|By the Project for Excellence in Journalism and Rick Edmonds of The Poynter Institute
For the last several years, newspaper ownership changes were few, and industry consolidation — the old pattern of big fish acquiring smaller ones — seemed to be stalling out.
With business fundamentals worsening and shareholders disgruntled, 2006 was far more dramatic. The dynamic flipped into reverse. Big companies came apart. Private owners, from large operating companies to private equity firms to rich individuals, peeled individual papers away from public ownership. In 2007, more of the same seems likely.
The trend even tends to raise a new question: Has public ownership, the model that increasingly took hold in the industry from the 1970s on, begun to show cracks? Do the demands of Wall Street now conflict with the demands of management? Is the future of the newspaper industry, to survive the transition to the next phase, demand longer-term bets and more risk than the public markets can safely allow? And what risks are special to the private alternatives?
Among the highlights of a volatile year:
*Knight Ridder, the second-largest chain in circulation and third in revenues, vanished — sold for $4.5 billion (and assumption of $2 billion in debt) to McClatchy Co. in March.1 McClatchy turned around and sold 12 of the 32 Knight Ridder papers, including the Philadelphia Inquirer and San Jose Mercury News, to an assortment of private buyers by July.
*In a year-end surprise, McClatchy sold its largest newspaper, the Star Tribune of Minneapolis, to Avista Capital Partners, a private equity group, for $530 million.2 McClatchy had paid $1.2 billion for the paper and some smaller businesses in 1998.
*Tribune, second-largest of the companies, in revenue with 13 newspapers and a range of television and other holdings, was formally put in play by management in the fall. Wealthy individuals, including the real estate tycoon and philanthropist Eli Broad and the entertainment mogul David Geffen, bid on the Los Angeles Times. Local investor groups also expressed interest in the Baltimore Sun, Newsday and the Hartford Courant. By early 2007, it appeared that the market had deteriorated. Two rounds of bids came in so low they were rejected. A possible outcome is that Tribune will retain its Chicago properties and some other newspapers, taking the company private, and auction off its broadcast division and some other newspapers.
*Several companies — Dow Jones, Journal Register and the privately held Copley — disposed of a number of their smaller newspapers to redeploy resources to stronger properties and digital ventures.
*Early in 2007 E.W. Scripps management indicated it might eventually consider selling some or all of its 19 newspapers. Nothing imminent should be expected, CEO Ken Lowe said later. But the company did tell investors at a December conference that newspapers and broadcast will play a progressively smaller role in the company, whose main business now is cable television networks, which contribute 60% of earnings.3
*The New York Times Co. was also under pressure from unhappy shareholders, but, unlike Knight Ridder and Tribune, is protected by a controlling family share of voting stock. Jack Welch, the former General Electric CEO, and associates expressed serious interest in acquiring the Boston Globe, a money-losing problem child for the Times in recent years. Times management did not sell but was equivocal on whether it might in 2007. The Times bought the Globe and other New England properties for $1.1 billion in 1991 and added the Worcester Telegram & Gazette for $296 million in 2000. In early 2007, it wrote down the value of the properties by more than half to reflect changed market conditions.
*Amid all the breakups, GateHouse Communications, a New England-based chain of small weeklies and dailies, had a successful initial public offering in October. Its promise to pay a cash dividend of 7.5%, a novel business proposition, ensures a good return to shareholders even if the stock does not appreciate.4
What’s Happening Here?
What has caused the sudden activity? For the first several years of this decade, newspaper share prices continued to rise, even as circulation, ad revenue growth, earnings growth and margins were stalled. Safe and steady was attractive to investors after the burst of the tech bubble in the late 1990s. Plus, conventional wisdom held that newspapers would be first to come roaring back after a recession like that of 2001.
Holders of big blocks of newspaper stocks were thus set up for a fall when industry performance turned worse in 2004 and 2005 despite a relatively healthy economy. With an 18.5% share of Knight Ridder and little prospect of a stock turnaround, Bruce Sherman of Private Capital Management saw a potential way out by demanding that the company be put up for sale in the fall of 2005. He was joined by two other longtime Knight Ridder shareholders, and suddenly nearly 40% of the company’s ownership was pushing for a sale.
The sale to McClatchy in March was hardly a windfall, but it gained back some of the losses the three big institutional investors were experiencing.5
Tribune has less concentrated ownership, but came under a parallel set of pressures in 2006. Share price had fallen more than 50% from its peak.6 Like Knight Ridder, Tribune responded with cuts and promises of more cuts. It also did a large share buyback in the middle of the year, enabling investors who wanted out to leave at a modest premium.
