The New Jersey hedge fund Chatham Asset Management likely will become the new owner of McClatchy, the beleaguered parent company of the Charlotte Observer.
Earlier this month, Chatham emerged as the winning bidder in an auction to take ownership of the family-run newspaper chain that filed for bankruptcy protection in February. It’s not a done deal, though. Last week, for instance, McClatchy said it needed more time to negotiate its terms. A judge will sign off on the agreement during a hearing scheduled for August 4. McClatchy has said it expects the takeover to close in September.
Anyone familiar with the business of newspapers would probably bristle at the mention of hedge fund ownership. Hedge funds have decimated newsrooms everywhere from Denver to Toronto. That’s why journalists often call them “vulture capitalists.” (Full disclosure: I worked for the Charlotte Observer from 2015 to 2019.)
“Hedge funds have not gotten into the (newspaper) industry to invest long term,” newspaper industry analyst Ken Doctor says. “They have generally invested in it to take out profits.”
If there’s a silver lining it’s that most industry experts believe Chatham was the better of the two hedge funds vying for ownership. Chatham’s been an investor in McClatchy since 2009 and is already already familiar with its business. The other finalist, Alden Global Capital, bought the Denver Post in 2011 and has slashed its newsroom headcount by 70 percent.
So what does it mean that Chatham will soon take over the largest newspapers in the Carolinas — the Observer, News & Observer, and The State in Columbia? And who is Chatham anyway?
Chatham is the controlling owner of American Media Inc., parent of the National Enquirer tabloid. You may recall the name of AMI’s chairman David Pecker, who’s close friends with President Donald Trump and worked with former Trump attorney Michael Cohen to bury a story about Trump’s affair with former Playboy model Karen McDougal. AMI announced last year that it plans to sell the National Enquirer, but that deal hasn’t happened yet.
Chatham also took over Canada’s largest newspaper chain, Postmedia, in 2016. The company has since cut more than 1,600 employees, or 38 percent of its staff, the New York Times reports, citing company filings. More than 30 of the company’s newspapers have shut down since then, too.
Like most hedge funds, Chatham is notoriously tight-lipped. The company would not make any executives available for an interview. But a spokesman said in an email that Chatham is “pleased with the outcome of the auction.”
“Chatham is committed to preserving newsroom jobs and independent journalism that serve and inform local communities during this important time,” the spokesman said.
Melanie Sill spent nearly three decades between the News & Observer and the Sacramento Bee, both now McClatchy papers. Now the executive director at Elon University’s NC Local News Workshop, Sill hopes that new owners invest in vital local positions rather than spend all their energy on consolidation. Newspapers need to be responsive to needs in the local community, she says.
In recent years, for instance, McClatchy has consolidated design and copy editing functions at its 30 newspapers into regional jobs. It has also eliminated key local publisher roles, which are now regional.
“More consolidation to cut costs further erodes the community mindedness of newspapers,” she says.
Doctor envisions three possible scenarios for the fate of McClatchy, the nation’s second-largest newspaper chain.
- Chatham could hold and continue to operate McClatchy and all of its 30 newsrooms nationwide.
- Chatham could enter merger talks with another newspaper chain.
- Chatham could sell the whole company, or it could sell off parts of it.
A merger is the likeliest outcome, Doctor says. That could be with Alden Global Capital, whose media arm, MediaNews Group, owns newspapers such as the Denver Post and the San Jose Mercury News. Alden also is trying to fully acquire Tribune Publishing, which owns prominent papers such as the Chicago Tribune and Baltimore Sun.
“A merger is gnarly in Covid times,” Doctor says. “Anticipating what future revenues are is difficult, and that means valuation is difficult. So this is not a slam dunk.”
For centuries, the Charlotte Observer has driven the news cycle in the Charlotte region. The paper’s staff has won five Pulitzer Prizes for its journalism.
It remains one of the largest news-gathering organizations in the region, with about 40 journalists. A few television stations, when you include photographers and producers, are larger. But on the non-television side of the local industry, the Observer‘s newsroom is still larger than the news staffs of Charlotte magazine, QCity Metro, WFAE, and the Agenda combined.
Point is, the paper’s longtime prominence is unarguable. But the deterioration of print advertising revenue had already helped erode the size of the newsroom staff. At its peak in the 1990s and 2000s, the paper’s staff had nearly 300 newsroom staffers.
And if it endures any more cuts, its staff could become smaller than some of the others. WFAE, for instance, has about 25 newsroom staffers.
McClatchy’s troubles began years ago, in particular after the company bought the newspaper chain Knight Ridder, the Observer‘s former parent.
That deal took place in 2006, during the peak of the newspaper industry, and right before the recession. To cut the $4.5 billion check for Knight Ridder, McClatchy had to take on a huge debt load. Some industry experts compare the deal to a minnow swallowing a shark.
For years, McClatchy worked to reduce the debt, all while grappling with decreasing print revenue and circulation. That’s made it difficult to reinvest in newsrooms, add more reporters, or offer better benefits. (To supplement its newsroom headcount in recent years, the Observer and other McClatchy papers have turned to funds from Report for America. The program helps pay the salaries of reporters who cover issues like affordable housing).
Chatham’s deal means that the hedge fund will assume a chunk of McClatchy’s more than $700 million in debt, though it’s not yet clear exactly how much.
That’s a good thing for newsrooms, says Doctor, who spent 21 years at Knight Ridder.
“The revenue coming in will be not immediately depleted for pension obligations,” Doctor says. “That should give them more money to invest in the newsroom and the business.”
Problem is, of course, the pandemic, which has wreaked havoc on the newspaper industry.
Joshua Benton of the Nieman Lab recent analyzed four months of financials from McClatchy. From mid February to the end of May, McClatchy’s average daily operating revenue fell from $1.984 million to $1.710 million to $1.403 million to $1.433 million.
That’s a revenue decline of 29 percent.
Although second-quarter numbers aren’t out yet, Doctor says there’s no question McClatchy lost money. It’s just a question of how large of a loss it was.
To save costs, seven McClatchy papers, including the Observer and The State, exited their leases and are opting to work remotely through the end of the year.
“The move from uptown offices helps ensure that we can keep local journalists on the job, giving our community the daily reporting and accountability journalism you expect from us,” Observer executive editor Sherry Chisenhall wrote in a June column. (Chisenhall declined a request for an interview for this story.)
That may not sound like a big deal; millions of office workers are working remotely right now because of the pandemic.
But a newsroom without a physical space marks a significant shift for an industry known for its close and constant in-person collaboration and office banter.
What helps to mitigate this loss is a surge in digital subscriptions. Readers want to know what’s going on. During the pandemic, McClatchy newsrooms have continued to do important journalism throughout the Carolinas.
The Observer recently examined the lack of enforcement over coronavirus safety measures for business operating during the pandemic. The News & Observer has extensively covered Reopen NC groups protesting business closures up in Raleigh. Both newsrooms are participants in a statewide collaborative that brought to light a bill that would’ve limited transparency in death investigations. The collaborative also exposed flaws in the state prisons’ response to the virus.
Still, more eyeballs on the newspaper and more subscriptions won’t fully offset the dramatic loss in advertising, Doctor says.
“A lot of people think that until a vaccine actually comes and works, which seems like the earliest really isn’t until the early part of next year, that 2020 is a lost year in the business of newspapers,” Doctor says.
Correction: An earlier version of this story understated the size of WBTV’s newsroom. When you include producers, it is larger than the Charlotte Observer’s.