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    Sept. 17, 2018, 11:25 a.m.

    Newsonomics: Could a McClatchy-Tronc merger help local newspapers transition to digital?

    One’s a family-controlled, century-plus-old newspaper chain, known for believing in its civic mission but not for its digital strategy. The other is, well, Tronc. With an assist from L.A.’s richest man, could this be a path forward?

    Could McClatchy unexpectedly join Gannett and GateHouse as survivors in the game of the American daily newspaper consolidation?

    Could California become a new epicenter of the American local newspaper business?

    Could Patrick Soon-Shiong have found a bigger lab to test his theories of AI-enhanced journalism?

    As we learned over the weekend, the newspaper chain Tronc may be entertaining multiple suitors — or might just be trying to juice a lukewarm market. As the Chicago Tribune late Friday, McClatchy had emerged as an unlikely dark horse in the bidding. That emergence opens up an array of fascinating scenarios for the fast-paced consolidation of daily newspapering amid its continued business downturn.

    With the help of a number of confidential sources in and around the potential transactions, let’s explore them. (McClatchy, Tronc, and the Los Angeles Times each declined comment for this story.)

    First, consider Patrick Soon-Shiong, the billionaire and new Los Angeles Times owner. Owner of one-quarter of Tronc, he was always going to be a key player in its future, as I recently reported, and his holding has in a new context.

    His ownership share remains critical to the question of who will win Tronc. Why? If a company wants to buy Tronc and Soon-Shiong wants to be bought out as part of a deal, that would cost the buyer more than an additional $150 million. If he’s willing to stay in a deal with new Tronc ownership, a buyer would have less to come up with in cash or financing.

    So the first question: Who would Patrick Soon-Shiong like to control Tronc? Whose ownership could best aid his desire to make the Los Angeles Times a major player, both in the news industry and as a wider force in politics and policy? Who could give him a bigger network to deploy the artificial intelligence-inflected technologies he hopes to build?

    Alternative investment firm Donerail had become a frontrunner for Tronc just weeks ago. But Soon-Shiong’s desire to be part of that Donerail deal hasn’t been clear; he and his associates have been dating other parties.

    Further, Donerail’s strategy for Tronc may be running into a roadblock. Donerail’s Will Wyatt has built a career on buying in cheap and selling more dearly, and that was his plan with Tronc — buy the whole company and sell of its constituent newspapers one by one. But he may be having problems doing so with Tronc’s 10 properties. While he’d buy at a 5× or so multiple price, he’s been shopping them to would-be individual buyers for as much as 7× — and finding resistance at that price. Without enough downstream buyers lined up, Wyatt’s ability to pull off the Tronc buy, with required financing, is diminished.

    That’s what creates an opening — and makes the conversations and budding partnership of Soon-Shiong and McClatchy CEO Craig Forman so intriguing.

    If McClatchy — still a major owner of significant newspaper properties, in total, including the Miami Herald, Kansas City Star, and Charlotte Observer — could in effect merge with Tronc’s , all of sudden there’d another heavyweight newspaper chain on the scene. Such a company could claim at least 11 of the country’s 50 top markets. Add in a close alliance with Soon-Shiong’s newly independent Los Angeles Times and San Diego Union-Tribune, and the new McClatchy would find itself fighting for standing with Gannett.

    Gannett — long seen as the leader, in revenue and in number of properties — has seen its place in the local news business damaged after its own failed 2016 pursuit of Tronc. Lately, GateHouse, whose consolidation mojo has astounded its peers has challenged Gannett’s primacy. A bigger McClatchy would be a contender as well.

    McClatchy as a consolidator?

    By the numbers, the two companies match up well in some ways. Tronc second-quarter total revenues equaled $253 million; McClatchy’s $204 million. McClatchy’s EBITDA of $30 million outpaced Tronc’s of $22 million.

    But, hold on, you say — is that the same McClatchy that just a 3.5 percent staff cut across the company — and the two-week furloughing of senior staff, part of a deep and wide cost-cutting?

    Is that the same McClatchy that just announced it had lost a full quarter of its print ad revenue year over year, for the second quarter?

    Indeed it is. None of these print ad numbers — nor, to be honest, the print circulation numbers — look good.

