The Enduring Legacy of Our New Media Barons

Less than a decade ago, in the wake of the worst recession since World War II, a group of private equity and hedge fund investors swooped in to purchase hundreds of financially struggling newspapers, many in bankruptcy. The managers of these funds promised shareholders they had the golden touch and would be able to quickly turn around the fortunes of mature enterprises through a combination of cost cutting and innovative business practices.  But the turnaround has proved to be harder than expected, and 2018 may well be a pivotal year for the newspaper industry as these newly minted media barons decide whether to head for the exit or increase their stake.

At the beginning of the year, five of the 10 largest newspaper chains were owned by hedge funds, private equity firms and other types of investment groups, which have vast portfolios of unrelated holdings such as real estate, financial services, international debt and health care companies.  By the end of 2018, there may be only two of these companies still actively investing in newspapers: New Media/GateHouse, the largest newspaper company in the country with 451 papers, and Digital First, the third largest with 158 papers.  Faced with disappointing returns, the other three large investment-owned chains – Community Newspaper Holdings Inc. (CNHI), tronc/Tribune Publishing and BH Media, which together own almost 300 papers – are either exploring sales of their newspapers or opting out of day-to-day management.

Seven investment companies own 882 papers in 41 states.

Yet, despite their shrinking number and their relatively short tenure as media moguls, the large investment firms have left an indelible mark on the country’s news landscape, which has experienced unprecedented structural change and technological disruption over the past decade.

The investment firms introduced a new way of thinking about the business management of newspapers and their journalistic mission, which often ran counter to the historic practices of traditional print newspaper companies.  The standard operating formula often included aggressive cost-cutting, the adoption of advertiser-friendly policies, the sale or shuttering of under-performing newspapers, and financial restructuring, including bankruptcy. At the most extreme, their strategies have led to the closure of hundreds of local papers and diminished the important civic role of newspapers in providing reliable news and information that helps residents of a community make important decisions about governance and quality of life issues.

As the traditional business model for print newspapers has collapsed, many of the business practices introduced by the investment firms have been incorporated into the strategies pursued by legacy newspaper companies, both the large publicly traded chains, as well as the private ones. This raises a number of questions about the future of local newspapers, which have historically been the prime source of news and information in communities throughout the country. What will become of the thousands of newspapers now being sold to the highest bidder?  What about the future of the hundreds of papers that remain under the management of hedge funds and private equity companies?  Is this retreat by the large investment groups an admission of defeat that will prompt new strategies?

Here are the strategies and tactics introduced by the investment firms that have the most potential to continue altering the local news landscape in the near future:

A willingness to sell or close underperforming papers. Prior to 2008, large chains typically paid 13 times annual earnings for a newspaper. This meant purchasers needed to own a paper for at least 13 years in order to recoup their investment, so they would typically “buy and hold” a paper for years. In the wake of the Great Recession of 2008, the price of newspapers dropped dramatically.  Even the most iconic dailies could be acquired for three to five times annual earnings. At these depressed prices, purchasers could potentially sell or “flip” a newspaper in five years or less and make a profit. Over the past decade and a half, almost half of all newspapers in the country have changed ownership; many have been sold two or more times. If investment firms cannot sell underperforming newspapers, they close them, leaving hundreds of communities without local news outlets. Since 2004, more than 1,800 newspapers, mostly weeklies, have been closed or merged with other papers. For example, Versa Capital Management formed Civitas Media in 2012 when it combined four small newspaper chains that it had purchased in bankruptcy proceedings the previous year. In 2013, Civitas closed eight suburban weeklies in North Carolina and Ohio because “the suburban newspaper isn’t a fit in (our) business model,” according to Civitas CEO Michael Bush.1 In 2016 and 2017, Civitas effectively exited the market by selling all but four of the remaining 90 newspapers in its chain to nine different companies.

Reliance on aggressive cost cutting that leads to diminished investment in news operations.  “The thing that we always have to think about and remember is that our first objective is always what’s the best thing for our shareholders,” said Mike Reed in a June 2018 interview. Reed is CEO of the New Media Investment Group, which owns and operates the Gatehouse chain of newspapers.2 This emphasis on shareholder return has led to aggressive cost-cutting in many newsrooms, as print revenues and profits continue to decline. Widespread cuts affect all aspects of local news coverage, from routine government meetings to the arts. While overall newsroom staffing declined by nearly a quarter between 2012 and 2017, 3 Digital First Media cut staffing by more than half during the same period, in an effort to boost profit despite declining revenues.4At the Denver Post alone, Digital First has reduced newsroom staffing by nearly two-thirds over the past five years. 5The Digital First chain had a profit margin of 17 percent in 2017, one of the highest in the industry.6This year, both Gatehouse and Digital First experienced pushback on their newsroom strategies from community activists and concerned residents, as well as journalists who sought to unionize.

