And now, newspapers’ newest problem: The vultures have descended.
Newspapers continue to lose money and advertising – the New York Times Co. reported print ads would decline 5 percent in the third quarter across all its media. But investors are actually buying newspaper properties, often through bankruptcy sales.
What gives? Are they vultures just picking over already tattered carcasses for spare change? Or do these investors expect to make significant money – somehow?
The New York Times’ Julie Creswell reports that
A handful of hedge funds, as well as some big banks, are vying for ownership or have already gained controlling interests in newspapers across the country, including The Los Angeles Times, The Minneapolis Star Tribune and The Chicago Tribune.
And it’s not just newspapers or newspaper companies. They’re buying supermarket tabs, television properties, radio and big publishers. Creswell’s story identifies who’s buying what. But a secretive investor is the most active.
Creswell calls Randall D. Smith a pioneer of vulture investing. Vulture investors seek to profit by buying debt of companies who are bankrupt or unable to obtain credit. They buy the assets of such companies at low cost. They can profit by breaking the whole and selling the parts at high enough prices to offset initial investment cost. Some are specialists in reviving distressed companies.
But newspapers? Can properties be more distressed than them? Haven’t media corporations hacked and whacked at costs for a decade already? What’s left to cut that would allow the low revenue to achieve a high profit?
A smart bet, however, would be that these investors sense bargains. From HedgeCo.Net, which covers hedge-fund news:
“Distressed debt” hedge funds such as Angelo, Gordon & Co., Alden Global Capital and Oaktree Capital Management, have been buying up cheap, delinquent debt, then taking it to bankruptcy court for a settlement that transforms the debt into a large share of company stock, the LA Times reported, with itself, Tribune Co., being one of the newspapers under siege along with KTLA-TV Channel 5, among others.
Michael Oneal of the LA Times, a target of hedge fund investors, notes this:
Interviews with close observers and people briefed by some of the funds say they tend to see little remaining upside in cost cutting. They also profess to recognize that quality, branded journalism still draws advertisers and therefore is worth preserving. [emphasis added]
But Oneal cautions that hedge funds, particularly those with vulture reputations, are opportunistic entities that target quick returns. The likely result: Turmoil in the news business. Reports Oneal:
Their objective from Day One will be to seek the most profitable way to turn their investments back into cash. That is likely to mean a restless quest for “value-creating” exercises such as spinoffs, acquisitions, public offerings and other transactions that will keep the newspaper industry in a state of flux.
Consider a hedge fund such as Angelo, Gordon & Co., says Oneal. The passage of time is not necessarily its friend. “Their compensation and fee structure is generally based on raising a fund, investing it to generate 20% to 30% annual returns and then monetizing those returns over a period of a few years,” he writes.
Well, Angelo, Gordon & Co., which focuses on distressed investments, and deal partner Alden Global Capital, another hedge fund, leads a group of 30 banks and other hedge funds that will shell out $139 million by Oct. 8 to buy the Philadelphia Inquirer, Philadelphia Daily News and philly.com Web site.
And it’s a deal: Local investors paid $515 million for Philadelphia Newspapers in 2006. They filed for bankruptcy in February 2009. Hence the term “vultures”: They’re sweeping in on a bankruptcy. But, of course, the new owners-to-be tout “revitalization” of the newspapers. Says the incoming publisher, Greg Osber::
We look forward to operating the company out of bankruptcy, revitalizing the Inquirer and Daily News, and building the most successful regional portal in the country.
But he’ll have to do that with employees who will be paid less: Newsroom employees have agreed to 6 percent cuts as the owners seek cost cuts of 13 percent.
And among the bidders for the Inky, the News and philly.com? Randall D. Smith. He’s been active. Reports Creswell:
Smith has built up a significant stake in MediaNews Group, a publishing company that owns The Denver Post and San Jose Mercury News, as well as The Journal Register, which controls 170 titles, including The New Haven Register and The Trentonian.
These are not going to be happy times for those who wish, nay, dream of newspapers as regaining a position of public trust and as desperately needed informational adversaries of governments and corporations. From John Morton, a respected, long-time newspaper industry analyst:
These people have been bottom feeders, and they figure what they’re getting is still a valuable, though diminished, franchise and they’re willing to pay bottom dollar for it. But it’s unclear that this industry is going to get a whole lot better.
Bottom line? Fewer good news stories for online aggregators to grab and pretend they have value.