    CEOs like Forman tell investors to look away from them and focus on the numbers reflecting the digital transition underway. “By most key measures, many of which we are sharing publicly today, the second quarter of 2018 marked a sequential acceleration of that digital transformation, both in terms of digital-only advertising and subscription growth,” Forman analysts on the company’s second-quarter call on July 27.

    “Compared to the second quarter of 2017, our total digital advertising revenues were up 8 percent, while our digital-only advertising revenues grew more than 20 percent. Indeed, in May and June, we reached another milestone. Our digital-only advertising revenues exceeded our print newspaper advertising revenues.”

    Is Forman right? Is that transition really on a successful enough path? That’s an unanswerable question, but there’s one commodity as important as the money here: time.

    Perhaps Forman’s biggest accomplishment in his 19-month as CEO has been re-engineering McClatchy’s still-massive debt — a hangover from its 2006 acquisition of Knight Ridder Newspapers at a pre-collapse price tag. That debt, which still stands at almost $800 million — down from its height of $2 billion — now hangs a bit less precipitously over McClatchy. Earlier this year, Forman pushed off a substantial amount of debt from 2022 to 2026. That reduced more immediate pressures — and made a McClatchy/Tronc merger thinkable.

    Look, for a moment, beyond that debt. Several confidential sources tell me that the key to the merger is deleverage. Combine Tronc’s nearly debt-free balance sheet with McClatchy’s recently improved one, and the new McClatchy would presumably carry less leverage than the old one.

    One big driver of such a deal would be cost reductions. Financial observers point to an annual savings that could be as high as $50 million per year. That’s a combination of three things. First, two corporate overhead costs would become one — not an insignificant number, considering these are both publicly traded companies with significant legal reporting responsibilities. Second, in all the areas of company consolidation — from finance to production to human resources and more — single company ownership would reduce costs. Third, geographic clustering — led by a McClatchy Miami Herald/Tronc Ft. Lauderdale Sun-Sentinel combination, but also found in some Mid-Atlantic properties and Pennsylvania as well — would save some expense.

    In addition — and this is key — McClatchy is a longtime newspaper operator. Longtime as in founded in 1857. Two-year-old Tronc has behaved like a two-year-old, a whirlwind of deal-making and deal-making speculation. It’s shown far more inclination for deals than for improving its operating performance, though newspaper veteran Tim Knight has provided the most sustained recent efforts in that direction.

    Importantly, McClatchy is still by the McClatchy family, thanks to a New York Times-like two-class share structure. Given its public ownership and its still-heavy debt, the company has less room to maneuver — to rebuild and to hasten its digital transition — than it would like. But the ownership’s sense of community mission is materially different from what you see in Tronc, GateHouse, Digital First Media, and others.

    Against that background: Enter Patrick Soon-Shiong.

    Soon-Shiong, with both his 25 percent stake in Tronc and plenty of available cash for added investment, could prove a useful partner if McClatchy and Tronc were to merge.

    How might such a deal work? Would Soon-Shiong just throw his Tronc stake into a merged company, maintaining a (smaller) share? Could he sweeten the pie with a greater investment, making a McClatchy buy easier by requiring less new debt? Is it even possible that Soon-Shiong could make a greater investment in an expanded McClatchy, strengthening it into the digital future? While sources confirm the talks, the extent of a McClatchy/Soon-Shiong possible partnership is known only to a few.

    How likely is such a deal? Talks are moving, and while they are reportedly in “early stages,” they could move quickly. It’s also unclear where Tronc and Donerail stand with their possible deal.

    Among many points of negotiation, of course, will be price.

    I’ve documented former Tronc chairman Michael Ferro’s self-dealing at length, the latest instance of which accelerated his “consulting” deal with Tronc. In addition, there’s the up to $23.5 million in golden parachutes that company executives have packed for themselves in the event of “change of control.”

    Critics of such corporate governance abound — but few may know that they include Patrick Soon-Shiong himself, aggrieved by the use of the company’s finances as a piggybank for the few.

    So as any new deal may be negotiated, expect those millions to be scrutinized as overall price is negotiated.

    California dreaming?

