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Ownership

Newspapers
By the Project For Excellence In Journalism
Ownership

This was the year almost nothing changed in the ownership of American newspapers. But that is a story in itself.

Many papers were openly or quietly for sale.  But buyers were sitting on their hands, unwilling to pay anything in anticipation of future earnings.  The offers – the few that were accepted and the many rejected – tended to be just for the value of real estate and other hard assets like presses.

Put another way, the ownership groups in place as 2009 began were stuck running those properties indefinitely.  Those who would like to sell may see a slight thaw in 2010, but big changes in ownership await a fuller recovery.

A year ago, the industry saw lively theoretical discussion about whether nonprofits might become a forceful presence in newspaper ownership.  Unburdened by market expectations, debt or the need for big profit margins, the argument went, they could keep the public service function of a community’s newspaper alive as the industry lost its appeal to red-meat capitalist investors.

No such trend materialized in 2010.  Tax laws and the complexity of converting a property from for-profit to nonprofit was a factor.  Equally important, philanthropic groups like one led by San Francisco financier Warren Hellman took a hard look at the business challenges facing troubled metros and concluded that even operating at break-even in coming years was no sure thing.

Instead, an unanticipated class of new owners emerged: private equity firms, banks, investment groups specializing in distressed assets and their advisers.  They gained control of the Star-Tribune of Minneapolis and the San Diego Union Tribune in 2009 and could take over other important metro papers in bankruptcy as those proceedings play out in 2010.

Banks in Charge

Beginning in late 2008, a wave of bankruptcies began to sweep through the newspaper industry (see detailed discussion in the Economics section of this chapter).

As bankruptcy reorganizations played out – and some were unresolved in early 2010 – several passed ownership to the holders of secured debt that the original owners had been unable to pay.   In practice, the original bank lenders often sell their stake at a steep discount to smaller private equity firms that specialize in turning around distressed properties and then sell them off.

That is how Angelo Gordon & Co. of New York became lead partner in a group that took over the Star Tribune of Minneapolis in September.  Angelo Gordon is also the lead in a secured debtors group trying to gain control of Philadelphia Newspapers, publisher of the Philadelphia Inquirer and the Daily News. And Angelo Gordon also is a major holder of secured debt in Tribune Company, whose holdings include the Los Angeles Times, Chicago Tribune, Baltimore Sun and Orlando Sentinel.

In a different scenario not involving bankruptcy, Platinum Equity of Beverly Hills acquired the San Diego Union Tribune in May 2009.  Platinum, another specialist in buying distressed properties, also was among the final bidders for the Austin American-Statesman and the Boston Globe, both of which were ultimately taken off the market.

So how do asset managers like Angelo Gordon or Platinum run a newspaper once they take control?

The press-shy principals of the two firms would not discuss even such basic questions as why they see an opportunity in newspapers when others don’t.  But events in San Diego and Minneapolis give some hints of how they will operate.

They are in it for the money, running the businesses for a period of time then hoping to exit and sell at a premium to the modest amount they paid.  While this turnaround-and-flip process typically takes two years or so, mangers of the firms have indicated that the newspapers will be a longer-term proposition, probably taking five to seven years before they are resold.

Platinum cut 192 employees in San Diego when it took over in May and another 118 in August, a 30% reduction.1 Angelo Gordon did not make major staff reductions at the Star Tribune immediately, but it did announce in January 2010 plans to cut up to 30 newsroom positions, mostly copy editors.2 The previous owner, Avista Capital Partners, had made many rounds of cuts earlier.

On the plus side, Platinum quickly gave the green light to installation of a pagination system at the Union Tribune (the last big paper in the country still pasting up the old-fashioned way).  It also agreed to contribute startup funding to a new nonprofit investigative unit former senior editor Laurie Hearn is trying to set up in cooperation with San Diego State University.

Platinum is drawing on help from Canadian publishing mogul David Black, who earlier bought the Akron Beacon Journal from McClatchy.  Angelo Gordon, on taking over the Star Tribune, immediately installed a new board headed by local businessman Michael Sweeney and including former Wall Street Journal publisher L. Gordon Crovitz.

The bankruptcy process typically takes at least six to nine months, allowing the takeover firms a big time window to analyze operations and plan an operating strategy.  They often hire consulting firms with special expertise in publishing – FTI Consulting of Washington is the most prominent – to do some of that work.

So both the equity firms and their consultants are becoming new forces in newspaper ownership.  And there may be more to come.  Angelo Gordon is fighting for control of Philadelphia Newspapers and secured lenders could end up in control of Tribune Company and its papers.  So a half-dozen or more major metros could end up in the hands of nontraditional owners.

