Will McClatchy/Bee Sale to Vulture Hedge Fund Disturb the Force?

Steve Ringhoff is a freelance writer. View more of his work at A Little Long Form Journalism.

Did you “sense” it, like Obi Wan recognizing the great disturbance in the force, as McClatchy, that family owned newspaper chain whose 30 newsrooms included the Modesto Bee, changed hands Friday?

There was no big ceremony like a symbolic handover of a huge key as has been pictured in thousands of newspaper photos over the years, according to Jeanne Seagal, director of public relations and communications for McClatchy. We asked.

You may see no difference in the product of the news gathering efforts of the reporters and editors whether you consume the news electronically or on paper, at least for a while. But changes there will be.

But first, we digress for a brief history. For more than 150 years the McClatchy family owned and operated a handful of daily papers, primarily “Bees” in Sacramento, Modesto and a Fresno. More papers were purchased and the privately held company went public, an event which allowed some heirs to cash out but which also triggered major financial changes. Now the company had to answer to shareholders and had to fear a hostile takeover.

To avoid the latter, McClatchy tried to grow so big it could not be eaten. It did so by swallowing two much larger operations. The problem was that it had to borrow to do this. It borrowed big…billions.

Then, the wings fell off as the internet siphoned off advertising revenue. Example number one: Craigslist replaced the classified ad sections of the paper. Then Google and Facebook started taking the lion’s share of the other ad revenue sources.

McClatchy fought bravely on, slashing expenses to pay the interest on the debt; selling off one of the other chains at a huge loss; selling, then leasing back, the real estate which housed their newsrooms, including the glass palace of the Kansas City Star, the waterfront home of the Miami Herald and even the modest headquarters building at 21st and Q in Sacramento. They even sold the building that housed the Modesto Bee and its huge custom printing press at 1325 H Street in downtown Modesto. The building covered an entire square block.

As this was occurring, Chatham Asset Management, manager of a number of hedge funds registered in New Jersey and the Cayman Islands began buying some of the debt. Some of the “high yield” funds specialized in distressed debt, a category into which McClatchy clearly fit.

Seemingly like the gambler chasing a loss, Chatham’s holdings grew and grew. Ultimately it became the largest debt holder, by far, and the largest public shareholder. It’s latest series of loan rollovers was called a “loan to own” by one percipient observer, because that is what happened. But ownership by Chatham faced a major hurdle, a large ($120,000,000) payment due to a defined benefit pension plan for the benefit ratio of about 10 former employees to one current employee.

So McClatchy, unable to get a waiver of the payment to the pension plan, danced into bankruptcy holding hands with Chatham (figuratively)  and proposing that Chatham be handed keys to the kingdom with all other creditors told to pound sand (literally or actually).

Some of the creditors balked, accusing McClatchy of collusion and other bad acts and seeking discovery and a trial. But, the fancy lawyers for the alleged colluders came up with the ultimate solution: “We’ll have an auction!”

However, since Chatham could “credit bid” its debt, no other real bidders emerged and the sale closed Friday with Chatham owning about 97% of the company and the creditors, including participants in an unqualified pension plan ($118,000,000) looking to a “trust” for some relief. The trust is to be funded in the future by tax refunds and other sources, but is not expected to provide full compensation.

Sorry, that’s as brief as I could make the history and still have some relevance to what follows.

The opening paragraph’s “Star Wars” reference was not meant to presume that the changeover would result in the Dark Side taking control. OR WOULD IT?

Well, hedge funds, at least those involved in this drama, are not created for philanthropically purposes. So, its investors expect to be paid back, if not earn some interest.

There are two ways to accomplish this, probably in combination. You can increase revenue, cut expenses, and/or do both.

Increasing revenue was problematic in the past and was made even worse by the pandemic. For the 30-day period ending August 2, 2020, McClatchy had less than $50,000,000 in gross revenue. That is roughly a 70% drop from the same period last year. Operating expenses remained about the same as McClatchy was running pretty lean a year ago.

Combined, the operating loss for those 30 days was just short of $12,000,000. You can see that Chatham would not likely have sought a debt-burdened company losing those kinds of numbers if it was not having to chase its previous investment.

Figuring out what will happen going forward would be pure speculation. So, let’s speculate!

We begin with staff cuts. Payroll is the largest single operating expense. Any cuts there yield significant change. Promises were made in press releases and other statements but the actual sales documents tell a different tale. Chatham has only promised not to lay off enough people to trigger federal or state requirements under the WARN act. The language of the agreement only limits the number who can be laid off; it does not preclude all layoffs.

Also there is language in the sales agreement which allows for transfer of employees to “affiliates.” So an affiliate can be created and layoffs below the number that trigger the WARN act can occur.

The buyer promised to offer equivalent salaries for one year, in the aggregate. Phrases like “in the aggregate” are wiggle words, aren’t they?

Many McClatchy newsrooms were staffed at a skeletal level already. This is why we see bylines from management level employees on routine stories like traffic accidents or fires.

But limits on what can be covered are not the only problem. How stories are covered may be an insidious type of corruption.

Every parent has heard that left alone a child will ultimately arrive at a healthy diet but no parent has let that play out. It’s the old want versus need dilemma.

With professionals making the decision about what readers need, the front page or its digital equivalent, lays out the priorities. But what would happen if reader wants decided what was on the front page, or featured most heavily in digital format?

Well we may soon find out. Reporters are not well paid. For example, reporters with six or more years’ experience make less than $50,000 a year in base pay. A Modesto police officer will make about $75,000 in base pay and a sergeant more than $100,000. Both may also make an equal amount in overtime pay.

The reporter can also be awarded a “merit raise” based upon performance reviews by his or her managers. In the past, the performance criteria did not explicitly include reader reaction.  In the not too distant past, reader reaction was not accurately measured. A nasty or complimentary letter to the editor might provide some insight.

But now, the reaction is measured in real time, thanks to the electronic handshake you make when you click on a story. Cookies tell not only what you clicked on but also how long you tarried.

See where this is leading. Yep, merit raises will be based in large part on whether you gave the “reader” what they wanted, not necessarily what they needed.

You can call it click bait, or chum, or some other term, but what it amounts to is appealing to the reader by offering sweets not vegetables.

For example, recently at modbee.com there was a story headlined about a schoolteacher having an affair with a student. Turns out it involved a substitute teacher in Santa Clarita. The “editor” who posted that story might be forgiven for geographical ignorance as the editor was based in New York City.

The ultimate danger is that our local paper loses integrity and turns into a version of Weekly World News. Remember Bat Boy?

Probably not going to happen. Hopefully not going to happen. But, then, two years ago McClatchy management was saying there was no chance the company would go bankrupt.

Chatham issued a press release today announcing the appointment as an independent director, among others, former NBA player Jamal Mashburn. He owns about 90 companies, primarily Outback and Papa John’s franchises.

There were these words: “The company is now poised for sustainable long-term growth driven by differentiated local content and an acute focus on our digital presence and offerings.”

I feel better, now. Do you?