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July 6, 2020, 9 a.m.

Newsonomics: There’s no Knight in shining armor coming to rescue McClatchy

But Alden Global Capital would be happy to lend a hand. Plus: When a standstill isn’t really a standstill.

The bids are in, and the bankruptcy auction is now on. Who will the board of newspaper company McClatchy choose as its new owner? It faces a July 8 court-imposed deadline to pick.

All lips are sealed, publicly, but numerous sources tell me that, as of today, there are three bidders for the 30-newspaper chain.

We know two of them, and they’re familiar names to those who’ve watched the news industry’s conquest by hedge funds and private equity. And the list doesn’t include the knight-in-shining-armor many had hoped would turn McClatchy into the country’s first nonprofit newspaper chain.

As we’ve known for months, Chatham Asset Management, both McClatchy’s leading investor and leading debtholder, is among them — and still the likeliest to become the company’s new operator by the end of July.

Also bidding is the now-ubiquitous [cue horror-movie intro music] Alden Global Capital, the Randy Smith/Heath Freeman-run hedge fund that operates MNG Enterprises and is in step-by-step pursuit of Tribune Publishing.

There’s also an offer from a third financial player, but insiders report that it’s a non-starter.

While Alden’s participation here isn’t particularly unexpected, it’s significant — and may help explain the tighter hug Alden wrapped around Tribune last week.

The biggest news, though, is who didn’t bid. Last week, I noted that a “leader in the field of nonprofit journalism” was considering making an offer. That leader, as many guessed in offline and online last week, was the Knight Foundation. And in the end, Knight chose to drop out of the process and not make a bid.

Miami-based Knight is the country’s leading funder of journalistic experimentation and innovation. (And its leading generator of disclosures for those who write about journalism.) But it’s in the business of grants and investments, not operating businesses. That it even considered a bid for McClatchy shows how desperate the situation is in the business of local news.

Led by CEO Alberto Ibargüen, Knight felt compelled to consider such a change of course by the twin forces of financialization and consolidation that have quickly consumed the country’s major newspaper chains. Since I began reporting 18 months ago on what I’ve called the Consolidation Games, financial players have come to dominate much of the daily readership across the country.

With Fortress Investment Group managing the new merged companies of Gannett and GateHouse, with Alden owning MNG Enterprises, and with the likely takeover of McClatchy by Chatham, about 40 percent of daily newspaper readership (as measured by print circulation) will have its fate in the spreadsheets of financial engineers. (And that’s before considering what will happen to Tribune, Lee, or whatever other dominos topple next.)

Knight’s month-long assessment

That’s why the Knight Foundation deeply considered a bid — before deciding that the risk it would take on was too great and that its role as an owner would be too problematic.

That Knight didn’t bid will be cheered by some in the widening local news revival community, even as they understood the foundation’s motivation. They wondered how Knight might balance its roles as a funder and as an owner. They wondered if Knight would retain current McClatchy CEO Craig Forman, which indeed was one of the possibilities discussed. They wondered why the foundation might put $300 million-plus into a still-transitioning dead-tree company, rather than investing more in digital-only enterprises. Knight could have mustered answers to all those questions and more, further fueling an existing debate among those in and around the news business.

The likelihood of hedge fund control for McClatchy struck a particular chord for the foundation. Knight is in Miami, where the McClatchy-owned Miami Herald is a key civic player. (Before becoming Knight’s CEO, Ibargüen was the Herald’s publisher.) Then there’s the Knight-Ridder legacy built into its very name. John S. and James L. Knight’s money built the foundation, and the idea of preserving that hometown paper, is a heartfelt one.

Then there’s that McClatchy–Knight Ridder link. In 2006, the smaller McClatchy bought Knight Ridder Newspapers, then the country’s second-largest chain, for $6.5 billion in cash, stock, and debt. The timing proved disastrous; 2006 was the top of the market for newspapers, and all that debt choked McClatchy financially. It staved off bankruptcy for more than a decade until finally succumbing in February. Still, though, in terms of its journalistic DNA, the new expanded McClatchy largely resembled Knight Ridder.

Knight engaged McKinsey for a month-long sprint. They talked to many in the news business about the pros and cons of buying and “transforming” McClatchy. In the end, amid both board and staff concerns, the foundation stepped away from a bid, numerous sources tell me.

The Knight Foundation declined to comment for this story.

It’s hard to overestimate the drama of Knight’s consideration, even if it stopped short. It’s another big reality check for how far American newspapering has been yanked from its civic mission roots, as well as the unorthodox lengths true believers may go to in trying to revive a vital local press.

How will the auction proceed?

With Knight out, this week’s bankruptcy drama may seem less interesting, but it’ll still go forward. (With the proviso that a bankruptcy court hearing today could delay things. Judge Michael E. Wiles will decide if and how the complaint of a “fraudulent transaction” in McClatchy’s 2018 refinancing can go forward. Based on the judge’s previous statements, observers say it’s likely that the threat of a lawsuit won’t much hold off sale decisions — but it could.)

Few know the numbers in the Alden bid, but most consider Chatham’s approximately $300 million stalking horse offer the odds-on favorite.

