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July 13, 2020, 11:04 a.m.

Newsonomics: The McClatchy auction ends not with a bang, but only more whimpers

The hedge fund Chatham Asset Management reeled in its prize, as expected. But now what does it want to do with it?

It lacked a good villain like Michael Ferro, and its conclusion was mostly foregone. But along the way, the drama of McClatchy’s bankruptcy was compelling enough to deserve some attention — even if only a few reporters, the best by far paid by McClatchy itself, paid much attention to it.

There were attempts at theatrics. Would thousands of retirees have their pensions saved? Would mustache-twirling Alden Global Capital tie McClatchy’s properties to the railroad tracks as its train rounded the corner? And, most intriguing of all, would the Knight Foundation bet $300 million-plus of its $2 billion-plus in assets on trying to revive an old newspaper company?

That last possibility came and went without public acknowledgment, but down the road it may look like a retrospective tipping point in the disappearance of the American daily press.

In the end, any drama was distilled down to a moment of awkward comedy: Passionate supporters of a vibrant free press rooting for what they hoped would be the less damaging hedge fund to come out on top.

Things turned out just as we and everyone else were predicting back in February, when McClatchy and CEO Craig Forman acknowledged their financial dead end and filed for bankruptcy. On Sunday, the board of the No. 2 newspaper chain in the United States picked the winner of its thinly attended auction: Chatham Asset Management should be the new owner of McClatchy.

It is just a recommendation; bankruptcy Judge Michael E. Wiles must still bless the deal, which he’s expected to do July 24. While we’re still waiting on some details of the deal, including how much Chatham will pay and how much McClatchy’s creditors will get, we can sum up this little chapter in daily descent in 10 points.

1. As this deal closes, and Alden all but takes control of Tribune Publishing (taking its third seat on its seven-seat board), consider a number. Investment companies — private equity, hedge funds, financial companies whose interest is maximized profit — will control (or almost control in Tribune’s case) almost 45 percent of total daily circulation in the country. That’s Fortress’ Gannett, Alden’s MNG Enterprises, Chatham’s McClatchy, and Alden-colonized Tribune.

2.Chatham managing partner Anthony Melchiorre has a chance to show that not all hedge funds operate their newspaper properties the same way. Melchiorre has, like most financial investors, been fairly silent on the prospects of being a press boss. Chatham has issued a few nice statements about the role of the press and how it believes in that mission. But we’ll have to watch its first moves Chatham after it assumes control.

3.Among those early decisions: the tenure of CEO Craig Forman. Will he stay or will he go? Forman’s tenure, along with walking a debt tightrope, has been focused on accelerating the transition to digital. Today, McClatchy really is more digital (in terms of revenue) than its peers — but it’s also lagged behind them in quarter-to-quarter earnings. Does Chatham believe that Forman has set a decent stage for whatever comes next, or will it change up leaders? And if so, with what strategy, with who leading, and with what kinds of repercussions in anxious McClatchy newsrooms?

Newspaper chain CEOs have a short half-life these days. Forman’s been on the job only three years, and he’s spent much of that time on debt and refinancing. Tribune CEO Tim Knight logged only a year on the job before Alden pushed him out at the beginning of the year. New Gannett dispatched its “operating CEO” Paul Bascobert after a ten-month cup of coffee. (And with as much as $7.5 million in a goodbye package. That’s $750,000 per month in severance — easily enough to pay 100 journalists for a year in a company still laying off and furloughing.) Then there are the cost-cutters at Alden’s MNG Enterprises, who have crossed out that expensive CEO line item on their budgets by only having a COO for nearly three years.

4.Another big early decision: whether to keep the storied McClatchy D.C. bureau and its staff of more than two dozen. That staff, one of the few substantial D.C. bureaus left among newspaper chains, continues to distinguish itself and symbolizes what has continued to distinguish McClatchy itself, even amid rounds of cuts. What Chatham does with it will tell us a lot about its intentions.