None of this, however, sent share prices up significantly. The Chandler family, with more than 10% of the stock, was the most outspoken of many Tribune critics. And the company’s management was further damaged when its two top executives in Los Angeles, publisher Jeffrey Johnson and editor Dean Baquet, openly broke with their corporate bosses, denouncing their plans for more cuts as short-sighted and damaging. In September, Tribune’s board established a committee to “explore strategic options” — code for seeing whether the company, or at least pieces of it, could be sold at a premium.
The auction drew expressions of interest from several private equity firms. The billionaires Broad, Geffen and Ron Burkle all indicated they wanted to buy Tribune’s largest paper, the Los Angeles Times. But as of March, the rumored interest hadn’t translated to a winning premium offer.
That implied some cooling of the acquisition climate since the Knight Ridder deal. Even so, with share prices falling again in 2006 after a 20% tumble in 2005, investors looking for a shock-wave boost to the value of their holdings are likely to continue as a force pushing for the sale or breakup of big newspaper companies.
A second dynamic became apparent with McClatchy’s decision to sell 12 of the 32 newspapers it acquired in the Knight Ridder deal. McClatchy explained that the papers, quickly dubbed the “orphans” of the transaction, were in slower-growing communities that did not match McClatchy’s preferred profile. The papers also had lower profit margins, were mostly in the Northeast and Midwest, and had union representation.
Nonetheless, all 12 sold within a matter of three months. Even more eye-opening, those ostensibly less attractive properties actually went at a higher ratio to earnings than McClatchy paid for its Knight Ridder keepers.
Lauren Rich Fine of Merrill Lynch and other analysts extracted the clear lesson: we seem to have entered a period where private markets now value newspapers more highly than Wall Street does.
The buyers included big private companies like MediaNews and Hearst, obscure small companies like Black Press and Shurz Communications, and consortiums of local investors (in Philadelphia and Wilkes-Barre). All are in a better position than Wall Street institutional investors to be patient if the industry is indeed making a multi-year transition to new business models with depressed earnings in the meantime.
Private equity funds are flush with cash — including money from institutional investors like pension funds that also can play on Wall Street — and they are looking for deals. As we had speculated might happen in earlier editions of this report, very wealthy individuals are now looking at newspapers as the might look sports franchises — high-profile enterprises important to their communities, where making lots of money may not be the main point. Nonprofit foundations and even the Newspaper Guild have also surfaced as potential buyers. But what such owners would do to papers and their journalism is yet to be tested. (See Private Ownership section below)
With 2007 looking no better than 2006 for operating results and other near-term indicators, the valuation gap is likely to continue for at least another year.
In 2006 newspaper companies felt a variety of financial pressures, forcing some hard choices about which operations are essential and which expendable.
Dow Jones sold six of the papers in its small paper group to Community Newspaper Holdings for $282.5 million.7 The transaction allowed Dow Jones to complete its acquisition of Factiva, an electronic business information service.
Journal Register, experiencing some of the sharpest ad revenue and share price declines, sold two Massachusetts papers and has three in Rhode Island for sale, hoping to pay down debt.
Copley Press, facing an estate tax bill after the death of its owner, Helen Copley, is in the process of selling all nine of its smaller papers, to concentrate on its flagship San Diego Union-Tribune and its online and niche businesses.
The New York Times Co. dealt off its seven TV stations in January 2007. It declined an initial offer for the Boston Globe from Jack Welch and associates, but has left the door open to revisiting the deal in 2007.
McClatchy provided a coda to turbulent 2006 when it announced the day after Christmas that it had sold the Star Tribune of Minneapolis to a private equity firm. “How often does a newspaper company sell its largest paper?” William Dean Singleton, CEO of MediaNews, commented. “It doesn’t happen.”
On close inspection, though, the deal, while surprising, was not inexplicable. With the big loss compared to the purchase price eight years ago, McClatchy said, it was able to save $160 million of the $500 million in capital gains taxes it was facing on the sale of the orphan Knight Ridder 12.8
The proceeds could be used to pay down debt and invest in Internet ventures, the company added, after a year in which operating results had fallen far short of expectations.
McClatchy’s CEO, Gary Pruitt, has emerged as a leader among those speaking out for the future of the industry, and the company has been considered a model of commitment to news quality as a sound business strategy. The Star Tribune offered an ambitious redesign in late 2005 that Pruitt said he hoped would be a model for the industry.
All of which made the transaction a letdown to the Star Tribune’s staff and many outsiders alike. It underscored that financial logic, unfortunately, trumps journalistic idealism with some regularity these days.
