Nieman Foundation at Harvard
The news shocked long-time newspaper observers two months ago: “Tampa Bay Times to be sold to GateHouse Media in $79M deal.”
Had GateHouse devoured yet another storied publisher? No: It was a FloridaPolitics.com April Fool’s prank played out to a near-incredulous audience. Mike Reed, the CEO of the New Media Investment Group that runs GateHouse, spent much of his April 1 responding to the confusion among the company’s shareholders and employees.
The news wasn’t real, but it was believable: GateHouse’s acquisition appetite has seemed insatiable. The company now owns more daily titles than any other U.S. publisher, or for that matter, any newspaper publisher anywhere. In total, it owns 146 dailies — more than 10 percent of the U.S. total. That total itself may amaze some, though it well could be doubled, creating the first real national roll-up of U.S. dailies. In fact, with Patrick Soon-Shiong finally closing Monday on his deal to buy the Los Angeles Times and San Diego Union-Tribune from Tronc, the rest of Tronc’s properties could soon hit the market, accelerating more consolidation. Could GateHouse be interested in any of those properties? GateHouse has long eschewed larger metro properties, so the company is highly unlikely to bid for the new Tronc overall. Yet, if Tronc’s Sun-Sentinel in south Florida were to be sold singly, regional efficiencies could drive a GateHouse deal. In fact, GateHouse is one of the very few companies mentioned in any conversation about newspaper buying. The reason is obvious: The pace of GateHouse buys just this year have been head-turning.
Twelve days after April Fool’s Day, in fact, GateHouse announced it was buying another small metro paper, the Akron Beacon-Journal, for $16 million. A couple of weeks before that, GateHouse had outbid both Tronc and Gannett, and at least one local billionaire, to buy the Palm Beach Post from Cox Media for $49.25 million. A few weeks before that, it had acquired the Austin American-Statesman, which Cox had put up for auction in late fall. In that deal, it had emerged as the victor over Texas daily publisher Hearst Newspapers, paying $47.5 million.
Even within the last month, GateHouse has added still another daily: the 150-year-old Pueblo (CO) Chieftain, which had been locally owned.
GateHouse emerged out of bankruptcy just five years ago, but under the leadership of Mike Reed and COO Kirk Davis, it’s rapidly moved up the food chain. Once a seeming hodgepodge of smaller community dailies, it has more recently claimed smaller metro turf — Providence, Columbus, and Worcester, in addition to Austin, Palm Beach, and Akron. And it has no plans to stop buying. In early spring, the company’s board authorized the further sale of $300 million in new shares, to be used to fuel more buying.
In a recent, wide-ranging two-hour interview, I spoke with with Mike Reed, the financial engineer of the company’s growth. Reed, who’s worked in the industry since 1988, has rarely spoken publicly about GateHouse’s stunning growth or the strategy fueling it.
Could GateHouse outrun Gannett, the country’s leading daily publisher by revenue, building from 150 properties to 300 or 400? “It could. It could,” he told me.
In fact, amid all the tumult of a daily newspaper industry gasping for breath, GateHouse seems like a company with confidence and a plan, as its peers struggle mightily.
Gannett is struggling to turn around its image as a fading leader, contending with poor financial results and orchestrating a major shake-up of its business side coast to coast.
Tronc has just halved itself with the sale of California dailies, and is now likely test the market for the rest of the company. Sources say that shopping has quietly begun, with Rupert Murdoch passing on a Tronc buy. Patrick Soon-Shiong, himself still a 25-percent owner of Tronc, has been flexing his Tronc muscles, declaring the silliness of the Tronc name.
Then, there’s much-vilified Digital First Media. DFM remains in limbo, though its comfort level with its status quo may be newly challenged. On Monday, the Colorado Sun, featuring some of the Denver Post’s best talent, announced its digital startup plans and a couple of years of funding. That’s competition for readers that DFM isn’t used to — and competition that could spread to other markets. Two top DFM executives arrived in Denver Tuesday afternoon, at least in part to address the Post staff.
As his peers’ missteps have been quite public, Reed has made GateHouse (under the ticker symbol of NEWM) almost has valuable as Gannett. The company passed the billion-dollar market cap milestone last week. GateHouse now standing just about $100 million behind the longtime U.S. local newspaper leader. That’s despite the fact that Gannett remains a far larger company, with revenues more than double those of GateHouse.
Reed told me that he is aiming for his company to be revenue-growth neutral (on the basis of same properties, not counting new acquisitions) in 2019. That would be a major milestone, as newspaper companies (with the recent exception of The New York Times) have seen largely negative revenue numbers for a decade.
