What Splitsville Tells Us — and New Intrigue in L.A.
First published at Harvard’s Nieman Journalism Lab
Earlier, related posts: Tribune’s Latest Lease on Life
We’ll remember summer 2014 as Splitsville in the U.S. newspaper industry. We’ve seen both the expected (Tribune) and the unexpected (Gannett, Scripps/Journal Media). The final orphaning of newspaper properties in the U.S. is nearly complete.
But we’re just beginning to see the impact of that orphanage, as the quarter-by-quarter results of the standalone newspaper-only companies roll out (“10 takeaways from Gannett’s blockbuster announcements”). New rounds of troublesome numbers could precipitate still more sales and combinations of properties. Southern California — ground zero for daily newspaper bankruptcy and turmoil — remains Exhibit A.
This week’s Tribune Publishing results are instructive. Tribune’s eight papers, led by the Los Angeles Times and Chicago Tribune, were down 3.8 percent in revenue. The usual culprit: print advertising. Overall advertising is down 7.1 percent, with detail on print vs. digital performance unavailable until next week. Circulation revenues helped offset that drop; they were up 2.3 percent, due to higher subscription pricing. The thinness of margin is all-too-apparent: The company made just $15.2 million in net income, down from $21.9 million a year ago. (The first six months’ net income comes in about $27 million, down from $43 million a year ago.) The Q2 profit is small in dollars, and represents a razor-thin 6 percent margin.
Though the stated results are somewhat clouded by the second quarter being the newspapers’ final reporting as part of the combined Tribune Company, it’s the expense side that will probably see more split-related change than the revenue side going forward.
The Tribune’s revenue performance mirrors that of two other newly split companies. Time Inc’s first standalone report, too, showed it staring into a small but nasty revenue hole. Time Inc. was down 2 percent year over year, attributable to 5 percent decline in circulation revenue; optimistically, its 12 percent digital ad increase helped swing advertising to a 3 percent positive. News Corp, which split last summer, has been similarly challenged. It reported a (currency-adjusted) 5 percent decline in news publishing revenues, largely due to ad dropoffs.
(Meanwhile, even those more highly valued broadcast-centric companies emerging from the split are showing they’re not necessarily high fliers — they’re just in much better relative shape than distressed newspapers. For instance, Tribune’s broadcasting operations showed a small $3.8 million decline in advertising, although that was more than made up by increased retransmission revenues. Gannett’s recent broadcast ad results showed similar weakness. Both companies’ acquisitions provide them good banner headline increases in revenue, but the underlying digital disruption of their core advertising businesses will become more noteworthy over time.)
The splits offer the choice of your favorite pop tune — “Breaking Up is Hard to Do,” or “One (Is the Loneliest Number),” perhaps. With an inflation rate of 2 percent, and revenues dipping 2-5 percent, news publishers will need a big shovel to dig out. They’re at least a handful of digits away from just staying even, despite all the many publisher efforts at diversification or developing alternative revenue streams.
At the L.A. Times, a surprising new publisher joined this struggling crowd. Tribune Publishing CEO Jack Griffin’s first big appointment is a little bolt out of the blue: Austin Beutner. Beutner is hardly a household name, but he’s a player in L.A. A venture capitalist turned one-dollar-a-year salaried L.A. Deputy Mayor for “jobs,” the appointment of the 54-year-old Beutner signals an effort to shake things up — and maybe set things up for the future.
First, he’s not a newspaper guy by trade, a member of the brotherhood of usual publisher suspects. Second, he’s a Los Angeleno (since 2000), glad to call himself a civic booster. Ever since 2000, when the Tribune Company bought Times Mirror and the Times, the civil war between Chicago and L.A. has simmered and occasionally boiled. Times leadership has bristled at corporate and Chicago authority, all of that exacerbated by the nonsense of the Sam Zell ownership years and the ceaseless wielding of the budget-cutting knife. Now Beutner, a guy who doesn’t need a job, is poised to try to break barriers of past rivalries and past strategic thinking.
The naming of Beutner fuels a familiar parlor game: guessing who may be Tribune Publishing’s next owner.
Oaktree Capital Management, Angelo, Gordon & Co., and JPMorgan Chase currently own 40 percent of the company and control it. We’ve chronicled the will they/won’t they sales odyssey of the past year or two (“The newsonomics of the Kochs: The impact on the L.A. news landscape”).
Austin Beutner occupied a role in those dramas, expressing interest in buying the Times (or possibly all of Tribune) when it looked like the company would be sold, before it decided to first split its newspapers from TV assets last year. He’s a smart guy, and now he’s in the driver’s seat at the Times. That’s a perfect starting point for what could be a “management buyout” of the Times — and maybe more properties — as Tribune Publishing’s tax spinoff clock winds down over the next couple of years.
By then — or sooner — we may see rollups, or maybe rolldowns, in the 20 million-person population area ranging from Simi Valley to the Mexico border.
Look to Orange County, to start. The news keeps coming out of Aaron Kushner’s always shape-shifting family of Registers.
