The New Media Giants

  • The large hedge funds and private equity groups that purchased distressed newspaper chains in recent years introduced a new management philosophy that focused on bottom-line performance to the exclusion of journalism's civic mission. As revenues and profit margins fell sharply, these practices were widely adopted by other newspaper companies, leading to major cost-cutting initiatives and almost no investment in innovation.
  • Despite the shrinking universe of surviving papers, the chains are bigger than ever – and, at the beginning of 2020, they were poised to grow even bigger, with the creation of highly leveraged mega-chains formed by the union of large publicly traded newspaper companies with large hedge funds and private equity chains. Privately held regional chains are also growing rapidly, too.
  • Massive consolidation in the newspaper industry has shifted editorial and business decisions to a few large corporations without strong ties to the communities where their papers are located. This raises questions about the future journalistic and business viability of the very largest chains.

In 2017, Japan's telecommunications conglomerate Softbank Group purchased the investment firm Fortress Investment Group, which managed more than $70 billion in various assets, including real estate firms, private railways, golf courses and debt collection agencies.80 Though it went largely unreported at the time, Fortress also owned and managed the country's largest newspaper chain, Gatehouse, which, at the time, operated more than 400 newspapers in 36 states. By the end of 2019, the Gatehouse chain had ballooned to more than 600 papers, by purchasing the country's second-largest newspaper company, Gannett. Gatehouse immediately shed its old name and began operating as the "new" Gannett, having adopted the name of the century-old newspaper enterprise it had acquired.81

The purchase of a U.S. newspaper chain by a Japanese company is emblematic of the dramatic and dizzying change in the industry in recent years. New ownership structures, backed by complex – and often opaque – financial transactions, have transformed family-centered media businesses into diversified, highly leveraged investment entities that prioritize shareholder return over producing all the news that's fit to print or publish online.

The media barons of the 21st century – hedge funds, private equity firms and other investment entities – swept onto the scene in the years immediately following the 2008 recession when they began aggressively purchasing hundreds of distressed newspapers and chains, many in bankruptcy proceedings. Their rise displaced the media barons of the 20th century – the large publicly traded and privately held chains – such as Gannett, Knight Ridder, Hearst and Advance. They employed the same disruptive business models they used in other industries – many of them adopted by the surviving chains as the fortunes of the newspaper industry continued to decline. They financed their acquisitions with significant debt and managed their highly leveraged newspapers through aggressive cost-cutting and revenue goals, paired with financial and pension restructuring, including bankruptcy. To reduce costs, they laid off staff, froze wages, reduced benefits and consolidated sales and editorial functions in regional hubs, far removed from the community where the paper was located. Profits derived from cost cutting were not reinvested; instead, they were used to pay loans, management fees and shareholder dividends.

At their peak in 2016, six of the 10 largest newspaper chains were owned and operated by private equity firms or other investment entities. These six firms owned 15 percent of all papers in the country. In recent years, as print revenue has continued to decline, and efforts to significantly increase digital advertising revenue have failed, some of the smallest firms – such as Civitas and 10/13 – headed for the exit. Others, such as Community Newspaper Holdings, Inc., owned by the state pension fund of Alabama, have been unable to sell their chains, and have, instead, downsized by closing and merging unprofitable weeklies, including 12 in April and May 2020.

However, the largest chains, including Gatehouse and Digital First, have decided, at least for the moment, to double down and acquire or merge with other large chains – specifically the last remaining publicly traded firms – in hopes of gaining "synergies" on the cost side and shoring up sagging revenue trends.

In late 2019, Gatehouse took on $1.8 billion in debt, financed at 11.5 percent interest by another private equity firm, Apollo Global Management, to purchase Gannett.82 BH Media, owned by Berkshire Hathaway, asked Lee Enterprises to assume day-to-day management of its 79 papers in 2018, and then in early 2020 Berkshire Hathaway sold the chain to Lee. Berkshire Hathaway also provided $576 million in long-term financing at 9 percent interest to cover both the acquisition and refinancing of $400 million in debt Lee still carried on the books from earlier acquisitions.83 Rebuffed in its effort to merge with Gannett, Alden Capital, which owns and operates the Digital First chain, amassed more than a third of outstanding shares of the Tribune's stock in an attempt to force a merger.84 Alden Capital has also taken a minority stake in Lee Enterprises. McClatchy, the last of the remaining publicly traded chains, filed for bankruptcy protection in February 2020. It will emerge from bankruptcy owned by the hedge fund Chatham Asset Management, which has considering auctioning off the entire chain. One likely option is that McClatchy will merge with Tribune.