Reed knows that GateHouse engenders suspicion among its peers. In 2017, its revenue was down almost six percent compared to 2016. Its earnings report for the first quarter of 2018 showed a decline of 4.5 percent compared to the same time last year. Many in the industry suspect that GateHouse is bent on “buying revenues in big chunks while using the new cash flow to prop up earnings,” one financial source suggested to me recently. Some have put GateHouse in the same bucket as Digital First Media, especially given that it’s managed by a private equity company, Fortress Investment Group, through parent company New Investment Media Group.
It’s a characterization that Reed and other top GateHouse execs decry. For starters, GateHouse isn’t private equity–majority-owned the way Digital First Media is (Alden Global Capital controls it with a 50.1 percent stake). Though Fortress, bought last year by Softbank, manages GateHouse, it only owns about 1 percent of the company. Institutional funds, including pension funds, hold major stakes.
Reed point to a number of executive hires over the last year as evidence that GateHouse — unlike Alden’s DFM — doesn’t have a burn-the-furniture, maximize profit, and turn-off-the-lights strategy. As Alden has become the bête noire of the business, GateHouse aims to convince the industry that it’s not of the same ilk.
“Content is our number-one priority,” Reed told me. But he’s unwilling to publicly commit to any new level of funding or staffing to meet that goal.
GateHouse has also had its share of struggles with the News Guild, which represents more than 30 of its newsrooms, and is organizing efforts to unionize more. Last year, the company agreed to its first “global” contract with the Guild, providing two one-year pay increases. Long-standing issues, though, persist. GateHouse believes it needs more flexible work rules, given the pace of change in the industry and wants to reward higher-achieving employees with pay increases more based on merit, and still finds itself at loggerheads with the Guild on those issues.
The company has made efficiency, and cost-cutting through regional and national synergy, a hallmark — and that’s included major cuts at some of the properties it’s bought. How smartly or bluntly has it wielded that cost-cutting, especially in newsrooms, is a tough question to answer conclusively, but an important one. Clearly, though, the company that began as a roll-up consolidator, and whose corporate staff looked more like a holding company than a strategy-driven operating one, appears to be building structure.
In March, GateHouse hired digital product pioneer Jeff Moriarty as its first digital business head. Last year, it hired Denise Robbins as SVP of consumer marketing, from The New York Times. And last week, GateHouse announced that Robbins would head a new consumer marketing agency that, over time, will focus beyond digital subscriptions on “products and services including apps, podcasts, specialty newsletters, e-editions and other digital products across the entire enterprise.”
Those executives joined Jason Taylor, GateHouse’s president for western U.S. publishing operations and the leader of the company’s events business; Peter Newton, a six-year veteran of the company and CEO of its UpCurve brand; and SVP of news Bill Church, who heads GateHouse’s production facility in Austin. (Church won industry notice and cred when, as editor of GateHouse’s Sarasota Herald-Tribune, he refused to participate in journalistically unethical “investigative work” meant to aid Sheldon Adelson.) And Kirk Davis, CEO of GateHouse Media, has long been Reed’s partner in the reinvention.
I spoke with Mike Reed about it all. Our conversation, edited for length and clarity, is below.
For example, Columbus, Ohio, is on the large side for us. Worcester, Providence. These are a stretch for us on the top side. What we loved about those opportunities, though, is that the newspapers are dominant local sources of news and information. They’re also in markets that are fairly vibrant and have, we think, longer-term sustainability as community builders.
Columbus, on the other hand, was a great fit because it’s the state capital. The people in Columbus get the paper. Penetration rates are high, we think, because of Ohio State.
There are still more 1,300 daily newspapers in the U.S. Take Digital First, Lee and McClatchy, CNHI, and GateHouse, and you add all those [and other chains] up, you’re only at about 50 percent of those 1,300. So there are still opportunities.
We have publicly stated valuation metrics that we’re willing to pay for a newspaper. What we’ve stated publicly is 3.5 to 4.5. We’re not going go out and start paying seven or eight times. If anything changed in that regard, or if we didn’t have access to capital that was reasonably priced, then that could change our acquisition strategy. Scale matters, and the more that we have, the better the opportunity becomes for us to execute on our operational strategy — which, in turn, makes all of these individual newspapers better and stronger and able to do more local journalism and investigative journalism.
Scale matters. I think it’s really hard to do things in onesies and twosies. Our hope is to continue to consolidate the industry, with the focus on the types of deals we’ve been doing in the past — but we can’t do them at all costs.
Austin was on the high end for us, but Austin is a market that presents more growth opportunity from a market perspective than any single market we’re in today.
