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April 16, 2018, 9 a.m.
Business Models

Newsonomics: 8 questions as Michael Ferro leaves the stage ($100 million richer)

What are the first challenges the new ownership faces? What happens to the Tribune name? And could Chicago see two locally owned daily newspapers?

Michael Ferro has left the room. Tronc announced Friday that Merrick Media, the Ferro-led, Chicago-based investment firm had sold its 25% stake in Tronc.

The hometown Chicago Tribune tries to tell us more about Sargent McCormick, the buyer of Merrick’s stake. We do know of his interest in the family legacy and in art, but not yet much about what he will do with the stake he bought through his McCormick Media.

We also know that Ferro’s exit from the newspaper industry spotlight again changes the dynamics of the industry.

As we pay our respects to Mr. Ferro, this new story will unfold over the next several weeks. With a closing of the sale to be scheduled, let’s assess what the repercussions could be.

What’s the half-life of Justin Dearborn? Colleagues describe Dearborn as the perfect complement to the boisterous Ferro. He’s quiet and non-inflammatory, but one issue has emerged in his two-year tenure, after Ferro installed him upon seizing control of the company: He brings little media or publishing experience — business or editorial — to the job.

With Ferro — presumably — out of the picture, Dearborn’s continuing leadership of the struggling company makes less and less sense. Don’t expect a quick resignation, though. Dearborn is among a handful of Tribune/Tronc exits who got top-of-the-line golden parachutes upon taking their jobs. He and others will make sure they fully extend.

One exec to watch: Tim Knight. Ferro brought former Tribune business executive Knight back into Tronc last year; Knight had worked for Ferro when Ferro’s Wrapports ran the Chicago Sun-Times. Lately, Knight has been ascendant at Tronc, trying to catch up on the “digital transformation” that Ferro and Dearborn had promised but not delivered on. He’s a low-key exec.

Unlike the more flamboyant Ross Levinsohn, Knight aims to apply some more mundane best practices, to revive Tronc’s sagging business and editorial spirit. Might he stick with new ownership?

In the meantime, it seems clear that Levinsohn’s syndication operation — trumpeted upon his reinstatement after a confidential company harassment investigation — is in tatters. Just last Friday — the day Ferro sold — Tronc fired syndication content head Lewis D’Vorkin (who now has the distinction of being fired twice by Tronc within a six-month period) and several dozen related outside-the-newsroom employees. (Recall that the short-lived, semi-aborted L.A. Times Network).

If Dearborn is still in charge, who will actually control the company when both the McCormick deal and the sale of L.A. Times and San Diego Union-Tribune to Patrick Soon-Shiong close? Ferro’s Merrick Media owned 25.41% of Tronc, and has utterly controlled it. Ferro got the board to oust then-CEO Jack Griffin soon after buying into the company in 2016, then packed it with friendlies. They allowed him to advantage himself both financially and operationally. The board also turned against Patrick Soon-Shiong — who even as he closes on the L.A. Times sale still remains Tronc’s second-largest shareholder, with something less than a quarter of the company.

Soon-Shiong hasn’t forgotten the board’s many slights, as it bounced him out of the vice-chair job and weakened his position vis-à-vis Ferro.

Now as Sargent McCormick replaces Merrick as the 25.4 percent owner, expect some of those board members to follow Ferro out the door.

What’s the first question the new ownership faces? It would make a lot of sense for Soon-Shiong and McCormick to find common cause. Both bought what they bought with the interest of the hometown metro top of mind. And there may be business partnerships of various kinds (yes, another Tribune/Times Mirror back-to-the-future idea) to be done, as the barrier of Ferro/Soon-Shiong animosity disappears.

Their first question: What do they do with the company? While Tronc officially told me Friday that Ferro’s sale “does not alter our business strategy,” that seems unlikely. Ferro’s passion for expansion is gone, the ownership’s new, and Tronc without the L.A. Times is a far smaller player than it used to be. Perhaps McCormick and Soon-Shiong will kindle new national ambitions, either using Ferro’s deals team of Dearborn, CFO Terry Jimenez, and digital head Ross Levinsohn, or dispatching and replacing them.

Most likely, as a number of sources told me: Tronc may fade into history as a company, selling its seven dailies outside of Chicago.

So is Gannett back in the picture? Recycling past storylines may be all the media world can do. If Tronc puts up its remaining titles for sale, certainly Gannett will take a look. In fact, some sources say, Tronc and Gannett have already had discussions in recent months. But Gannett really wanted the Chicago Tribune, for synergistic efficiencies with the Milwaukee Journal-Sentinel it bought in 2016. With Chicago-based McCormick Media buying into the company, it’s unlikely it will want to sell the Chicago Tribune.

That leaves five major metros.

Of those, Gannett may be most interested in Tronc’s two big Florida properties, in Orlando and Fort Lauderdale. The company already has a big footprint in Florida, so synergies, again, may play a role, as does Florida’s continuing growth.

The Baltimore Sun and Hartford Courant may be of less interest to Gannett.

Then there’s the odd buy that Michael Ferro made in September: the New York Daily News. He was the only serious buyer then. No one looks forward to “buying” such a storied, money-losing title, just to shut it down to public acrimony.

There are two smaller dailies in Allentown, Penn., and Newport News, Va., which could fit into Gannett’s (or several other chains’) portfolio. In addition, local buyers like the Allentown-adjacent Times-Shamrock might find a combination attractive.