Outsourcing of news and sales operations to remote locations, and the establishment of regional publishers and editors, responsible for several newspapers. Both practices tend to weaken the ties of a local newspaper to its community. While this streamlines the cost of producing a newspaper, the editors in remote locations often lack knowledge of local hot-button issues, and the sales staff and group publishers are often unfamiliar with the specific needs of small businesses in various communities. Editing, design and marketing operations for more than 200 papers owned by GateHouse throughout the U.S. are handled in a center in Austin, Texas.7 GateHouse has also pioneered the concept of appointing publishers and editors at a larger newspaper to be responsible for the day-to-day supervision and decision-making for other smaller papers in the same geographic region, permanently eliminating those high-paying positions at the smaller publications.8

This trend in consolidation and outsourcing leads to the merger of papers, resulting in further cutbacks in newsroom staffing. This, in turn, leads to a lack of coverage of local issues that may affect residents of one town, but not others. Digital First has been among the most aggressive merging and consolidating papers, including the eight papers it acquired in the San Francisco Bay area from Media News in 2010 that have been merged into only two papers.9

An aggressive push to grow bigger and bigger. Consolidation typically occurs in mature industries with declining revenue and profitability. In the short-term, by acquiring other newspapers, newspaper companies can show year-over-year revenue growth, while simultaneously shoring up the bottom line by consolidating and cutting costs across several papers. Long-term, there is a prevailing strategic assumption that, in order to attract both print and digital advertising revenue, local newspapers need to have a large geographic and circulation footprint that extends across several markets. Therefore, in recent years, the largest chains have shifted their focus away from small markets, which was the initial focus of the large investment firms, toward papers in mid-sized and large markets, such as Austin, Texas, or Boston. GateHouse has been the most aggressive newspaper acquirer in the country, spending more than $1 billion10 on 200 newspaper acquisitions since 2013.

 Aggressive adoption of advertiser- and business-friendly policies and practices.  In some cases, investment firms have prioritized advertiser needs over those of the consumers of its news, leading to cutbacks in the newsroom funding. Randy Miller, founder and president of 10/13 Communications, a chain of 45 papers, repeatedly emphasized throughout the company’s nearly 10-year existence that newsroom staffing should be kept at a minimum and sales staffing should be kept at a maximum.11

The sales practices introduced by the investment firms – and adopted by other large chains – are pushing up against well-established norms and traditions that have separated editorial coverage from advertiser concerns. Newspapers are forced to rethink and often redefine the “wall” between editorial and advertising content. Many companies have set up in-house digital agencies that offer everything from corporate videos to social media communication strategies. The GateHouse chain, which is owned by the Fortress Investment Group, is pushing the envelope further, and raising questions about the role of a local newspaper’s sales department in supporting local businesses. GateHouse is offering newspaper advertisers everything from small business loans (arranged through a subsidiary of the Fortress Investment Group) to IT support (also offered through a Fortress subsidiary).  When a GateHouse representative approaches an advertiser, is that person acting as the sales representative of a local newspaper, or as a loan officer and technology expert with one of Fortress’ other subsidiaries?

Despite the pursuit of these strategies and practices, the seven largest investment companies have produced mixed to poor results for their shareholders, and often lagged behind the performance and benchmarks of other companies.  With names like Digital First and “tronc” (short for Tribune Online Content), one might also expect these companies to be at the forefront of digital innovation. However, the major investment owners have proven slow to adapt to a viable digital model that offsets print revenue declines.  In fact, they have often been outpaced in their transformation by traditional newspaper chains.

 The large investment-owned newspapers chains are often part of a larger portfolios of assets held by public or private equity-based firms or hedge and pension funds. The New Media/Gatehouse newspapers, for example, are a subsidiary of Fortress, which is owned by Japanese telecommunications conglomerate, the Softbank Group. Digital First is owned by Alden Capital, which manages a portfolio that includes a Canadian pharmacy chain and foreign debt holdings. BH Media is part of the Berkshire Hathaway equity group, and CNHI is a subsidiary of the Retirement Systems of Alabama portfolio.

The investment firms actively manage their vast portfolios of properties. Newspaper revenues and profits often account for a very small fraction of the revenues generated by the vast portfolios worth billions of dollars held by the investment entities. Therefore, if newspaper chains perform, they are retained in the portfolio of assets.  If they fail to meet expectations, they are either sold, or management is passed off to another company.

At a time when many newspapers are struggling to maintain single digit profit margins, both New Media/GateHouse and Digital First are vying with one another to buy more papers, whereupon they immediately introduce a round of cost cutting in an attempt to extract double- digit returns. In a quarterly call with analysts in May, Softbank executives indicated that they were pleased with the returns Fortress had achieved with the GateHouse chain. Similarly, despite calls from journalists and community activists to sell the Digital First papers, Alden Capital has given no indication that it is ready to exit the newspaper business since Digital First is producing double-digit profit margins that offset losses in other divisions.

In contrast, the Retirement Systems of Alabama, which established CNHI in 1998, decided in June to put the chain of 114 papers up for sale. Also in June, Warren Buffett, frustrated at the lackluster returns on his chain of 75 newspapers, turned over day-to-day management of BH Media to Lee Enterprises, a publicly traded chain with 100 papers. Tronc/Tribune, which has 77 papers and been has been repeatedly frustrated in its attempts to buy or merge with other papers or chains, is seeking new investors and considering a sale of its assets to both private equity companies, as well as publicly traded chains, such as the McClatchy Company. Two other chains, Civitas and 10/13 Communications, sold almost all of their 145 papers in 2016 and 2017.

At the beginning of 2018, the large investment groups owned almost 900 papers in 42 states. Here’s how these media barons are positioned in the final months of 2018:

 Click below to find out more about each company:


Next: New Media/GateHouse