and investigated for doing so.

Then there’s the big question of what value these newspaper brands will hold in the future if they’re shrunk even further. Or, as one company CEO put it, “How much life is left in the asset?” And how much of any deal would be cash and how much stock?

But despite all those questions, yes, Tribune could “buy” MNG. Or vice versa — recall that it was the smaller GateHouse that swallowed the larger Gannett. And one thing is clear: There’s a reasonable chance that Heath Freeman and Alden will get the opportunity to slice and dice Tribune’s papers as he has MNG’s.

McClatchy aims to mid-year

If the Tribune/MNG combo happens, that would bring those five newspaper chains we had a month ago down to three.

How might we get to two? That comes down to McClatchy. After a Tribune/MNG merger, McClatchy would again be the third-largest U.S. newspaper company — the position it held before adding Gannett to GateHouse promoted it to No. 2.

And as a standalone No. 3, struggling with the same operating economics as its peers, it would certainly like a dance partner as well. Except the dance floor is looking pretty sparse this late in the night. Not many options left. So it’s possible McClatchy’s play would be to join up with the new Tribune/MNG — or maybe even New Gannett. Either would be a level of consolidation almost unimaginable in the industry not long ago.

Of course, McClatchy would like to be an acquirer, as it almost was a year ago when it came close to buying Tribune. But its financial and strategic positions have weakened since then.

On Wednesday, Bloomberg’s Joe Nocera wrote an excellent piece on McClatchy’s challenges and CEO Craig Forman’s continued public focus on community difference-making journalism that matters.

Internally, McClatchy has its share of detractors who’ll argue that, while some of its journalism remains top drawer, the cuts its newspapers have seen aren’t that far off from those of its peers. But it’s nonetheless true that McClatchy seems like an industry outlier. It’s a publicly traded company, but its two-class share structure still gives the founding (1857) McClatchy family some control. While financial player Chatham Asset Management, its largest shareholder and debtholder, circumscribes management’s decision-making, the company stands out as an advocate of traditional journalistic values in the widening sea of hedge fund and private equity owners.

Forman, in Nocera’s piece and elsewhere, makes the case that McClatchy is leading the pack in terms of digital transition, especially in well-priced digital subscription selling.

But none of that will save McClatchy — by the time it finishes getting its internal financial house in order — from facing a vastly altered industry landscape. What choices might it still have by summer?

Five major companies could become two. Those could well both be run by investment companies with little real affection for or attachment to the newspaper business — Alden, whose sins are well known, and Fortress Investment Group, which has a management contract to run Gannett through the end of 2021. Though Fortress and Alden differ significantly in their management practices, the fact remains that both companies’ interest in the bottom line crowds out most thoughts of journalism’s role in serving its communities.

Those two companies would own probably close to a third of the daily press; New Gannett already holds a 18 percent share. Then there’s Lee Enterprises — in 50 markets, with mostly smaller properties — and the two big private companies, Hearst and Advance. Following them are a fair number of smaller chains, most of them focused on smaller newspaper properties.

So is this more Armageddon or doomsday, asks the New York Post?

We’ve got ghost newspapers, news deserts, and now an assortment of Biblical references to choose from. What sounds like Hollywood summer fare, though, comes down to one sobering word: reality.