Private Ownership: Potential and Perils
The emergence of various private ownership groups, especially those more attuned to their communities and public service role than to maximizing profit margin, was hailed in some circles as a potential avenue to put the industry back on track journalistically.
John Carroll, the respected former editor of the Los Angeles Times and a bruised veteran of Tribune’s newsroom cost-cutting initiatives, articulated the possibility in an April speech to the American Society of Newspaper Editors. Profit-driven public corporations, answering mainly to fund managers, Carroll said, “are shrinking the social purpose of newspapers…are shrinking the newspaper journalist.”9
Potential local owners, he continued, include “sophisticated people with real money…willing to accept a lower financial return” to maintain a newspaper that will serve their community.10 But Carroll conceded that “the old local owners were far from perfect. Some of them were good, most were mediocre, and some were downright evil.”
How are the new owners doing? The honest answer is that by early 2007 the model has barely been tried. Though the billionaire class is eagerly pawing the dirt for potential acquisitions, we don’t yet know, as the writer Michael Wolff put it in a Vanity Fair article, what “the Daily Geffen” would look like. And we may not know for awhile.
One cautionary case exploded soon after Carroll’s talk. Wendy McCaw, the billionaire owner of the Santa Barbara News Press, already had a record of turning over publishers quickly and supporting pet causes in editorials. But beginning with the protest resignation in July of her editor, Jerry Roberts, she was soon at war with much of her news staff. Resignations and firings, lawsuits and a movement to unionize soon followed.
A scenario that seemed more likely to become typical played out in Philadelphia, where a local group headed by the public relations executive Brian Tierney bought the Inquirer and Daily News for $562 million.11 In his PR days, Tierney was a bare-knuckles advocate for clients like the Roman Catholic Archdiocese of Philadelphia. But he and his partners signed a pledge not to interfere in editorial matters, which appears, so far, to have been honored.
The hitch was that a steep fall throughout the industry in third-quarter advertising hit the Inquirer especially hard. With union negotiations looming, Tierney wrote in an October memo to employees that without substantial concessions (and some reduction in work force), his group would be unable to meet their commitments to lenders in 2007.
A strike was narrowly averted in December and the unions accepted some easing of work rules and reductions in benefits. Then the other shoe dropped in the first week in January: 71 Inquirer newsroom employees and 30 more in the advertising department would be laid off. The following week, management announced it was considering putting the Inquirer’s landmark building in downtown Philadelphia up for sale.
Not all the news was bad. Tierney claimed he was bringing an informed outsider’s view to market the paper better and make it more attractive to advertisers, efforts that would start to bear fruit in 2007. He also succeeded in hiring as editor Bill Marimow, who won two Pulitzer Prizes as an Inquirer reporter and had earlier top editing jobs at the Baltimore Sun and National Public Radio.
Still, the events called into doubt whether Tierney would be able to play out his hopes for a gradual revitalization of the battered Philadelphia papers. The problems raised the question whether his group may simply have paid too much at the wrong time.
Elsewhere several of the new private owners made sharp newsroom cuts on top of those earlier imposed by Knight Ridder: MediaNews at the San Jose Mercury News, Hearst at the St. Paul Pioneer Press, and Black Press at the Akron Beacon Journal, which lost 40 newsroom employees from a staff of 160. (See News Investment).
The year occasioned interest in models of nonprofit ownership like that of the St. Petersburg Times or the Guardian in Great Britain. At both those companies, control is firmly in the hands of journalist/executives, an arrangement that may be difficult to replicate on the fly.
Freedom from short-term profit pressures has served those papers well, just as it has helped some of the large private chains like Advance and Cox. But no one is insulated from the current rough financial climate, and as much as news company executives are maligned for short-sightedness and timidity, it is far from clear that owners with no experience will do better.
And the new private owners are different in one important characteristic from the patriarchal owners of the past, a group whose record may be more checkered than is remembered. Whatever their strengths and weaknesses, family owners like Ochs, Hearst, Pulitzer, Scripps, Copley and many more made their reputations and their fortunes in news. They were, fundamentally, news industry people. The new generation is a different model. For some, such as Geffen or Welch, news is a second act in life. They made their fortunes elsewhere, with a different set of business pressures and attendant cultures. For others, such as private equity firms, newspapers may even be short-term, three-to-five-year investments made with an eye toward turning around and selling.
It is safe to say, though, that 2007 will almost certainly provide more public-to-private transactions and a richer record of whether the new ownership models are a potential path to salvation.