A second version of bank control, also taking shape in 2009, was the so-called “pre-packaged” bankruptcy.  In these cases, owners failing to make debt payments yield to new management, which does some of the restructuring in advance, gets buy-in from the secured lenders, then files for bankruptcy protection. The proceedings move quickly and the interim management assumes control, reporting to a new board of directors appointed by the secured lenders.

Publicly traded Journal Register, publisher of the New Haven Register in Connecticut and the Trentonian in New Jersey, went that route, filing in February 2009, closing several of its papers and wiping out the little remaining equity when it emerged in August.

Privately held Freedom Communications, publisher of the Orange County Register, announced September 1 that it was filing for a pre-structured bankruptcy that will pass control to creditors.  Veteran publisher Burl Osborne, formerly of the Dallas Morning News, has been installed as interim chief executive.

Sales and Nonsales of the Last Year

Very few papers of any size were sold in 2009 and for the few that did change hands there were typically some special circumstances.

Such was the case for the Portland (Maine) Press Herald and Maine Sunday Telegram, sold to a private equity group headed by Richard Connor in July.  (Another group that Connor heads bought the Wilkes-Barre Times Leader in Pennsylvania from McClatchy in 2006). The seller, Blethen Communications, had indicated it wanted out to concentrate its hometown Seattle Times.  The Times had been losing money as had the Portland papers, but its business prospects improved with the closing in March of the Seattle Post-Intelligencer.

The price was not disclosed but was believed to be little more than the value of real estate and presses.

A similar scenario played out in San Diego, where Copley family ownership had lost interest in turning around the paper and was willing to settle for the clearance-sale offer from Platinum.

January 2010 opened with the sale by of the Daytona Beach News Journal for $20 million to a private equity group including several Florida-based executives backed by Stephens Capital Partners of Little Rock.3

In this instance, the sale was prompted by a federal court judge who had taken the paper into receivership.  The sale, if the judge gives final approval to the price, partially satisfied a judgment against the paper’s family owners, the Davidsons, in a case alleging mismanagement and squandering of assets, brought by minority owner Cox Enterprises.  The family and Cox will then split the modest proceeds.

Perhaps more notable than these transactions were several that did not happen.  Atlanta-based Cox offered the Austin American-Statesman, and the paper attracted substantial interest and at least four serious bidders.  The American-Statesman was an unusually attractive prospect, still profitable and in a growing market that is a government, education and high-tech business hub.

Nonetheless, Cox called off the sale in August, disappointed by the bids. “Cox Enterprises said from the beginning that it would not preside over a fire sale,” Statesman publisher Michael Vivio said in the paper’s own article. “This is a profitable company, and it just did not make sense to sell it for the prices offered.”4

The New York Times shopped both the Boston Globe and the Star-Telegram of Worcester, Mass.  Final bidders were identified for both, but the upshot was the same as in Austin.  The Times Company announced late in 2009 that it had decided not to sell and to continue owning and managing both papers.

The sales and nonsales were flip sides of the same coin.  With the difficulties and uncertainties of the industry in 2009, newspapers had little or no sales value as going enterprises.  Under the circumstances, all but the most motivated sellers were inclined to wait for better times.

Takeover Artists Back Off

We wrote in last year’s report about the purchase of large stakes (roughly 20%) that Harbinger Capital Partners and Firebrand Partners had assembled in both the New York Times Company and Media General, based in Richmond, Va..  The apparent strategy was to get buy-in from other investment companies with large holdings and force a sale at a premium as investor Bruce Sherman had done several years earlier with Knight Ridder.

Instead, share prices tumbled early in 2009 at both companies. No premium sale was in prospect.  So Firebrand and Harbinger took their losses and sold off most of their Media General stock and cut their holdings of New York Times shares by about a third.

Earlier in the year, the New York Times, faced with liquidity issues as some of its long-term debt matured, borrowed $250 million at a 14% interest rate from Mexican billionaire Carlos Slim Helú.5 Slim also acquired an ownership share and an option to increase the stake to 17% of the company’s common stock, triggering speculation he could be a white knight for the controlling Sulzberger family if the company became an acquisition target (which it has not).

At Media General, investment companies controlled by financier Mario Gabelli have held a big minority share, roughly 25%, for decades and sought to influence management.  Had Media General stock not rallied, Gabelli might have teamed with Harbinger/Firebrand to try to force a sale.  But like the New York Times, Media General has a controlling share of voting stock in family hands and thus a strong defense against an unfriendly takeover.

Nonprofits Turn Elsewhere

As 2009 began, it seemed as if this might be the year that nonprofit ownership became a growing force in the industry.  A number of for-profit papers appeared to be failing.  Wall Street was shunning the sector.  Concerned foundation executives and wealthy individuals were worried their cities might be left without the civic information and leadership a newspaper provides.