GateHouse is an operating company, 100 percent owned by New Media, and so all of our newspaper assets are underneath GateHouse. Fortress has a management agreement in place with New Media to manage the business, and so I’m actually employed at Fortress.
Beyond that, we have access to the whole Fortress network of employees, whether it be legal, HR, analysts for diligence, the folks that help structure financings and equity and stuff like that.
In the structure of our credit agreement, for example, for every dollar that we make, a piece goes to the lenders, but we have full discretion to redeploy that dollar. So we can invest in the business, we can do acquisitions, we can pay dividends to shareholders. We have capital.
Most of the money [other companies] make floats back to the lenders. Having the deep structure in place, which we could have never got without Fortress’s brand and leverage, has allowed us to create value for shareholders that none of our peers have been able to do.
And on the coasts, for whatever reason, the communities tend to be a little more digitally savvy and tech savvy. Which is not a favorable trend for newspapers, either.
We believe that local news, in today’s world, is more valuable than it ever has been — if you can provide something that’s unique to a consumer, that they value and want. Then you have something long-term that continues to be sustainable and of value. So the cornerstone of our strategy is to have local media properties that provide a comprehensive objective.
When the announcement came across that you were buying the Austin paper, you saw what Texas Monthly said. It was a take on how GateHouse is a downsizing company; you bought the Columbia Tribune, in Missouri, and there’s one reporter left. They cited some other markets that they said you had reduced staffing in. How do we square this? How do we square what seems to be a smart and logical strategy with those kinds of reports? Or what can you say, in terms of numbers of journalists in those markets, or how you have improved papers?
So, to further that, why didn’t that guy that wrote that piece talk about the fact that GateHouse won a Pulitzer Prize two years ago? Was a finalist for the Pulitzer last year. And is a finalist right now for the Scripps Howard local investigative journalism award. Give his audience the full picture of GateHouse, rather than just saying they cut the newsroom over here, therefore they don’t care about journalism. A reader, to make their own independent decision, should have the benefit of both. But they don’t write that.
So, for me, the guy like Texas Monthly, there’s nothing I can do about that, other than continue to keep our heads down and keep our company focused on doing the right things and hopefully doing great investigative journalism work and being recognized with national, state, and local awards in the future.
I don’t bring that kind of rose-colored view of it. At the same time, the key point you’re making is that it’s all about local content, local identification as a differentiation, if you’re going to have a successful business. So what can you point to in terms of what GateHouse has done to bolster local? Where are you going to be able to really assert that strategy of local content?
I’m trying to figure out how this works. I get the design part of it. As I said, in the abstract, it makes sense to me and I know you’re improving the process, I hear that. But you’ve got to have reporters and good editors in those markets.
The people in the industry who are making extremely excessive cuts in the newsroom are not only damaging their own products forever, but they’re damaging us, because everybody gets painted with the same brush.
What I would say, though, is we first want to get the production expectations correct. If I acquire Columbus, Ohio, and I have three guys in there that have been in the newsroom for 30 or 40 years and each of them shows up a couple times a week and they produce a story every two or three weeks…
That’s we found that in Columbus. So, what we said is, “Okay. We should take those three jobs, make it one job, and have that person do four stories a week.” We can have a really good reporter do four stories a week, so over the course of three weeks, you get 12 stories, where before, I had three guys coming in, doing one story every two or three weeks.
We really want to increase the expectations for coming into work every day and caring and being passionate about the community and the journalism work. We want it to be more than lip service: We want it to be shown with output. We want our reporters to come in and actually do the work. And so, that’s step one.
Step two is then, yes, we need to increase the resources we have dedicated to our local newsrooms. We can’t raise prices forever. We have to put out more products and we need to have better value in our local products. To me, one of the key cornerstones to that is the investigative work we do, and that’s where I think the local newspapers have failed. That’s where you’ll see our company make investments back into the newsroom.
First we’ve got to get ’em right-sized. The industry was fat, dumb, and happy, and when we were out printing money, you didn’t really care about the reporters that came in and wrote a story every two or three weeks.
It usually takes a year to right-size.
But just look at the business side. If we don’t do a better job and improve and increase the amount of content, and produce products that are appealing to our readers or prospective readers, then the rest of our business will not succeed.
The biggest review we’re doing right now is on the kind of investigative journalism we’re doing. We’re trying to understand where we’re not focused on the right things and need either more resources, or the right focus, or both.