Could there be more surprises before July 8 — or even July 10 or so, if the judge provides a couple more days of decision-making, as he may? The McClatchy board, which makes the decision on who to recommend as the company’s buyer to the bankruptcy judge, can still receive new bids this week. Will any appear?

There remains a big question of valuation. What is McClatchy worth today — and more importantly, given the $300 million purchase price, tomorrow or in 2023? Its just-under-$100 million pre-COVID free cash flow, will be substantially reduced by the major continuing advertising crater driven by pandemic and recession.

With significantly reduced revenue — “we don’t even know what the fourth-quarter will look like, much less the next three years,” one keen financial observer says — what is this company really worth?

One answer to that question is: To whom? While Chatham maintains interests in both Canada’s major Postmedia daily chain, and in AMI’s National Enquirer, it can’t fruitfully combine McClatchy assets with either. It can’t — in the parlance of financialization and consolidation — grab the golden ring of “synergies.” Gannett CEO Mike Reed has claimed that the Gannett/GateHouse merger will produce $300 million in synergies, major cuts of what are said to be redundant and overlapping costs as the two companies — quite fitfully, say those inside the merger — become one.

How much could Alden further squeeze if it combined McClatchy’s properties with its MNG dailies and weeklies? The total could be $100 million or more. And what if Alden further crunched together Tribune’s papers, creating an Alden MNG/McClatchy/Tribune rollup? Such a company would approach the new Gannett in size and reach. Together, Gannett and Alden would control almost one-half of U.S. local daily readership.

All of that math means that McClatchy offers a different value to Alden than it does to Chatham. Alden knows its numbers; if it’s bidding, we’d expect it to be playing to win — and beat Chatham’s offer.

But Chatham — by its position as McClatchy’s largest investor and debtholder — is in a unique position, and most observers believe that, financially, its takeover makes the most sense.

As I’ve written, even if Chatham wins McClatchy, what might it do with it afterwards? In fact, Alden’s emergence as a bidder here renews speculation that Chatham may be a short-term owner. It could well move to merge with Alden’s MNG Enterprises — or the new Gannett, as I’ve suggested — sooner or later.

There’s also the glimmer of hope among civic leaders — both the mayors of Miami and Sacramento have written the bankruptcy judge, appealing for a resolution that supports community journalism — that Chatham may be willing to sell individual properties to civic leaders, backed by philanthropy.

For them, this week’s drama is only Act I.

The standstill that’s not a standstill?

While it’s not surprising, this Alden bid for McClatchy could help explain why, mysteriously to some, Alden agreed to a new “standstill” agreement with Tribune last week. Standstills are meant to offer protection against hostile takeovers by current shareholders. This one appears to be an imperfect vaccine.

Alden chairman Randy Smith joining the Tribune board got the headlines last week. Essentially: The Man With A Dozen Palm Beach Mansions Goes Public. But his presence was a bit overblown. First off, the Tribune board isn’t exactly a Trump rally, but rather a small, fairly private boardroom session.

Second, how much do we really care about why Smith, and not his sidekick-in-newspaper-cutting Heath Freeman or some other underling, took the seat? We’ll have to wait for Freeman’s tell-all, but in the meantime, the question is where this month’s events lead. The smart money still says we will likely see a more formal combination of Alden’s MNG Enterprises newspapers and Tribune’s at some point.

As well-documented in Chicago Tribune reporter Bob Channick’s story, the announced “standstill” to push off an Alden takeover rests on some pretty squishy sand. It seems to be a standstill in name only.

As Channick explained: “A filing Thursday with the Securities and Exchange Commission lays out a number of circumstances — from other major shareholders teaming up to someone making an offer to buy Tribune Publishing — that would terminate the agreement and allow Alden to buy more shares…In fact, Alden itself could make an offer to buy a majority stake in the company, despite the standstill agreement.”

In essence, within the SEC filings, Alden has placed itself in the driver’s seat, able to act when it wants to and fairly able to prevent others from buying Tribune. And all the while, it gets a front-row seat to examine any company financial detail it wants.

And of course it gets the lucky seventh board seat at Tribune Publishing, two months after the company dispatched its two longest-standing and journalism-supporting board members, reducing the board to six. Two of those six, appointed soon after Alden bought a third of the company in November, were hand-picked by Alden.

Add it up, and Alden keeps Tribune right where it wants it while it plays the field.

Or to put it in more graphic terms, as one top industry leader suggested Sunday: “Alden can keep one foot on Tribune’s neck while they’re seeing what plays out with McClatchy.”

In the meantime, as Joshua Benton summed up last week, Alden can continue to let other guys do the cutting, while it assesses longer-term COVID-driven business damage.

Then there’s always, simply, the money. This isn’t the easiest environment to win financing for a newspaper deal. One deeply knowledgeable financial source offers an elegantly simple surmise: “They probably can’t find a way to finance the deal, so they have to wait and see. These guys need leverage to do deals, so this is a delay and blocking tactic.”

Disclosures! The Knight Foundation is a financial supporter of the Nieman Foundation, which published Nieman Lab. It’s also given a grant to Lookout Local, Ken Doctor’s local news startup. And, as previously noted, Ken is a former Knight Ridder executive, meaning he was among those affected by McClatchy’s early 2020 cessation of “non-qualified” pension payments.

POSTED     July 6, 2020, 9 a.m.
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