These hybrid chains – a merger of a private equity firms and a traditional publicly traded chain with shares that can be bought and traded on the New York Stock Exchange – appear to be poised to exert tremendous influence on the future of the newspaper industry. They control the fate of more than 1,000 papers, including a third of the nation's dailies, and more than half of total circulation.

However, their ride at the top may be fleeting. By the end of April 2020, Gannett, Lee and Tribune had all announced furloughs and pay cuts to compensate for the significant drop in revenue their papers experienced as the economy shut down abruptly to deal with coronavirus.85 There were indications that additional layoffs would follow, as all of them were lobbying for federal funds to shore up their rapidly declining bottom lines. Lee Enterprises stock had fallen from $2 a share at the beginning of 2020 to less than a dollar, and Tribune was trading at $8 a share, down from $13. Gannett, which had also suspended the dividend on its shares, had taken the biggest tumble, from $6 a share at the time of the merger in late 2019 to about $1 at the end of April.86

While it is too early to know whether these hybrid mega-chains will survive for long, the business practices introduced by these relative newcomers – the financiers – as well as the exponential growth of chains in recent years, pose new and difficult societal and economic issues.

The Goliaths Grow Bigger

Even as the universe of newspapers shrinks, newspaper chains are bigger than ever – and are poised to potentially grow even bigger in the months ahead. Over the past 15 years, the number of newspaper owners decreased by more than a third, from about 4,000 to 2,400, with large chains gobbling up smaller regional chains, as well as locally owned dailies and weeklies. More than a dozen of the largest chains in 2004 – including Knight Ridder, Media General, Pulitzer, Journal Register and Media News – no longer exist. At the same time, companies that did not exist 15 years ago have acquired dozens of papers in recent years and now are among the biggest owners.

The fate of more and more newspapers is in the hands of the largest 25 or so chains. At the end of 2004, the largest 25 chains (as measured by number of papers, not circulation) owned only a fifth of the 8,900 papers and less than a third of the 1,472 dailies. Fifteen years later, the 25 largest chains own a third of the 6,700 surviving newspapers in the country and 70 percent of the 1,260 dailies. While the biggest 25 chains own 2,156 papers, including 863 dailies, the next largest group – 26 through 50 – owns only 445 newspapers and 54 dailies.

As chains have grown in size, the ownership structure of the newspaper industry has changed dramatically. In the latter years of the 20th century the large publicly traded firms – including Gannett, Knight Ridder, Lee Enterprises and Pulitzer – supplanted the large privately held chains, using the money they raised by issuing stock to become aggressive buyers of other newspapers. In the wake of the 2008 recession, the publicly traded firms were supplanted by the private equity and hedge owners, who purchased hundreds of papers in bankruptcy proceedings for bargain prices – two to five times annual earnings compared with 13 times earnings in 2007.87 Chains became bigger than ever. In 2004, the largest chain, Gannett, which was publicly traded, owned 177 papers. A decade later, the largest chain was the private-equity financed Gatehouse group, with 379 papers.

At the start of the third decade of the 21st century, the ownership structure is morphing yet again as the largest private equity and hedge fund newspaper owners merge with the last of the surviving publicly traded companies. The very biggest chains dwarf the others. In 2020, the largest chains – Gannett/Gatehouse, Tribune/Digital First, and Lee/BH Media – own 15 percent of all newspapers (990) and a third (416) of all dailies, including some of the largest in the country, and control more than half of all circulation. By comparison, the next seven largest chains – 4 through 10 – own a total of only 600 newspapers and only 258 dailies.

However, another ownership trend has also been emerging. As newspaper revenue has continued to decline, so have valuations of newspapers, which are at historic lows. As the economy began to recover from the recession in 2013 and 2014, some of the smaller privately owned national and regional chains, which were largely debt-free, began quietly and selectively purchasing papers. As the private equity companies – such as Civitas and 10/13 – sold their papers, these private chains – such as Hearst and Adams – bought those papers, as well as smaller family-owned properties, such as the fourth-generation Jones Media, headquartered in Tennessee.88

The most active purchasers in the years leading up to 2020 include century-old national private chains, such as Hearst, as well as smaller chains, such as Ogden, Boone and Paxton. Boone, a chain based in Alabama, almost doubled in size between 2004 and 2019, growing from 37 newspapers to 65. New companies were also formed, including AIM in 2012 and Adams Publishing in 2013, both established by CEOs with extensive newspaper and financial experience.89 In 2014, Adams owned only 38 newspapers. By 2020, it was the fourth-largest chain in the country with 158 newspapers spread across the upper South and Midwest. AIM, the 13th-largest chain in the country, owns 46, mostly in Texas, Indiana and Ohio.