If you said to me, “Mike, you can have a 10-percent margin business with its top line growing 4 percent a year, or you can have a 25-percent margin business with its top line declining eight percent a year,” I’m going to take the 10-percent margin business that’s growing. Frankly, we’ve made that sacrifice for years now and our investors are obviously supportive, because our share price has grown. We’ve invested $65 million in our UpCurve and ThriveHive businesses over the last four years or so. That’s a real number. There’s not a lot of folks in our industry that are putting that kind of capital to work right out of EBIDTA, to actually figure out and solve the top-line growth. I think that’s why our numbers are better. I mean, it’s a mixture of having smaller markets, combined with our investment in where the future growth is going to come from.
Creating that future growth is going to allow us to invest back into our content creation. Now that we’ve made the investments in our UpCurve business and that’s growing, I can also start to shift some of that investment over to content creation. I’m not really worried about it, and I actually don’t think our margins will suffer.
Three years ago, that formula still sort of worked. We’d see small circulation revenue growth, one- to four-percent growth overall. But in the last two years or so, circulation revenue in many companies has turned negative.
My sense is that the combination of more aggressive pricing and deteriorating products means that companies have kind of hit a wall on circulation revenue or reader revenue, on the print end of things.
And then on the digital reader revenue end, to find growth, companies need to execute at a high level — not just operate the paywall, but do everything right behind it in terms of data analytics, messaging, and marketing.
Given all that, I want to understand what you’re able to do on circulation revenue and then digital reader revenue.
I do think [raising prices] was a big mistake that our industry. We’ve chosen not to do it, and boy, did we face criticism a couple years ago when we cited the numbers you just cited. We had peers that were going out raising prices 20, 30, 40, 50 percent.
I don’t think it’s the right thing to do. I think that you have to raise prices in a very managed way, and you have to provide value with your content — you can’t just go in and raise the prices.
We’ve taken a much more methodical approach to price increases, and therefore we’ve had the ability to have smaller volume declines, which has helped us keep circulation revenue stable because we can offset small volume declines with small price increases.
I don’t think we can endlessly raise prices. The thing is, if you raise prices on somebody by 30 or 40 percent, you can’t then come back next year and raise prices again. I just don’t understand the logic of a 30- or 40-percent price increase, because then you can’t go back to that customer for maybe three or four years. If your volumes are going to decline because of those price increases by 15 percent and you can’t go back and raise prices, it’s so short-sighted. It’s operation out of panic in the near term, versus sound business decisionmaking for the long term.
It’s been a long time since the newspaper industry did that. I wrote a column, God, five years ago, called the “Newsonomics of zero,” saying how important it was for newspaper companies to just get flat — which isn’t really flat, given inflation, but just zero. [Most newspapers] have gotten nowhere close; The New York Times is kind of an amazement, in that it finished up 5.9 percent in 2017.
How would you get from, essentially 5.5 percent to 6 percent down to zero-plus, in a little more than a year and a half?
If it continues to be a smaller piece of the pie, and the stuff that’s growing continues to be a bigger piece of the pie, we think that sometime by the end of 2019, those two lines will cross and we’ll be able to grow.
That means the rest of our business that’s growing is 66 percent. As an example, just take $100. If 34 percent of that is declining at 10 percent, that’s $3.40. How much does the 66 percent have to grow to match that $3.40. The answer’s about 45 percent. Our UpCurve and events businesses, you know from our public files, are growing at anywhere from 30 to 50 percent. So, when you combine flat circulation in with those growth categories, that 66 percent, we think, will continue to grow at 45 percent. So that’s just the simple math of it.
Kirk is definitely more of the day-to-day operator and is building this great team. I spend a lot more time with shareholders, and a lot more time on earnings and that kind of stuff. I guess you would say, more of building the broader company. And I focus a lot of my time on UpCurve as well, making those investments and figuring out whether we have the right strategy. How do we build distribution sales channels that are outside of our markets?
Kirk and I work great together. We’ve been working together for 12 years now and we talk multiple times a day. We kind of know what each other’s strengths and weaknesses are and we play off of those. It’s been a great partnership.
What I would say is that we’ve made a substantial and serious investment in a business strategy that’s different than Digital First’s or any other company in the newspaper industry in our services business. We’ve made a substantial investment in the content side of our business, starting with the design center in Austin, which is designed to improve the quality of all of our products across the country. And we’re building out the high-quality senior management team.
I don’t think those are things Digital First is doing…I think that company is maybe going the other way.
Our company back then wasn’t as big as it is now. [$140 million] was just so large of a number that I would have violated my fiduciary responsibilities to public shareholders if I didn’t do it. It was just too big. What I would say also, though, if I could do it over again: I probably would have pushed harder to not have the kind of fiasco that happened for a few days there, where the guys buying it didn’t want anybody to know who they were.
