December 1, 2020

Chatham Hedge Fund Has the Winning Bid for McClatchy Newspapers

After years of declines in revenue and print circulation, the McClatchy Company, one of the largest and most respected news publishers in the country, announced on Sunday that it expected to be bought by Chatham Asset Management, a New Jersey hedge fund, at the conclusion of a bankruptcy auction.

The announcement, which signals an end to 163 years of family ownership, underlines the growing influence of the finance industry on American newspapers. And it means that a news company known for winning top journalism prizes is likely to become the property of a firm that owns The National Enquirer and other supermarket tabloids.

McClatchy, the publisher of The Miami Herald, The Kansas City Star, The Charlotte Observer and its flagship publication, The Sacramento Bee, filed for Chapter 11 bankruptcy protection in February. Chatham, an investor in the company since 2009, is its largest creditor. In recent months it put together the bid that has been declared the winner in a U.S. Bankruptcy Court auction supervised by Judge Michael E. Wiles, a McClatchy spokeswoman said on Sunday.

Chatham, which manages about $4 billion in assets on behalf of its clients, is expected to become the majority owner in the third quarter of the year, McClatchy said, and the publicly traded newspaper company will go private. It will not be split up, McClatchy said, its 30 news outlets remaining intact.

In a statement, a Chatham spokesman said the company was “pleased with the outcome of the auction,” adding, “Chatham is committed to preserving newsroom jobs and independent journalism that serve and inform local communities during this important time.”

McClatchy did not disclose terms. In April, the company said it had received a Chatham-led bid worth more than $300 million. That offer included the debt assumed by the hedge fund and its partners. Another McClatchy creditor, the New York hedge fund Brigade Capital Management, was named in a public filing as a partner of Chatham in the April bid.

The court and regulators must approve the deal. A bankruptcy court hearing on the matter is scheduled for July 24.

Hedge funds and private equity firms have had a growing presence in the news industry, to the chagrin of press advocates who argue that financial firms do not make civic-minded stewards of a business built largely on holding the powerful to account.

“I’m always for local ownership whenever possible, and local support,” said Sree Sreenivasan, professor of digital innovation at Stony Brook University’s School of Journalism, sounding a note of caution regarding finance-industry ownership.

John Longo, a professor at Rutgers Business School, said such ownership did not necessarily mean a disregard for journalism.

“Hedge funds are certainly profit-oriented,” Mr. Longo said. “If the business is not profitable, they’ll do what they need to to right-size it.”

He added: “If they look at the assets they are buying, part of their core purpose is to serve their community. If they don’t do a good job serving their community, the profits won’t follow.”

McClatchy’s troubles can be traced to 2006, when it bought its much larger rival, Knight Ridder, then the second-largest newspaper chain in the United States, for $4.5 billion, plus the assumption of $2 billion in debt.

From shortly after the merger to the end of 2018, McClatchy’s work force was cut from more than 15,000 full-time employees to around 3,300, according to public filings. Chatham took a financial interest in McClatchy not long after its financial troubles began.

The McClatchy chairman, Kevin S. McClatchy, the great-great-grandson of its founder, has said the company’s inability to meet its pension obligations tipped it into bankruptcy. The $1.4 billion pension plan, created 75 years ago, was intended to provide money to more than 24,000 current and future retirees.

In a statement, Craig Forman, the McClatchy chief executive, said Chatham would allow the company to continue providing strong news coverage.

“Local journalism has never been more vital,” Mr. Forman said, “and we remain steadfast in our commitment to delivering on our mission and continuing to serve our communities.”

Hedge funds and private equity firms entered newsrooms during the Great Recession, when readers were migrating toward digital sources of news and local newspapers were losing value. Google and Facebook came to dominate the online ad market, hampering publishers’ attempts to generate the necessary revenue from digital advertising. From 2004 to 2019, roughly half of all newspaper jobs in the United States were eliminated, according to a University of North Carolina study.

But many dailies remained sources of reliable cash flow, making them attractive investments for owners focused on maximizing returns.

Chatham is not a newcomer to the news industry. In addition to being a principal owner of American Media Inc., the parent company of The Enquirer and other tabloids, it is a major investor in Postmedia, the publisher of Canadian newspapers including The National Post, The Montreal Gazette and The Ottawa Citizen.

Chatham is led by Anthony Melchiorre, a Chicago-area native who once worked at Morgan Stanley, where he led the junk bond division. He set up his hedge fund in Chatham, N.J., in 2002.

Chatham has tried to unload The Enquirer. In 2018, American Media announced the sale of the tabloid to the family that founded the Hudson News chain of newspaper and magazine shops. That deal still has not closed.

The sale was proposed after American Media signed a nonprosecution agreement with federal prosecutors in which it affirmed that it had made a payment to influence the 2016 election. That money was part of a deal the company had struck with Karen McDougal, a Playboy model who said she had an affair with Donald J. Trump. American Media acquired her story for $150,000 and never published it, a practice known as catch-and-kill.

In recent months, Postmedia closed approximately 15 community publications and laid off 120 employees in response to the Covid-19 pandemic, The Toronto Star reported.

Chatham was the favorite in the McClatchy auction, but the New York hedge fund Alden Global Capital expressed strong interest last week, when a lawyer representing the firm said at a bankruptcy hearing that Alden was prepared to “top” any other bid.

Alden controls roughly 200 outlets through its newspaper chain, MediaNews Group. With a strategy that led to deep layoffs at The Denver Post and other publications, it has made money in an ailing business while angering journalists and press advocates who accuse the firm of diminishing local news publications and doing a disservice to the communities they cover.

In the fall, Alden took a 32 percent stake in Tribune Publishing, the owner of The Chicago Tribune and several other major papers. Earlier this month, Alden secured a third seat out of seven on the Tribune Publishing board as it seemed to inch closer to taking control of that company.

The finance industry is also a key component of the largest American newspaper chain, Gannett, which publishes USA Today, The Arizona Republic and 250 other dailies. The new, supersize version of Gannett resulted from a merger last year between Gannett and the parent of GateHouse Media. The deal was partly financed by one private equity fund, Apollo Global Management, and Gannett is now controlled by another private equity fund, Fortress Investment Group, which is owned by the Japanese conglomerate SoftBank.

Journalists employed by McClatchy, as well as the mayors in Lexington, Ky.; Sacramento; and Miami — three cities served by McClatchy papers — pushed for local, civic-minded ownership of the chain.

“Even with the cuts it has endured over the past 15 years, The Bee remains the most significant source of original reporting and enterprise in our community,” Sacramento’s mayor, Darrell Steinberg, wrote in a May letter to the bankruptcy court. “It needs to be bolstered and rebuilt, not milked for whatever profit it can still produce.”