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Nov. 20, 2019, 11:43 a.m.

Newsonomics: By selling to America’s worst newspaper owners, Michael Ferro ushers the vultures into Tribune

Astonishingly, history might argue that Sam Zell was only the third-worst owner in recent Tribune history.

Is it the apocalypse, or just an unreasonable facsimile?

In a week of newspaper industry drama — GateHouse’s expected takeover of Gannett and McClatchy’s unexpected move in the direction of bankruptcy — who could write a better next act than that old newspaper vaudeville duo of Michael Ferro and Heath Freeman — the two most hated figures in the business?

Just as the ink was drying on New Gannett’s birth certificate, we learned that — really? could it be true? — Michael Ferro was exiting the industry. Rumors of his departure (and my own satire) had always come up as premature. But there it was, in his company’s own Chicago Tribune: Tribune Publishing’s largest shareholder Michael Ferro sells 25% stake to hedge fund Alden Capital. So much encapsulated in so few words.

Ferro — who had enthralled the industry in his relatively brief tenure heading Tribune, and who had brought such laughter into the world through his gift of Tronc — had pulled off a magnificent disappearing act. To his would-be peers in the industry, frequent targets of his disdain, he’s departing appropriately enough, with a signature fuck-you. Who better to sell his Tribune stake — the one his group of Chicago investors had bought at bargain-basement prices, and which, ridiculously, gave him effective control of Tribune — to than the only man in the industry more reviled: Freeman, whose Alden has become the face of bloodless strip-mining of American newspapers and their communities.

This man, once known to enjoy a trip to the Oscars, really does deserve some sort of award for theatricality.

Before we look at the implications of this transaction, let’s put it in the context of the wildest week in recent daily newspaper history.

The past few days have marked a major turning point in the fast-collapsing U.S. daily newspaper business. As this woeful decade comes to a close, financial players have taken control of much of the daily press. GateHouse, via its holding company New Media Investment Group, closed on its acquisition of Gannett, taking its prey’s name and creating a single company of 260 dailies, 18 percent of the country’s total. Who controls this New Gannett? Private equity, in the form of Fortress Investment Group. McClatchy, staring at a potential default on its pension obligations, faces either financial restructuring or a structured bankruptcy — and its primary shareholder/debtholder Chatham Asset Management is in the driver’s seat.

The Ferro-sells-to-Alden news drew the picture even more clearly. Almost four years ago, I warned of the financialization of the press — but the speed and sweep of that control by private equity and hedge funds is now breathtaking. (And of course it’s not just the newspaper world that suffers in this shift. Consider the recent Deadspin debacle, created by private equity owners who’d bought an ornery, spirited property they clearly didn’t understand.)

The impact is obvious. As America has moved from jokey indulgences in truthiness to a point where fact fights for its very life, it’s the bankers who are deciding what will be defined as news, and who and how many will people will be employed to report it.

For the Alden news, let’s start with what we know this morning:

  • Alden Global Capital, led by president Heath Freeman, paid Michael Ferro’s Chicago business group its 25.2 percent stake in Tribune Publishing.
  • It’s a private transaction between Ferro’s group, Merrick Ventures, and Alden. Tribune Publishing itself was not involved.
  • The price: $13 a share, or about $117.9 million in total. With Tribune Publishing closing at $9.73 a share yesterday, that’s a 33.6 percent premium. (As of 10:00 a.m. today, TPCO is trading at about $10.86, an 11 percent jump.)
  • Alden will get two of Tribune Publishing board seats, with the board growing from six to eight members.

Let’s ask three questions about the deal and its impact.

Was this a good deal for Ferro?

Not by historic standards. Through all of the Gannett takeover Sturm und Drang and its aftermath, Ferro told his associates he wanted — and deserved — $20 a share. Last December, Tribune rejected a McClatchy offer of $16.50 per share, with $15 of that in cash, the rest in stock.

So by those standards, $13 pales. But Ferro and his investor cohorts did well on the deal given how cheaply they bought in originally — $8.50 a share in 2016 — and considering how Ferro was able to push the limits of standard corporate governance over his tenure to accrue more wealth.

Why did Alden buy?

That’s not just a question we might have — it’s a question that Tribune’s management and board is now gaming out. The easiest guess: What’s past is prologue.

Alden’s strategy and operating practice is unapologetically cutthroat. The company’s executives believe that newspapers are on a permanent decline, headed inevitably toward a value of zero. However, there are differing opinions about how far away that zeroing-out point is, and over a long interim, smart operators can make a lot of money on the way down.

How? Milk your aging current subscribers by jacking up subscription rates — $600 or more a year for newspapers that might have fewer than a half-dozen reporters left. Invest into the business only what’s required to sustain its operation. Don’t put anything into the silliness of “digital transformation.” (This, remember, was at the heart of its case when it tried to buy Gannett back in January; Gannett, it argued, was wasting too much money trying to figure out a future in digital when it should just give up and skim as much cashflow off the top as it can.) Get rid of newspaper “editors” and “publishers” in favor of regional and lesser positions. Cut costs every which way. In a word: disinvestment.

