A Peek at the Private Equity Playbook for Running Newspapers

By Rick Edmonds

As bankruptcies run their course and private equity firms bid on properties for sale, the newspaper industry is entering a stage at which the bankers take control and start running major metros. What should we expect?

 

This topic gets more timely by the day. For instance, a crucial hearing Monday (postponed from Tuesday) in the Philadelphia Newspapers bankruptcy case may determine whether creditors gain a hard-to-beat advantage in a bidding war with a local group.

 

Common wisdom is that these private equity guys are in it only to make a buck, don't care greatly about public service journalism and will make even more cuts at distressed properties. That is not all wrong, but after looking at the slender record, I see a more complex strategy.

 

For instance, principals of Platinum Equity, which has owned The San Diego Union-Tribune for four months now, and Angelo, Gordon and Co., leader of a group just now taking control of the Star Tribune in Minneapolis, have said they are not in it for a quick turnaround and sale. (The firms did not return my calls.)

 

There is no way to transform these companies into sparkling assets in just a year or two. Rather, the equity firms are looking at a time horizon more like five to seven years -- at the outer range of how long they hold before reselling.

 

When it took control of the Union-Tribune in May, Platinum cut 192 employees, then cut another 112 in August, about a 30 percent reduction. However, it also fast-tracked plans to install a pagination system (San Diego was the last metro in the country to cut and paste), which will be installed and running by November. 

 

Platinum also agreed to provide start-up funding for a proposal from Lorie Hearn, a former Union-Tribune senior editor to leave the paper and reincorporate her investigative unit as a nonprofit, in cooperation with San Diego State University. (The unit would provide some stories to the Union-Tribune.  As my colleague Bill Mitchell has written, such an arrangement could complicate the tax status of Platinum's donations because its for-profit company would benefit.)

 

Bradley Pattelli, Angelo Gordon's lead banker in several newspaper bankruptcies in which it has bought debt from the original lenders, gave his only on-the-record interview to the Star Tribune, on the occasion of naming a new board of directors that included two locals, plus Gordon Crovitz of Content Online and Michael Reed, CEO of GateHouse Media.

 

"We've got people who have figured out how to build paid content models," he said. "We've got people who have built out strong local news organizations."

 

Except to say that the firm is often "contrarian," Pattelli did not explain Angelo Gordon's affinity for newspaper investments. Nor has Platinum, which is or has been among the final bidders for The Boston Globe, BusinessWeek and the Austin American-Statesman (which ultimately was pulled off the market).

 

Mark Barnhill, a Platinum spokesman, did tell a financial publication that after successfully acquiring the San Diego paper, the firm believes it has knowledge of the industry and is willing to double up its bets by taking on other properties.

 

A few other common denominators between Platinum and Angelo Gordon:

• The protracted sales or bankruptcy process, typically six to nine months, gives them time to make detailed plans and execute them quickly (especially cuts) once they gain control.

• They have access to operational consultants who can inspect and assess the property. They also can add well-known experts to a board of directors or as advisors once they assume control. In San Diego, Platinum is drawing on help from Canadian publishing mogul David Black, who earlier bought the Akron Beacon Journal from McClatchy.

• Some speculate that at a bargain price, the firms mainly want the newspaper properties for their real estate. I think that more realistically, they may be gambling that real estate prices will bounce back in the same five- to seven-year time frame as publishing. 

In the end, I'm not so sure that the banks' strategy will differ greatly from that of mainstream publishers:  Wait out the recession in button-downed hibernation, then try to work a comeback with a combination of old and new revenue streams.

 

I'm cautiously optimistic, too, that they will see the danger to their business in gutting news reports. But we'll have to watch that in the coming months as the private-equity bankers and their hand-picked operators move into the executive suites.