The McClatchy Company, the nation’s second largest newspaper chain and the owner of The Kansas City Star, Wichita Eagle, Miami Herald, Charlotte Observer and more than two dozen other daily newspapers, announced on Sunday that Chatham Asset Management had submitted the winning bid for the company at a bankruptcy auction.
McClatchy, burdened by debt it incurred in 2006 when it bought newspaper chain Knight Ridder for $4.5 billion and by pension obligations to 24,000 employees and retirees, sought Chapter 11 protection in February in the Southern District of New York.
Who is Chatham Asset Management?
Chatham is a $4.4 billion hedge fund based in New Jersey. It is McClatchy’s biggest creditor and shareholder. The company, which was founded in 2002, is secretive; its managing partner, Anthony Melchiorre, a one-time head of Morgan Stanley’s junk bond trading division, almost never grants interviews.
In a profile of Chatham last year, Fortune magazine said that during his stint at Morgan Stanley, Melchiorre “could be foul-mouthed and loud, and would berate fellow traders as he bopped around the trading floor in his stocking feet.”
Chatham already has investments in a stable of newspapers. It is a major shareholder of the publisher of several Canadian papers, including The Montreal Gazette, The Ottawa Citizen and The National Post. It also owns a major stake in American Media Inc., the parent company of The National Enquirer supermarket tabloid.
McClatchy entered into a debt refinancing deal with Chatham in 2018 that unsecured creditors of McClatchy claim unfairly benefited Chatham. A recent report by a law firm charged with investigating the matter concluded that McClatchy did not act improperly when it refinanced the debt, and did not give favorable treatment to Chatham.
What happens next?
U.S. Bankruptcy Judge Michael E. Wiles of the Southern District of New York, where McClatchy filed for bankruptcy, must approve the sale. He is expected to rule after a hearing set for July 24. The deal also must pass muster with the U.S. Justice Department, which will review it for antitrust issues.
The sale will allow McClatchy to emerge from Chapter 11, having restructured its debt and pension obligations, but ends its family ownership of newspapers dating back to 1857, when James McClatchy founded the Sacramento Bee during the California Gold Rush.
McClatchy said it would contribute $1.4 billion in pension assets to the federal Pension Benefit Guaranty Corporation fund and expects the PBGC, which takes over pensions of troubled companies, to assume McClatchy’s qualified pension plan.
Why would a hedge fund be interested in owning newspapers?
For the last decade, hedge funds and private equity firms have been buying up media companies, which they’ve been able to snatch up at fire sale prices because of their declining circulation and ad revenues. Once acquired, they typically cut costs by slashing reporting staffs, with the idea of eventually selling the companies at a profit.
Journalists tend to see them as financial predators focused on short-term profits, with little interest in the idea of journalism as a public trust. Alden Global Capital, a New York-based hedge fund, has become notorious as the face of rapacious newspaper-devouring hedge funds, having acquired newspapers like the Denver Post and cut their reporting staffs to the bone.
Were there any other bidders for McClatchy?
Chatham was the only publicly identified bidder until Alden challenged Chatham’s bid in court last Wednesday. McClatchy says “multiple bidders” submitted bids by the July 1 deadline but has not identified them.
Chatham submitted its bid a few months ago, establishing a floor for other bids. McClatchy’s board of directors must still approve the Chatham deal, but that’s expected to be a formality that will take place this week.
What will happen to McClatchy’s newspapers if the sale to Chatham is approved?
All of McClatchy’s newspapers will become the property of Chatham, which can do with them as it sees fit. McClatchy was a publicly traded company; with the sale, the newspapers will be owned by a privately held company. That means the general public will no longer have access to the kind of detailed corporate information publicly traded companies are required to file.
This isn’t the first change of ownership for The Kansas City Star, right?
In fact, it will be the fifth for The Star since 1977, when Capital Cities Inc. bought the newspaper, which was then owned by its employees, for $125 million. Nearly two decades later, The Walt Disney Company acquired Cap Cities, which by then owned the ABC television network, in 1996.
Disney had no interest in owning newspapers, however, so in 1997 it sold The Star and a handful of other newspapers it had acquired as part of the Cap Cities deal to Knight Ridder, a traditional newspaper company.
Nearly a decade later, under shareholder pressure to raise its stock price, Knight Ridder sold all of its newspapers in 2006, more than two dozen in all, to McClatchy for $4.5 billion.
The timing proved to be bad. Two years later, the U.S. descended into a steep recession, which led to a severe contraction in newspaper advertising. And the internet had already begun eating into newspapers’ biggest sources of revenue: classified and display advertising. The combined blows proved debilitating. Between 2004 and 2018, more than 1,800 newspapers across the United States disappeared. And since 2008, newsroom employment has fallen by half.
The Kansas City Star newsroom once boasted nearly 300 employees. It’s about a quarter of that number today. The Wichita Eagle has seen a similar drop in numbers.