Just this week, Bay Area journalists at MNG — the brand Alden operates its newspapers under — took to the streets to protest pay rates, saying they’d gotten only one pay raise in the last 10 years.

So is that Heath Freeman’s plan for Tribune? Will he appoint some of the company’s best and deepest cutters to the Tribune board, perhaps chosen from the failed slate of directors he put up in a Gannett proxy fight in May? Will he push Tribune, just as he tried to push Gannett, to optimize shareholder value by employing the tried-and-true Alden way? After all, it was bringing the company as much as $159 million in “profits” and the industry’s highest margins as recently as mid-2017. (At those Bay Area newspapers, Alden managed to double profits over a six-year period as the rest of the industry struggled, not least by cutting about 60 percent of its journalists.)

That’s certainly a possibility. Or — perhaps — Freeman might think that the era of easily sucking cash out of newspapers is drawing to a close. If he thinks the well is about to run dry, he might think it’s a good time to offload his assets. MNG Enterprises (née Digital First Media) has about 200 newspapers altogether, most less than daily, but including bigger names like The Denver Post (brought briefly to national prominence for a dramatic Alden haircut last year), the (formerly San Jose) Mercury News, and The Detroit News.

While Alden would have to abide by SEC rules about conflict of interest, being in both boardrooms at once can make a merger quite a bit easier. So we have to ask: What would a Tribune/MNG combination look like? The same reasoning would apply there as did with GateHouse–Gannett merger: Cut — meaning create hundreds of millions in new “efficiencies” — or die.

While that rationale is clear — and Tribune believes it, like everyone else in the industry — actually putting together the many half-broken pieces of MNG with the more conventionally managed Tribune could be a headache for ages. Determining real value, an issue in any deal, would be even harder given that Alden has managed its business far differently than Tribune. We don’t know the actual earnings of MNG Enterprises today, but we know that its strategies have reduced the market value of its assets going forward.

While there may be back-office synergies of every kind to potentially harvest, there’s little geographic overlap between the two companies. Unlike the New Gannett, which can wring more savings by combining the Gannett and GateHouse clusters in places like Florida and Ohio, a Tribune/MNG merger would bring many fewer such combinations.

While Alden now controls just over a quarter of Tribune, another quarter-interest owner could soon assert more authority. Patrick Soon-Shiong, who bought/rescued the L.A. Times and San Diego Union-Tribune from Tribune, didn’t sell his 24.6 percent interest in Tribune Publishing in the process. His standstill agreement — which temporarily ceded some of his voting authority to management — expires next year. He sparred with Michael Ferro, calling the L.A. Times under his leadership “an abused child, a beaten child”; what do you think he will think of his new Alden partners?

Not to mention that Alden owns nearly all of the newspapers in greater L.A. that Soon-Shiong doesn’t. (MNG’s Southern California News Group includes the Orange County Register, the Riverside Press-Enterprise, the Long Beach Press-Telegram, the L.A. Daily News, and seven other dailies.) In other words, his new partners in Tribune are his direct competitors back home in California.

As a hedge fund experienced in using leverage to maximize short-term advantage, would Alden advocate ladling up Tribune’s relatively clean balance sheet with a lot of debt — upping dividends, boosting its stock price, and otherwise finding ways to take more money out of the company?

Tribune is the bigger dog here, in revenues and in earnings, and that should give it some power. But it’s been thrown off-kilter by the Alden buy, which came as a surprise. (Of course.) In Heath Freeman, Tribune is dealing with someone who uses his unpredictability as leverage. Recall: Freeman so petrified Gannett’s board and management that it ran headlong into the less-objectionable embrace of GateHouse’s Mike Reed.

Will the 2020s be an age of endless vulture newspapering?

As economic inequity roils the world, from Prague to Santiago to Hong Kong, we hear increasing debate about “late capitalism,” increasing questioning of core elements of 21st-century life. Between democratic socialists in the U.S. Congress and populists in high office worldwide, something is clearly afoot in how we think about the role and responsibility of capital in democratic societies.

Within our smaller environment of news and journalism, the direction we’re headed is actually much clearer. Alden is the industry’s personification of the new vulture capitalism that has invaded what was once, not long ago, a business that cared about its mission and its civic role. There is of course much to criticize in the history of American newspapers, but they also did a fair job of balancing profit and service to their communities over the decades. Alden’s putsch-like move into Tribune is only the latest wakeup call. The old world is over, and the new one — one of ghost newspapers, news deserts, and underinformed communities — is headed straight for us.

Image taken from a mosaic representing the Last Judgment in the northwest section of the Baptistry of Saint John, Florence, Italy.

POSTED     Nov. 20, 2019, 11:43 a.m.
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