The liveliest possibility was in Baltimore, where the Abell Foundation, funded from the fortune of the family that had owned the Sun before it was sold to Times-Mirror and then Tribune, had been quietly exploring for years a way to facilitate sale of the paper and conversion to a nonprofit.  Theodore G. Venetoulis, a former Baltimore county executive and a publisher of smaller suburban papers, was on board for the effort, willing to invest some money himself and put together a local ownership group.

Off and on negotiations with Tribune never resulted in a sale.  There were also tax complications in buying and transferring assets and then operating as a nonprofit while selling advertising and subscriptions.

Not coincidentally, Senator Benjamin Cardin of Maryland introduced legislation in late March that would explicitly authorize newspapers to operate as nonprofits.But that legislation got set aside and continued negotiations with Tribune did not lead to a sale. It was unclear whether Tribune rejected an offer as insufficient, wanted to keep its family of newspaper properties together or had its hands tied by the bankruptcy proceeding.

Conferences were held in the course of the year at Duke, Yale, Harvard and the Poynter Institute on the nonprofit alternative, or a variation known as L-3-C, that allow low-profit ventures to operate as businesses with some of the tax benefit to donors of a nonprofit.  But there had been no response to these proposals by early 2010, either from Congress or the Internal Revenue Service.

Other groups in other cities with papers in financial trouble explored the nonprofit option, notably in San Francisco, where Hearst’s San Francisco Chronicle had been losing $1 million a week even before the worst of the downturn.  Hearst threatened in February to sell or close the Chronicle unless it received immediate labor concessions.6

In response, Warren Hellman, a billionaire financier who had earlier launched and now pays for a successful annual bluegrass festival in the city, organized a working group, hired consultants and set a fast-track schedule. Early on, Hellman told an interviewer, the group decided it did not want to take on the continuing losses, high fixed costs and labor issues at the Chronicle.7

Ultimately, the group chose instead to launch a nonprofit news collective, with an initial grant of $5 million from Hellman. The venture will draw on the work of professionals and students from the University of California at Berkeley.8 It publishes articles online and offers the work free to cooperating newspapers (including the New York Times for its new San Francisco regional edition).  Hellman acknowledges that this could further damage the Chronicle and the San Jose Mercury News but told a New York Times reporter their “demise might be inevitable, anyway. This might put journalism, broadly defined, on a much more stable foundation.”9

The Chronicle, meanwhile, did get the job cuts and other concessions it was seeking and was reported be operating profitably in early 2010.

Similar organizations were launched with millions in startup funding in Texas and Chicago, as did smaller counterparts in other states and cities.

For now, that appears to be the preferred avenue for philanthropies aiming to rebuild journalism in their communities – let the legacy newspaper organizations deal with trying to manage a business transition and invest directly in content production under independent auspices.

2010 Prospects

The coming year will likely be at least marginally better for the sale of newspaper properties. As the industry has stabilized at the end of 2009 and early 2010, investors bid newspaper stocks up substantially. Prospective buyers may not find the business so daunting, especially at smaller organizations.

We do not look for the recent dynamic to suddenly reverse, however.  Gannett, with the exception of a swap, did not buy an American newspaper in the course of the decade, preferring to invest in digital acquisitions and startups, in fact, choosing to sell its Honolulu Advertiser in February 2010 to the rival Honolulu Star-Bulletin. Other big chains also show no appetite for expansion.

Lenders taking control will continue to be a factor in the coming year.   For-profits and nonprofits will probably still favor low-overhead online startups.  The industry itself will be less concentrated, more under private and independent ownership rather than public.  And “journalism broadly defined,” as Hellman put it, will be far more dispersed than most could have imagined five years ago.


Footnotes

1. Joseph Tartakoff, “New Owner Platinum Continues to Slash Union-Tribune Staff, Cuts 112 More,” PaidContent.org, August 12, 2009.

2. David Brauer, “Star Tribune layoffs spare reporters; target copy editors, photographers,” MinnPost.com, January 6, 2010.

3. Henry Frederick, “Judge holds off decision on proposed sale of the Daytona Beach News Journal,” NSBNEWS.net, February 13, 2010.

4. Claudia Gresales and Lori Hawkins, “Statesman owner decides not to sell the newspaper” Austin American-Statesman, August 3, 2009.

5. Eric Dash, “Mexican Billionaire Invests in Times Company,” New York Times, January 19, 2009.

6. Richard Pérez-Peña, “Hearst Threatens to Close Paper,” New York Times, February 24, 2010.

7. Chris Rauber, “Warren Hellman to unveil new journalism model,” San Francisco Business Times, May 8, 2009.

8. Dirk Smillie, “Meet the Bay Area’s New Media Baron,” Forbes, September 29, 2009.

9. Richard Pérez-Peña, “In San Francisco, Plans to Start News Web Site,” New York Times, September 24, 2010.