With the L.A. Times, San Diego Union-Tribune, and Chicago Tribune — easily 60 to 65 percent of the company — removed from Tronc, it’s a far smaller company, which makes it cheaper. Cash isn’t the only way to get a deal done. A Gannett/what’s remaining of Tronc merger, with share swaps, might work.

If not Gannett, who? Never discount the billionaires or multi-millionaires! In Baltimore, several family names have popped up over the years, with that of the Under Armour CEO Kevin Plank now making the rounds. There’s some money in Hartford. In Florida, a frustrated Palm Beach billionaire or two who lost the Palm Beach Post acquisition to GateHouse Media could show interest.

Hearst Newspapers, in acquisition mode and having recently bought the New Haven Register, would seem a likely candidate for the Hartford Courant. But then Hearst would own seven of Connecticut’s 13 dailies. The company might be interested in other Tronc properties, but none easily fit in its wheelhouse.

The big metros likewise seem a poor fit for GateHouse Media. But it’s now the biggest owner of U.S. dailies (it holds a remarkable 142) and has been moving up the ladder in metro size, having plucked the Austin American-Statesman and Palm Beach Post from the market over the last two months. If it decides that any individual market meets its specs, it has new funding to further its expansion.

Then there’s Digital First Media. The company — seemingly more intent on selling than buying — surprised the industry by outbidding GateHouse for the Boston Herald in February. Though Alden Global head Heath Freeman has been pilloried for his greed, the company has remained focused on one thing: maximizing return.

DFM has continued to look at acquisitions over the past months, and there’s no reason to think it wouldn’t continue to do so if Tronc markets hit the market. Wildcard: If the Denver Post protests gain traction and spread (as they’ve begun to do more obliquely at DFM’s Los Angeles News Group) — and if those protests lead to any significant subscriber or advertiser suspensions or boycotts — then Freeman might decide to exit.

There’s also Apollo Global Management, another blast-from-the-past would-be entrant in the newspaper business. Though Apollo was recently rumored to be a Tronc buyer, that distant possibility may have morphed. Would Apollo — which has developed an extensive acceleration-to-digital-from-print strategy — be interested in a Tronc fire sale? Or could it even renew DFM interest?

Look at it this way: the newspaper industry’s financials continue to worsen. But the price of buying in has been reduced as well. How much brand equity remains, given a smart transformation plan that can be built upon?

How much did Michael Ferro make? Ferro sold his stake at a whopping 34 percent premium.

Ferro and Merrick Media bought shares both separately and multiply over their two-year investment horizon. I haven’t yet been able to locate each purchase and selling price. Partial data tells us that Ferro bought at prices from $8.50 (his initial price when then-Tribune Publishing CEO Jack Griffin brought his investment into the company in an ill-fated attempt to buy the Orange County Register) to $15. More than half of the 9 million–plus shares Merrick announced selling were bought at that initial $8.50.

Let’s conservatively take $12 as the median price of shares bought by Merrick. In selling at $23 a share, Merrick would have made $11 a share. Multiply that by the 9 million–plus shares sold, and it looks like Merrick made about $100 million for Ferro’s brief run. That’s in addition to the payments that Ferro got for his private plane and, lately, consulting, not to mention direct compensation.

That’s a big number, and of course, one that’s been “earned” as Tronc has continued to trim its expenses, including journalists. Tronc’s owners — like Alden and DFM — profit hugely by using newspaper assets as financial instruments to be manipulated. Michael Ferro could have multiplied local journalism as he multiplied his investment, but he showed little interest in that over the two years.

What will become of the Tribune name? For decades, the Tribune Company stood as a big American brand. The Chicago Tribune defined it, the Times Mirror purchase extended it, and the company’s TV investments grew its stature. But then Sam Zell took control and tanked the company, in late 2007. Seeking market capitalization optimization, Tribune split into separate TV and newspaper companies in 2014; TV became Tribune Media, and newspapers became Tribune Publishing. In that process, it orphaned the newspaper side. It stripped it of its real estate (that’s why L.A. Times staffers are now being exiled to El Segundo; LAObserved’s Kevin Roderick has the skinny on that move) and its substantial classified assets, while saddling it with a $325 million debt. (Sinclair Broadcasting, if it finalizes its acquisition of Tribune’s TV stations, will essentially inherit that passed-on value.)

In 2016, Michael Ferro came up with “Tronc” ((“Tribune Online Content,”) erasing Tribune. Now, amid all the questions of what happens to the wider company, what happens to “Tribune”? Maybe it will return to its straightforward Chicago Tribune usage. “Tribune Media” will likely fade into history, as will Tronc. And as these “assets” are swapped around, it’s unclear who has rights to what kind of “Tribune” usage.

Could Chicago see two locally owned daily newspapers? Edwin Eisendrath’s group rescued the Chicago Sun-Times from Ferro’s consolidating clutches last year and now tackles the task of finding a way forward. Sargent McCormick, so far described as a distant cousin of the McCormick family that dominated Chicago newspapering for decades — does the same with the Tribune.

Local is good. But big bucks to back it up — and make the patient long-term investments still required in digital business transformation — are essential.

Photo of Michael Ferro by Christopher Michel used under a Creative Commons license.

POSTED     April 16, 2018, 9 a.m.
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