Nieman Foundation at Harvard
The next 48 hours may decide the fate of two of America’s largest newspaper chains that collectively serve almost a fifth of all American local newspaper readers.
And what happens in those hours could prompt a wave of other moves across the rest of the industry.
The dates June 30 and July 1 have called out from the calendar for a while now. On Tuesday, Tribune Publishing will reach the end of two “standstill” periods. Tribune’s two major shareholders — Alden Global Capital, with 33 percent of the company’s shares, and Los Angeles Times owner Patrick Soon-Shiong, with 25 percent — had promised not to actively buy or sell any shares until June 30.
When that restriction ends, you can expect Tribune’s uneasy status quo to come to an end quickly. After a chaotic decade, the chain had been briefly semi-stable after Michael Ferro’s departure from management. But then Alden bought up those shares in November, and since then Tribune has given Alden two board seats, imposed Alden-style cuts, and created Alden-style management chaos.
Then, on Wednesday, final bids for McClatchy’s 30 newspapers are due, as the country’s second-largest chain prepares to wind toward some exit from bankruptcy.
This is the mid-year witching hour for the U.S. daily press, another stirring of the consolidation pot, and another stage in the transformation of newspapers from civic assets to financial instruments. These two big — and potentially interconnected — dramas will determine the futures of the No. 2 and No. 3 local publishers in the country.
The possible combinations and recombinations are numerous. What we know, from a variety of sources, is still piecemeal, with the future of McClatchy’s 30 titles the most uncertain piece.
Here’s one big new possibility to look for: a new potential buyer of McClatchy intent on pulling its newspapers from the clutches of hedge funds and setting up the country’s first major nonprofit newspaper chain. More on that below.
Part of the uncertainty is that the options that seemed possible in December are markedly different now. The one-word reason: coronavirus.
The months of COVID-19 shutdown have only deepened the business issues afflicting the daily newspaper business. Plans that felt like climbable mountains in December now look positively Himalayan. Everyone’s forecasts and valuations have gotten big haircuts. (And some look like they were done in quarantine, with clippers and a mirror.)
With a new wave of infections rampaging across the country, newspaper CEOs now look at another six to 12 months of potential downturn. Small businesses’ struggles will likely leave ad revenues down 35 to 40 percent in 2020, according to Ken Harding, head of FTI Consulting’s respected media practice.
The biggest data point from FTI’s June 1 update: “We project an unrecovered advertising revenue loss between 17 percent and 28 percent as a result of COVID-19 by Q4 2021.”
Those numbers — that projection of extended revenue pain — are driving everyone’s estimations of newspaper company value, which drive their plans for bids and M&A.
Think of this week’s McClatchy action as the beginning of what may become a two-act drama.
Those “final bids” are due on Wednesday. Then one week later, on July 8, a winner will be announced by the McClatchy board. On July 24, bankruptcy judge Michael E. Wiles will review the decision, and either approve it or not. His legal task: resolving the company’s debts as fairly as possible among those owed money.
Finally, they’ll be a formal Department of Justice antitrust review, which should be resolved before year’s end.
In bankruptcy court, wild cards can enter, and one did last week. McClatchy’s unsecured creditors publicly charged what others had been saying a bit more quietly. They alleged that McClatchy’s major 2018 debt refinancing with Chatham Asset Management was “fraudulent.” That refinancing gave Chatham a favorable lien position in bankruptcy; that means Chatham is more likely to be made whole (or more whole) than McClatchy’s unsecured creditors, including pension claimants, who would likely receive pennies on the dollar. While a lawsuit is possible — and could take years, as did some in the Sam Zell/Tribune five-year bankruptcy from hell — it’s more likely there’ll be a settlement that removes that obstacle from finalizing a sale.
Why might July’s drama be only Act I? Because whoever buys McClatchy could then turn around and merge it with another company — or sell off individual McClatchy newspapers, or groups of them. That’s Act II.
Who’s playing in each act?
The one known bidder is Chatham — currently both McClatchy’s lead investor and its largest debt holder. Chatham has already put in a stalking-horse bid of around $300 million.
Auctions like these draw all sorts of lookie-loos. Contemplating a bid can be a great opportunity to examine the innards of a company, to compare benchmarks and metrics — even if the looker has no intention to buy.
This auction has been no different. As the bidding hour approaches, no one expects more than a handful of bids. Likely one, two, or three — maybe, at the outside, four.