By the end of 2019, 20 of the largest 25 newspaper chains, as measured by number of newspapers owned, were privately held companies. In total they owned almost 1,000 papers. They ranged in size from Community Newspapers Inc., the 25th largest with 26 newspapers in Georgia and the Carolinas, to Adams. While all but Adams are less than half the size of the hybrid mega-chains, they were growing rapidly in the years leading up to 2020. These chains consist of several dozen papers – mostly weeklies – in small and mid-sized communities, not the highly competitive metro markets favored by the mega-chains. Most keep a low profile and are unknown outside the regions where they are headquartered.

The 21st century regional chains have more in common with the private chains that dominated in the early half of 20th century than the publicly traded and financially backed newspaper companies of today. Often a family member is at the head of the company – for example, David Paxton is CEO of the Paducah, Kentucky, media group that bears his family's name. Some, such as Adams, are known for retaining family members as publishers and editors when they purchase a newspaper, others for bringing in new management. Some, such as Morris Multimedia, encourage innovative journalistic and business approaches, and own a variety of media properties, including television stations and digital properties. All operate their newspapers as small businesses, with a singular focus on the bottom line and cash flow. In contrast to the mega-chains, they have lean corporate staffs and tend to keep low levels of debt. So, when hard times hit, they do not have to worry about paying off loans on "underwater" properties. As a result, they tend to buy and hold properties, instead of trading them.90

Going into the 2020 recession, there were two very different ownership models among the largest chains: the high-profile, highly leveraged mega-chain versus the low-profile, low-debt smaller regional chain. Industry analysts are predicting that a prolonged and deep recession resulting from the coronavirus could lead to the closure of hundreds of newspapers and, potentially, the bankruptcy of the chains that are highly leveraged. If so, 2020 could represent the high-water mark of the large hybrid mega-chains, and perhaps pave the way for a new type of ownership structure dominated by the rapidly ascending privately held regional chains.

New Urgency for an Age-Old Debate

As the 20th century business model for newspapers collapses, it brings to the forefront issues around obligations to shareholders versus journalism's civic mission.91 Massive consolidation in the newspaper industry – coupled with the recent widespread adoption of the business practices and philosophies of private equity and hedge funds – has shifted editorial and business decisions to owners and corporations without a strong stake in the local communities where their papers are located. As chains have grown bigger and bigger, it has become harder and harder to discern the financial and journalism priorities of local newspapers or to hold them accountable.

The debate is an old one, but with a new sense of urgency. A recent survey by Gallup found that while trust in local news organizations was higher than for large national news outlets, it is declining rapidly.92 Numerous rounds of layoffs at the large chains of today have left skeletal newsrooms with beleaguered editors and reporters struggling to provide timely and comprehensive news coverage of their communities. Almost half of the 35,000 people the Pew Research Center surveyed in 2018 noted a decrease in the quantity and quality of news they were receiving from their local newspapers, but three-quarters were unaware of the financial difficulties their local newspapers were facing.93

When Scripps and Hearst assembled the first large privately owned chains in the 1920s, concerns were immediately voiced about the span of influence they could wield across multiple markets. These concerns faded as radio and television amassed even greater audiences. Many scholars, policymakers and journalists voiced new concerns about the civic responsibility of chains in the 1980s and 1990s, as some of the largest chains – including Gannett, Knight Ridder, McClatchy and Pulitzer – issued stock and began managing the expectations of Wall Street investors and analysts.94

However, there was a financial incentive for even the most bottom-line-focused publicly traded companies to balance profits with civic duty. Since most newspapers in the latter half of the 20th century sold for at least 13 times annual earnings, chains had a financial incentive to "buy and hold" the newspapers they purchased. This encouraged the publicly traded chains to establish roots in the communities where their newspapers were located. They built new plants, purchased state-of-the-art presses and expanded circulation and distribution to outlying regions. The most civic-minded of the publicly traded chains invested in their journalism by establishing bureaus in Washington, D.C., and other major cities, including international capitals, and, forming news services, similar to the Associated Press, to share the news articles produced by journalists in these bureaus with other papers in the company.

There was also a level of financial transparency, since publicly traded companies are required to submit quarterly and annual reports with audited financial statements and management assessments to the Securities and Exchange Commission. This allowed shareholders – as well as policymakers, scholars and community activists – to scrutinize and judge both the journalistic and business accomplishments of these large publicly traded companies.