5.Of course, those decisions will depend on what Chatham actually wants to do with McClatchy. The hedge fund has kept its cards close throughout the five-month bankruptcy. There are three doors here:

  • become a traditional owner/operator, focused on revenues over the next several years;
  • begin merger talks with another chain, presumably Gannett or Alden/Tribune; or
  • listen to the civic entreaties coming from Miami to Sacramento, as local philanthropists and others consider the possibility of “saving” the local paper. The McClatchy sale has mobilized a loose coalition of would-be buyers across the country — though what they’re willing to give likely don’t come close to what Chatham would take.

6.What might Chatham want from civic buyers? Too much, probably. In other words, they’d want locals to “over-pay,” as a few others have done to rescue Tribune and Alden properties. But who’s willing to overpay when Covid-19 has sucked much of any remaining irrational optimism out of the ether?

7.Which leads to a big question: What the hell are McClatchy’s 30 papers really worth?

Alden underbid Chatham, arguing that its “cash bid” was better than Chatham’s roughly $300 million “credit” bid. The judge has so far rejected that argument, which financial observers described as Alden’s Hail Mary. Chatham, already so entangled as McClatchy’s primary investor and debtholder, has its own unique reasons to want control. But what’s the value of its new prize on an open, non-bankruptcy court marketplace?

Normally you might figure McClatchy’s value based on it trailing earnings, which were $90 million-plus in 2019. But now you need a crystal ball and a pair of dice to guess at earnings mid-Covid today and post-Covid a few years from now. Yes, bankruptcy has relieved its substantial pension and debt obligations, but simultaneously, its cash flow has taken a hit that isn’t yet calculable.

McClatchy can now can proudly note that the majority of its revenue now comes from reader revenue (print and digital subscriptions), the formula that has worked so well for papers like The New York Times. But losing, say, half of all ad revenue in 2020 — and a fifth of all ad revenue forever — would still be a big blow.

8.Will Tribune Publishing be the lucky (“lucky”) beneficiary (“beneficiary”) of all of Alden’s attention? As I pointed out last week, one of the reasons that Alden may have decided to slow-squeeze Tribune is that it wanted to find out how its pursuit of McClatchy would go. Now, with that all but settled, might we see that MNG/Tribune merger happen sooner rather than later?

9.The Knight Foundation’s almost-bid remains a stunning development. Over the last decade-plus, we’ve heard intermittent cries of “News emergency!” as one constriction after another has left local journalists and the readers they serve gasping. The mere fact that the country’s biggest philanthropic journalism funder deeply considered a bid — out of both desperation and duty — reinforces the idea that 2020 really is indeed a tipping point.

Amid all the horrors of this year, the financialization of the local press proceeds, if anything more quickly because of the pandemic. Right now, there’s more than just hand-wringing. There are not one, not two, but likely three “Marshall Plans” quietly afoot to reboot local journalism. As more newspapers slip into the hands of hedge funds and private equity, we’ll see how loud — and how well funded — those new plans might turn out to be.

10.Goodbye, family ownership. The McClatchy family first entered into the newspaper industry during the California gold rush — not the Silicon Valley one of the 1980s and 1990s, the original one, where a 24-year-old journalist (and frustrated gold miner) took a job with the short-lived Placer Times, in the settlement that would become Sacramento. In 1857, after working for seemingly every other paper in town, he became editor and then owner of The Daily Bee, now the Sacramento Bee. James McClatchy’s descendants have controlled the company (via a two-class stock structure) for the 163 years since.

Family ownership is still very common in Europe and Latin America, where it has served as a buffer in difficult business times. While it’s hung on at many of the country’s smallest dailies and weeklies, it is now all but extinct among the metro press in the United States.

Photo of Caïn venant de tuer son frère Abel (Cain After Killing His Brother Abel), a statue by Henri Vidal in Paris’ Jardin de Tuileries, by Andreas Lupp used under a Creative Commons license.

POSTED     July 13, 2020, 11:04 a.m.
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