The nation’s second-largest newspaper company had paid off most of its old debt and still generates positive cashflow. But it might head to bankruptcy anyway so investors can get paid.
Whenever the definitive history of daily newspapering is written, 2019 will be recorded as a major turning point.
Today, one year-long drama comes to a close, or at least an act break: New Gannett, the result of America’s two largest newspaper companies merging, will become a reality as the deal reaches final closure. But another drama has hit the stage to take its place.
Yesterday afternoon, this was the Bloomberg headline flashing across your news feeds: “Newspaper Publisher McClatchy Teeters Near Bankruptcy.” McClatchy, of course, being the second largest newspaper publisher in America, after New Gannett.
That headline is an attention-getter, and it contains some truth. You say teeter, I may say totter — either way, there’s a whole lot hanging in that balance. But there’s some nuance in this new drama — one of many to come from the past decade’s conversion of news companies into financial instruments stripped of civic responsibility by waves of outside money men.
After all, when we talk about newspaper companies, we typically use their corporate names — Gannett, GateHouse, McClatchy, MNG, Lee. But it’s at least as appropriate to use the names of the hedge funds, private equity companies, and other investment vehicles that own and control them. It’s Fortress Investment Group that’s taking control of New Gannett today; it’s Apollo Global Management supplying the debt that let the merger happen (and first in line to skim whatever cashflow New Gannett can produce). It’s Alden Global Capital that has strip-mined MediaNews and Digital First papers, become the industry’s bête noire, and provoked drama across the industry.
With McClatchy’s troubles — its share price collapsed last week, down 82 percent across five trading days — a new financial player steps to center stage: Chatham Asset Management.1 However McClatchy gets reorganized — and now it must be, one way or another — Chatham, the company’s biggest lender and shareholder, is in the driver’s seat.
While it’s easy to think of money men monolithically, they’re not. Each brings a particular view about the 2020s newspaper business, a particular theory of the case to their investment. But the lenses through which they view it are quite different from those of traditional newspaper company executives. I haven’t found any, for instance, who believe there’s a growth story for local news. As a result, their question is: What’s the best way to operate distressed companies in a distressed industry? How do you manage, and budget for, businesses on the way down?
Leaving this woeful decade and entering a new one, it’s the financial players that have the firmest grip on what these companies will become — what will be defined as news, and who will be employed to report it.
A McClatchy reorganization could end up with a company quite similar to today’s with Craig Forman remaining as CEO. Could. It could also mean a change at the top. Forman has to thread some narrowing financial needles.
One other likely outcome: a merger with its most fitting partner, Tribune Publishing. Last week, I reported that the two companies are once again in early talks, reprising one of the more durable storylines in the Consolidation Games. I first reported that potential merger in September 2018; the two came close to a deal last December, but it fizzled.
While a deal in the coming months is possible, given the past week’s events, Tribune seems more likely to wait out McClatchy’s drama and see what comes out on the other side. The idea: Let McClatchy reorg itself, even via bankruptcy, and tidy up its balance sheet by shedding debt. Then merge. That would create a stronger merged company, the theory goes.
Who might become the CEO of a merged Tribune–McClatchy — Tribune CEO Tim Knight or McClatchy’s Forman? The industry joke is that the loser of that potential power struggle will get to run it; the winner will head home with a nice departure package.
Here’s what we know at this point, with the help of confidential sources close to all the dealings.
Start with that teeter-totter. McClatchy sits on one end, bloated with more than $700 million in debt. That’s way down from the more than $5 billion it saddled itself with by acquiring Knight Ridder in 2006 — a disastrous deal, burdened with a price-tag held over from the good old days, just as they were ending. But it’s still $700 million.
Who’s sitting on the other end? Now that’s a good question.
The federal Pension Benefit Guaranty Corporation, established in 1974 to be a pension payment backstop, has taken a seat. Congress set up PBGC in 1974 to take over pension liabilities when companies found themselves unable to fulfill their commitments.
McClatchy, both directly and through some of its now four consulting companies — Evercore Group LLC, FTI Consulting Inc., Skadden Arps Slate Meagher, and Flom LLP — began talking with PBGC when the Internal Revenue Service jumped off that teeter totter. See, McClatchy had asked the IRS for a waiver that would let it skip its upcoming pension plan payment, due next fall, arguing that the fund, with $1.32 billion in hand, was in good-enough shape to handle it. McClatchy also made clear that its financial condition would make it hard to make that $124 million payment. (The company currently has fewer than 2,800 employees — and more than 24,000 pensioners.)
The IRS denied the waiver. That set up the conversation with PBGC.
Across the teeter-totter, McClatchy pitches PBGC this plan: You guys take over our pension plan, via a “distress termination,” and take the funding we have in it. We’ll work out a new defined and limited payment plan over time. The PBGC benefit is that it gets some new money over time from McClatchy, which it wouldn’t get in a bankruptcy. For McClatchy, the benefit is in reducing, and then capping, its cash outflow.