It now looks like owner/publisher Kushner is getting closer to closing on the sale of the Register’s headquarters building, at a sales price of about $27 million, as reported by the Orange County Business Journal. (The Register would then likely lease back space in the building. That would mean that none of the major dailies in southern California any longer owned its own building — another a sign of Splitsville: Real estate is being divorced from newspapers just as surely as broadcast is.)
Further, Kushner’s Freedom Communications finally settled one of three claims/suits against it. On July 31, the L.A. Superior Court approved a $4 million arbitration award to former Freedom execs Mitch Stern and Mark McEachen. That case, over contracted severance payments, gives the execs a lien on real estate parcels that Freedom owns — and which are also for sale.
In this case and in another, Aaron Kushner has countered claims in part by blaming the “misrepresentations” of others. In an April 23 judgment, Judge Luis Lavin failed to find those claims credible. The misrepresentation defense could take on its own irony, as Kushner’s own representations to those with whom he had financial dealings have come under fire.
In that April 23 decision, the judge also considered the necessity of providing Stern and McEachen an attachment: “Petitioners’ contend that Freedom will likely not be able to satisfy its severance payment obligations due to its perilous and continually worsening financing condition. The Court agrees.”
Freedom does have an obligation to the lenders who replaced previous financing, in December of last year. Silver Point Finance is owed $24,688,391.53, accordingly to July 31 Superior Court documents. It presumably has first call on real estate sales proceeds, given the language in the court ruling.
Related to the Silver Point financing, the July 31 court ruling also indicates “The Freedom Parties acknowledge, for the benefit of the Agents and the Lenders, that (i) there exists one or more “Events of Default” under the Senior Lender Agreement, and that the Agent and the Lenders are entitled to exercise all rights and remedies in respect of such Events of Default……and (ii) the application of the sales proceeds of property constituting Claimants’ Collateral as set forth with the exercise of such rights and remedies….”
Then there’s the heavy burden of pension obligations, which Freedom took on as it bought the Register and other properties out of bankruptcy proceedings two years. Freedom maintains certain early obligations to the federal Pension Benefits Guaranty Corporation and retains responsibility for funding the plan going forward. I asked Kushner if the company had missed a summer payment obligation, and he only offered, “I’m not going to get into it. I’m not commenting on our pension fund.”
I also asked him to verify whether the pension fund, which he controls, had purchased shares of Freedom Communication stock last year, to help fund his fall acquisition of the Riverside Press-Enterprise. He acknowledged that the pension fund had indeed bought Freedom shares, but says that purchase was “unrelated” to the Riverside purchase.
Finally, there is curious suit of Jack Griffin. Griffin, who formally became Tribune Publishing CEO last week, served as an advisor to Kushner when he tried to buy The Boston Globe and, he says, when Kushner’s 2100 Trust bought Freedom two years. He is seeking up to $13 million, for related fees he says are owed.
Griffin’s suit now takes on a new color. After all, Griffin and Kushner are now the CEOs of the two largest newspaper companies operating in southern California. While a financial falling out may have torn them asunder, their current posts bring them back together, geographically at least. To be clear, Griffin’s suit is a private matter, unrelated to his new tenure at Tribune. But the bad blood between the two brings a new edge to head-to-head newspaper competition in greater L.A.
Which brings us back to the question of where all of this may lead.
The new Tribune Publishing has already made the point that it’s got an eye out to buy more print properties in its core eight markets. It says its recent acquisition of Annapolis-area papers (close to its Baltimore Sun) will increase earnings later this year. So it makes sense to see Tribune as a potential buyer for adjacent Southern California news properties.
The opportunities are certainly within reach. Let’s also remember that most of the daily press can be bought in this greater region. There’s not only Freedom Communications, with its ever-changing strategies and questionable finances. In San Diego, owner Doug Manchester hasn’t hung a “For Sale” sign on the Union-Tribune he bought three years ago, but he’ll take calls. Digital First Media’s Los Angeles News Group is all but for sale, as DFM’s owners prepare their own auctions more widely.
Tuesday, in fact, a rumor made the rounds in the Orange County Register newsroom: Freedom and the Los Angeles News Group could merge. I asked Aaron Kushner about it. He laughed and said, “We don’t comment on rumors…It’s a fluid market.” In that flux, I asked, “Are you a buyer or a seller?”
“We have a proven track record of being acquisitive,” he said.
On one hand, given tight money all around, deals seem tough to pull off. On the other hand, they seem inevitable.
If somehow the new Tribune — constrained somewhat, by debt, lack of cash, and tight cash flow — could finance a deal, its path to doing so seems to be clearing by the month.
Who better to put together that deal than its new publisher, Austin Beutner? A founding principal in the Evercore investment banking advisory firm, he knows M&A inside out. He also knows the financial straits of the newspaper industry, and believes that intelligent, well-funded consolidation could be a route forward to successful, high-quality daily journalism.
It all seems like a lot to consider for a one-week-old Tribune Publishing company and a neophyte publisher newly named. But then again, change in America’s newspaper industry seems to picking up rapidly this year.
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