The takeover of newspaper chains in the early 21st century by private investment entities with complex and convoluted ownership patterns and financial transactions has posed a new and urgent set of concerns around transparency, accountability and civic mission. In contrast to publicly traded newspaper companies, the closely held hedge funds and private equity firms that own newspapers are required to disclose only the most basic information in their annual shareholder statements. So, there is almost no transparency, making it difficult to decipher the financial decisions made by the company, identify the largest shareholders or learn the compensation of the funds' executives and managers.

There is also no transparency around their journalistic decisions. Their stated mission is to earn money for their shareholders, and comments from executives suggest they prioritize profitability over any civic mission.95 Judging by their actions, instead of investing in their newly acquired papers, these chains focus on cutting costs to prop up profits and then using those profits to pay management fees, interest on loans or shareholder dividends. Newspapers often represent only a small portion of their portfolio of companies that can span the globe. Alden Capital, for example, has used profits from its Digital First newspaper chain to prop up failed investments in a Canadian pharmacy chain and Greek debt.96

In contrast to the traditional publicly traded and private chains of the 20th century, the investment-owned chains do not buy and hold properties. They view newspapers as short-term investments, and they hold newspapers to the same financial benchmarks as manufacturing plants or health care facilities. They actively manage their holdings, selling or closing underperforming properties. In recent years, there has been a constant reshuffling of the deck, with more than half of all surviving newspapers changing hands over the past decade, many sold two or more times by the large investment entities.

This constant turnover in ownership and trading of newspapers significantly weakens bonds between news organizations and the communities where they are located. Editors and publishers often cycle in and out of a community in a matter of months, never putting down roots. Another round of layoffs occurs with every transaction, leaving skeletal staffs on many newspapers. Sales, editing and back-shop functions are outsourced to remote locations, with regional editors and publishers responsible for multiple newspapers. Over time, this leads to the merger of two or more smaller papers into one paper – and the closure of the smaller paper. Most of the communities that have lost papers in recent years have above-average poverty rates and below-average household incomes. Once the hometown paper closes, residents in those markets are left without a reliable source of local information. This has led to the simultaneous rise of news deserts – communities without a local news outlet – and "ghost newspapers," with depleted newsrooms that are only a shadow of their former selves.

The newspapers chains of the 20th century provided economic benefits for shareholders and, arguably, societal benefits. Larger chains were in a better position to negotiate on price with vendors, including paper manufacturers, and offer national and regional advertisers access to multiple markets. By owning newspapers in multiple cities, chains could also pool journalistic resources and provide newspaper subscribers in even the smallest communities with a varied menu of state and national news, as well as local news.

But chain ownership in the 21st century offers many fewer economic and societal benefits, especially for the large newspaper companies. The collapse of the for-profit business model for print newspapers has sent projections on advertising revenue plummeting year to year, which means recent mergers and acquisitions are most often justified as "cost-saving measures." When Gatehouse announced it was purchasing Gannett, the company foresaw no revenue growth for the foreseeable future, but cost savings of almost $300 million.97 Invariably, such promises for savings result in several rounds of layoffs of journalists, which, in turn, mean a loss of local news and a diminishment of societal benefits. Plus, many of these large mergers and acquisition are highly leveraged, which places a premium on extracting even more earnings from operations to pay down the debt.

As the era of the print newspaper recedes into history, the economic rationale for the large chains of today abates.98 In the print era, there was a premium on operational excellence at each newspaper in a chain. The business operations at each paper were largely independent of those at another. In the digital age, there is a premium on organizational flexibility, fluid partnerships and engagement of audiences around special interests, including geographic concerns. This calls into question the long-term economic viability of large national chains in the 21st century.99

The price of buying a newspaper continues to fall – from three to five times earnings in the years following the 2008 recession to less than two times earnings at the beginning of 2020. Many newspaper owners who want to sell often cannot find buyers. This drop in the cost of owning a paper could potentially open the doors to new models in the years ahead – including a rebirth of local ownership or a return to the smaller, regional chains of the early and mid-20th century.

Steven Waldman, CEO of Report for America, a national service program that places journalists in newsrooms to report on under-covered issues, suggests that the government encourage the dissolution of the large financier-backed chains by placing a moratorium on large mergers. In addition, he suggests offering a variety of tax incentives for both the large chains – encouraging them to donate or sell newspapers to local residents in a community – and consumers, allowing them to deduct the cost of a subscription.100

Trust in democracy's institutions begins at the grassroots level, and newspapers have historically played an important role providing the information that builds trust. But as profitability has superseded journalism's civic mission on many newspapers, the ties have become frayed and threadbare. Reviving local newspapers in the 21st century – in whatever form they take – involves not only inventing new business models, but also re-establishing journalistic priorities.

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