Such a PBGC agreement could be a very good thing for McClatchy, freeing up cashflow to invest in its digital transition. So if those talks are in progress, and that payment to the pension plan isn’t due until next fall, then why is that dreaded word — bankruptcy — getting thrown around now?
McClatchy, more through cost cutting than through improving revenues, continues to have positive cashflow. In its Q3 financials, it even posted a modest 4.6 percent (or $869,000) increase in EBITDA year over year. While that’s a milestone of sorts — the first increase in eight years — McClatchy made clear it doesn’t expect to report similar plus-earnings in the coming quarters. Over the first three quarters of 2019, it generated $64.9 million in adjusted earnings. Moreover, the company has largely kicked its next major debt payments down the road a ways, to 2026.
So, in the big picture, McClatchy is cutting, just like everyone else, and it can pay its bills — other than that pension contribution next fall. But the focus has been on the ominous language in some of its SEC filings, acknowledging potential illiquidity and difficulty maintaining ongoing operations. That language — though mostly standard fare, given the pension issue — has stirred the headlines.
But it’s also fairly clear that both a financial restructuring of the company and bankruptcy are among the outcomes the company and its four consultants are considering.
Why — and why now? If that big pension payment is still months away, why the new urgency over the past week?
Consider some of the moving pieces. If PBGC agrees to a “distress termination,” it will secure a priority position in claiming McClatchy’s assets should the company later go bankrupt. Inserting PBGC high up in the claim chain inevitably forces others — largely equity owners — to slip further down it. (What about those receiving the pensions? “The company believes under current regulations, such a solution would not have an adverse impact on qualified pension benefits for substantially all of its retirees.”)
In other words, a PBGC deal requires some financial restructuring.
Then, on the other side of that teeter-totter, PBGC can slide over, making room for McClatchy’s current lenders and shareholders. Most prominent among those: Chatham Asset Management. Chatham is both McClatchy’s largest lender and largest shareholder.
The name on the door says “McClatchy.” That acknowledges the family, which launched the company in California’s Gold Rush in 1857, and which on paper still “controls” the company through a two-tier share structure. In a lot of ways, though, the door may as well say “Chatham.”
Chatham is the most important player in that McClatchy war room, with all those consultants. Assuming there’s a PBGC deal, the war gamers plot out those two scenarios:
- A financial restructuring of the company. That would put PBGC into the claim order and change others’ place in line.
- A bankruptcy. This would be a pre-pack bankruptcy— meaning that, as the company filed for Chapter 11, it would already have at the ready a plan to emerge from that bankruptcy. A pre-pack saves a lot of time — and prevents hellacious traumas such as Sam Zell’s four-years-in-court bankruptcy from hell. That bankruptcy semi-paralyzed Tribune at a pivotal time, when it should have been focused on digital transformation.
In either case, the McClatchy family would likely see a reduced position in the company. A bankruptcy would likely meaning the end of its control. So there’s a lot to balance here.
Importantly, this isn’t a new situation. When then-McClatchy CEO Gary Pruitt bought Knight Ridder in 2006, he paid $4.5 billion in cash and stock and assumed another $2 billion of Knight Ridder’s debt. It took out $3.75 billion in bank debt to make the deal work. (Knight Ridder was bigger than McClatchy, just as Gannett is bigger than GateHouse. In both cases, the smaller acquirer had to take on outsized debt to gain the larger target. Adding to the sting in McClatchy’s case was that it was the only company to even bid for Knight Ridder when it was up for auction.)
That McClatchy–Knight Ridder deal and Lee Enterprises’ acquisition of Pulitzer in 2005 turned out to be the most ill-timed of the era. Both Lee and McClatchy have struggled to deal with all that debt since.
McClatchy’s efforts on that front have been remarkable. It’s paid off more than $4 billion of its debt over a very tough period for the industry. And yet here it is, almost 15 years later, its very existence as a standalone company threatened by the debt that remains.
Money men taking front and center isn’t a new phenomenon either. Remember 2009, the bottom of the Great Recession? Newspaper revenues took at 19 percent hit that year — and it’s been all downhill since then, at varying trajectories, but with an alarming deceleration in revenues the past three years.
It was the Great Recession that largely opened the doors for those money men to enter. MediaNews, Tribune, Lee, and others all declared bankruptcy. Debt holders gained new sway and new equity. Companies like Angelo Gordon, Credit Suisse, Oaktree Capital, Alden, Apollo, and Fortress began showing up in SEC filings — and in company boardrooms.
Now, amid the tatters of a once-proud industry, they’re the ones who increasingly determine the fate of the primary gatherers of local news across the United States. Yes, there are a few contrarian independent papers — the ones with the well-known owners in big metros and the lesser-known smaller chains and single property owners. Those are largely still run by people with strong newspapering DNA. But across the wide expanse of this country, the papers still driven in part by a civic mission become fewer and fewer — and the ones that treat news providing as just another business grow in number month after month.