Let’s categorize the likeliest bidders:
Chatham is The Insider here. It knows McClatchy’s books and operations inside out, and it’s already bid. Its attorneys have said it wouldn’t mind being outbid, and that makes sense: As a hedge fund, it’s in McClatchy for a financial return, not long-term investment or community service. If someone else thinks McClatchy is worth more than they do, they’ll happily take their money.
Most intriguing is The Savior.
Many in the news business have looked aghast at the vultures and financial players who increasingly dominate ownership. They’ve wrung their hands. They’ve offered a vision of new, nonprofit-led future for local news, just as hundreds of smaller sites have set up a shop over the last decade. But nearly all of those startups still pale in size, if not dedication, next to even shrunken local dailies.
The McClatchy bankruptcy has hatched a new idea, one that’s been talked about for at least a couple of years, but mostly hypothetically: Why not buy one of these big struggling chains — and take it nonprofit?
That’s what on the table today. Leaders in the field of nonprofit journalism are deciding over these 48 hours whether or not to make a bid for all of McClatchy, sources tell me. They say they can raise the needed cash of $300 million-plus.
The big question: What then? How would a civic-minded nonprofit approach the tough transformations still ahead for local news, which is still highly dependent on print revenues smack in the middle of the COVID age? In this growing civic-good journalism world, there are many good people with the right motives — but very uneven skills to transform beleaguered companies.
Sources say there’s a newish player in the mix that is strongly considering a bid to be The Financial Engineer, sources say. And it’s not one of the usual suspects — Fortress Investment Group (Gannett’s manager), Apollo Global Management (Gannett’s lender), Alden Global Capital (MNG’s owner, major investor in Tribune and Lee). Those financial giants have each done their share of damage via unending cuts and only murky business transformation.
Then, there are at least two candidates to be The Roller-Upper. No one is putting down a big bet on one of them placing a bid — but no one’s betting against the possibility either.
First, consider the last big roll-up: New Gannett. The combination of Old Gannett and GateHouse, finalized in November, created the most dominant daily publisher in U.S. history, serving about a quarter of daily newspaper readers.
Gannett is highly encumbered by debt. The $1.8 billion loan from Apollo it took to do the deal now feels even more uncomfortable given 2020’s virus-driven ad decline. It just let go its second-in-command CEO Paul Bascobert, who’d been put inside New Gannett by Old Gannett — a scheme that simply didn’t work. It’s also announced an end to at least some of its COVID-related furloughs.
Gannett — and, importantly, Apollo — could make the case to themselves that further roll-up — more scale, more synergies, more cuts — would make the company’s position more secure over the next few years. Gannett + GateHouse + McClatchy is a combination that would reach about a third of American newspaper households. By the standards of old accounting, that’s huge scale. But what is it worth — what’s its value as a bid in bankruptcy court?
The big question for Gannett’s Mike Reed and Apollo’s Leon Black: Will they stay on the sidelines or get in this game?
Then there’s Heath Freeman, the head of Alden. He’s come out of the shadows a bit lately, even giving an interview here and there. His cash-flow-first strategy has worked — for him — with MNG (f.k.a. MediaNews Group and Digital First Media) and he plainly wants to apply it to as much of the industry as he can.
Of course, Freeman may have his hands full with the week’s other big deadline. On Tuesday, his standstill agreement expires with Tribune. While Alden and Tribune have managed to keep their plans very close to the vest, the wide expectation is that Tribune and MNG will move toward formal merger soon — perhaps very soon.
That combination would create a cash-driven newspaper company reaching more than 15 percent of U.S. newspaper readers.
That’s just this week’s potential action. How about Act II?
Whoever buys McClatchy whole may move to either merge it with another player (see The Roller-Uppers above) or sell off some of all of its pieces — whatever’s the best way to maximize its investment. One data point: Apollo’s and Chatham’s leaders have a good working relationship, say sources.
Here we could also see the emergence of more civic buyers. The mayors of both Miami (home of McClatchy’s Herald) and Sacramento (home of McClatchy’s flagship Bee) have publicly raised calls to support community-oriented buyers. We’ve heard such civic calls for several years, in many cities — but the question comes down to, as most do, funding.
There the intrigue is beginning to mount. If McClatchy’s West Coast properties come loose, sources say, philanthropic sources could be tapped for about $20 million within a year, in California (where McClatchy has five titles) and in the state of Washington, where it owns four). There’s also at least one other civically oriented private buyer waiting in the wings if individual properties come into the marketplace.
