Hedge funds gain clout in newspaper industry
The newspaper industry is starting to meet its new bosses — the hedge funds and banks that are moving in as rich family owners and starchy executives move out.
Although the objectives of these new owners remain unclear, insiders say the transition period promises more upheaval at newspapers just as they begin to emerge from bankruptcy protection.
Over the last year, bankrupt newspaper companies including Tribune Co., owner of the Los Angeles Times, KTLA-TV Channel 5 and other news organizations, have been overrun by a category of stealthy “distressed debt” hedge funds. These include Angelo, Gordon & Co. and Alden Global Capital, both of New York, and Oaktree Capital Management of Los Angeles.
Their basic strategy: Quietly buy up as much cheap, delinquent debt as possible and then fight it out in Bankruptcy Court for a lucrative settlement that transforms the debt into a large share of company stock.
Experts say it is unlikely that any single fund has amassed enough of a stake to take outright control of one or more publishers. But alliances of like-minded funds and big banks like JPMorgan Chase & Co., which have also received significant chunks of equity through restructurings, could give nontraditional investors like Angelo and Alden unusual clout over a wide swath of the newspaper industry.
Interviews with close observers and people briefed by some of the funds say they tend to see little remaining upside in cost cutting. They also profess to recognize that quality, branded journalism still draws advertisers and therefore is worth preserving.
But because they are opportunistic traders by nature, not long-term owners, their presence is likely to be disruptive. Their objective from Day One will be to seek the most profitable way to turn their investments back into cash. That is likely to mean a restless quest for “value-creating” exercises such as spinoffs, acquisitions, public offerings and other transactions that will keep the newspaper industry in a state of flux.
One area ripe for deals may be Southern California. Before they each filed for Chapter 11 in 2008, Tribune and Freedom Communications Inc. held talks about the Los Angeles Times buying Freedom’s neighboring Orange County Register, according to people with knowledge of the situation who were not authorized to speak publicly.
Now that Angelo, Gordon and JPMorgan are likely to emerge as big owners of both companies, these people say, talks probably will resume, and other options for consolidating newspaper assets in the region surely will be on the table.
Neither Chicago-based Tribune nor James Dunning Jr., newly appointed board chairman of Irvine-based Freedom, would comment on the conversations. The sources noted that no talks could resume until Tribune emerged from Chapter 11 (Freedom already has).
But Dunning said Angelo, Gordon, Alden Global Capital and Freedom’s other new owners had charged him with exploring ways to boost the company’s value so they could “monetize” their investments.
“All things are on the table,” Dunning said. “They are highly inquisitive and want us to be also.”
Most observers agree that the distressed investment world’s interest in newspapers has little to do with what they publish. Unlike the media barons of old, who often basked in the civic influence newspapers bestowed, these funds are economic animals that unemotionally flock to troubled companies where investor sentiment has ebbed to seemingly irrational lows.
The distressed-debt funds are hardly alone. Ever since newspaper industry financials hit bottom a little more than a year ago, conventional stock market investors have sent shares of publishers such as Gannett Co. and McClatchy Co. through the roof.
Chicago’s Ariel Investments has taken a ride up through major stakes in Gannett, McClatchy and Lee Enterprises Inc. Last month, JPMorgan said it had increased its Gannett stake to 10.2% from 2.2%.
The assumption behind these investments, analysts say, is that the newspaper industry had gotten so beaten down during the crisis that it became a bargain. Most publishers had cut costs so dramatically that any improvement in revenue as the economy returned to health would fall to the bottom line.
That bet has largely paid off for both conventional investors and the distressed-debt funds, as both the equity and the debt of newspaper companies has soared. Many industry experts agree that the next step in restructuring the sector is the sort of asset shuffling and consolidation that often transforms industries after they’ve been softened up by a severe downturn.
That’s the logic behind the consolidation talk in Los Angeles.
Assuming that Tribune escapes from bankruptcy sometime this year, almost the entire Southern California newspaper market will emerge from the economic crisis cross-pollinated with financial interests more interested in “creating value” than respecting corporate boundaries.
Angelo, Gordon and JPMorgan will be major shareholders in both Tribune and Freedom. Alden has stakes in Freedom and the parent of MediaNews Group, which owns the Los Angeles Daily News and eight other area papers. Private equity fund Platinum Equity owns the San Diego Union-Tribune.
The Los Angeles Times already delivers the Register’s papers in Orange County. Recent talks have explored The Times’ acquiring the Register to reduce corporate overhead, while retaining the individual brands and editorial identities.
Former Freedom Chief Executive Scott Flanders said MediaNews Chairman William Dean Singleton, meanwhile, has also talked to Freedom about consolidation in the market, and many analysts believe that his smaller community papers would complement either the Register or the Los Angeles Times.
Singleton wouldn’t comment, but in a speech last year he said, “In a business that will likely see modest growth, at best, when the industry turns, something must drive bottom-line performance. I believe that will be consolidation.”
Freedom’s Dunning and others point out that there are innumerable obstacles to newspaper transactions. Capital is still scarce, antitrust issues could come into play, cost savings may not be as great as at first assumed and tax considerations when selling long-held assets often spoil the economics.
It is also true that each company’s board of directors has a fiduciary duty to its own shareholders, meaning they have to be careful about keeping transactions at arm’s length, despite any cross-ownership.
But what is unlikely to get in the way of implementing ideas that seem to make economic sense, Flanders said, is the kind of institutional hesitation that has traditionally discouraged companies from exploring ways to work together.
“The L.A. Times and the OCR historically have just beaten the hell out of each other to nobody’s benefit,” said Flanders, who left before Freedom’s bankruptcy filing last year to become chief executive of Playboy Enterprises Inc. in Chicago. “If Angelo, Gordon is a shareholder in each boardroom, that won’t happen.”
John Johnson Jr., who runs a company called Foamex International Inc. and has sat on a number of boards for Angelo in the past, said the firm recognized that its strength was finance, not operations. So “they try to find the best industry expert they can and put them in there.”
The natural tension for funds like Angelo, Gordon, however, is that they don’t have unlimited time to wait for their investments to bear fruit. Their compensation and fee structure is generally based on raising a fund, investing it to generate 20% to 30% annual returns and then monetizing those returns over a period of a few years.
That tension may have led to a parting of the ways between the firm and Brad Pattelli, who gained some attention this year as the architect of Angelo, Gordon’s extensive newspaper investments. Neither Pattelli nor the firm would comment for this article, but Johnson, who talked to Pattelli about it, said he was interested in business building in the media industry, not just trading in and out of distressed companies.
Despite their time constraints, the hedge funds will have to remain patient if they want to reap what they’ve sown in newspapers, many observers believe. The funds probably don’t even have a firm exit strategy in place, and it will take sure signs of an economic recovery to grease deals and “liquidity events.”
For that reason, Freedom’s Dunning thinks any real shuffling is probably months away as the company’s new owners continue to learn what’s possible and wait for exit opportunities to present themselves.
“This will take some time to be cultivated,” Dunning said. “They realize they can’t be short-order cooks.”