    There’s lots to interest us about a McClatchy/Tronc tie-up: further national consolidation, a potential renewal of news mission, and of course the personalities at play.

    One other potential impact: What such an alliance would mean to California journalism? It’s a topic I’ve visited several times, as characters including Sam Zell, Aaron Kushner, Jack Griffin, and Digital First Media’s leaders have impacted the state’s news business.

    The country’s most populous state — having recently itself (surpassing the U.K.) as the globe’s fifth-largest economy and leader of both the anti-global warming and anti-Trump resistance — could suddenly move into a position of industry leadership.

    Twenty years ago, many of us expected that California would be a key leader in digital news. An early leader in Internet publishing via Knight Ridder Digital (at which I worked), Knight Ridder’s leadership quickly faded away after that 2006 sale to McClatchy. Would-be hotbeds of new digital news from Yahoo to Salon lost their luster. In truth, California’s newspaper industry hasn’t seen a true digital news leader. A few dozen blocks in south of Midtown New York host much of the elite of the country’s digital news industry.

    Consider what a McClatchy/Soon-Shiong alliance could mean to the state claiming an eighth of the country’s population.

    Five major newspapers would now stretch from San Diego to Sacramento. McClatchy’s three Bees — in Sacramento, Modesto, and Fresno, all aligned in the populous central valleys of the state — would find themselves aligned with Southern California’s two biggest dailies, the Times and the Union-Tribune.

    Such a “chain” could offer much in the way of journalistic sharing and additional cost efficiencies. The dream — had by many and hatched successfully by none — of “California-wide” news digital news products would inevitably get a new life at some point.

    Inevitably, as digital disruption of newspapers takes it further toll, California’s largest news publisher would likely turn its eyes to the state’s most affluent — and underserved — market: Silicon Valley. As Alden Global Capital’s Digital First Media works its cash-funneling, product decline-managing strategy on three major news properties in the Bay Area, McClatchy/Soon-Shiong could wait to pounce, moving in to buy at some point. With Hearst only controlling San Francisco’s Chronicle, the McClatchy/Soon-Shiong partnership would look goldenly dominant in California.

    What kind of journalism and of digital journalism innovation could we expect from such a new player? That’s a big unknown.

    McClatchy has that sense of mission; you can see it in its still-surviving impactful Washington bureau, as noted last week. (In fact, it’s worth noting that the L.A. Times’ Washington bureau — which Soon-Shiong demanded be included in his Times buy — has also survived widespread bureau closures, and in fact is adding three new positions.)

    And yet McClatchy is still a company stuck cutting and reskilling, with insiders saying that issues of cultural change and the lack of requisite skills still bedevil efforts to more quickly grab hold of a digital future.

    Would a Tronc merger and Soon-Shiong provide new wherewithal — and time — to put that the right level of modern resources in place to grab that future?

    Technology scheming

    As new L.A. Times editor Norm Pearlstine announced 24 newsroom job openings, the twitterati joked that no one has seen such hiring at a newspaper since 1998. (Well, except at Jeff Bezos’ Washington Post.)

    That package of jobs may be just be Soon-Shiong’s opening salvo, as he begins to answer the question of whether he wants to be the newspaper industry’s West Coast Bezos. (We already know he is considering ditching the Washington Post’s Arc platform in favor of building his own.)

    It’s technology that drives Soon-Shiong’s passion. At the same time, it has been the difficult Tronc transition agreement, including technology, that has made his near-term operation of the Times more difficult. So why not buy into Tronc — with more control — and provide the Soon-Shiong expansive tech strategies ample room to be deployed? It’s easy to say why that would — in the abstract — be more attractive than seeing the Tronc properties sold to Donerail, and parceled out. And, in the process, he may well find a more sympatico journalism partner in McClatchy.

    Have no doubt: Patrick Soon-Shiong intends to be a player in the remaking of local news. That understanding — as much as the welter of deal points complicating any final disappearance of the Tronc brand into the history books — will drive this particular drama to conclusion.

    Photo of newsprint loading dock at McClatchy’s Sacramento Bee by used under a Creative Commons license.

    POSTED     Sept. 17, 2018, 11:25 a.m.
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