Losses at Fred’s pharmacy chain could mean trouble
By Julie Reynolds
Class action litigators are sniffing around Alden Global Capital’s investment practices, signaling potential new trouble for the secretive New York hedge fund as it pillages newspapers to prop up bad investments elsewhere.
Fred’s Inc., the Memphis-based pharmacy chain controlled by Alden, is being investigated for possible securities fraud by Glancy Prongay & Murray and Howard Smith Law, class-action law firms that sue on behalf of unhappy shareholders. Both firms issued press releases announcing the investigations in late May. (Neither firm responded to a request for comments.)
The investigations are just the latest sign of scrutiny by members of the financial sector looking into Alden’s practices and questioning the hedge fund’s business ethics and acumen.
In March, court documents showed the secretive, privately held Alden was being sued by a fellow hedge fund for possible fraud. The filings also showed Alden has a $220 million loan due this year.
Alden took out the loan through its Digital First Media newspaper chain, and according to court documents, it used the $220 million to pay off other debts and to finance a mysterious fund called InvestmentCo.
It’s unclear what InvestmentCo has done with the millions, but the court papers show that earlier this year Alden was urgently shopping around for a new loan of similar size, presumably to pay off the $220 million coming due.
If Alden defaults, that could put all of its investments at risk, especially the DFM newspaper chain.
Although DFM is bringing in substantial profits (a leaked financial report shows it netted a $160 million profit in the last fiscal year), other Alden investments have fared poorly. As a result, Alden has gone from managing more than $2.2 billion in assets on 2015 to $1.2 billion this year, according to its latest filing with the SEC.
The investigations into Fred’s follow an eleventh-hour postponement of the pharmacy chain’s April 18 earnings presentation and, nine days later, the abrupt resignation of Fred’s CEO Michael Bloom. Bloom’s departure was followed last week by the sudden retirement of three Fred’s board members whom Alden also wanted gone. Then came Fred’s removal from the S&P SmallCap 600, a list of financially viable small stocks.
Those developments, and the resulting stock price drop, are the direct work of Alden co-founder Heath Freeman.
Heath Freeman’s War
Alden president (and Fred’s board chair) Heath Freeman had been pushing for a year for Fred’s board and executives to resign. In a bizarre mishmash of disparate industries, Freeman was able to get DFM’s then-CEO Steve Rossi (a lifetime newspaperman) inserted into Fred’s board.
But Freeman was clearly steamed that others had been appointed without his blessing.
“We are deeply frustrated by the board’s decision to reconstitute the board with new candidates, including CEO Michael Bloom, rather than work in good faith with its largest shareholder to reach an agreement around board composition,” Freeman fumed in a 2017 press release. “It is quite clear that these changes were only made in reaction to our involvement and were crafted in such a manner to give the appearance that the board is acting reasonably, while really seeking to protect the destructive status quo.”
In hindsight, it’s possible those deemed part of Freeman’s “destructive status quo” were worried Fred’s would go the way of DFM papers — that vulture fund Alden would strip the company of all its assets and then shut it down, leaving its bones to dry in the desert.
In fact, Alden has already begun the strip-mining of Fred’s that’s been so devastating to hometown newspapers across the country.
It began in May, when Fred’s announced that it would sell off its specialty pharmacy division to CVS for $40 million.
According to reporter Andy Meek of the Memphis Daily News, the specialty pharmacy operation was a free service for Fred’s customers “who’ve been prescribed certain specialty medications. Services and benefits as part of that service include answering questions and informing patients of any handling instructions, administration, monitoring and follow-up care related to the prescriptions.”
In addition, two new Alden-approved board members are real estate experts — setting the stage, according to Forbes “as the retailer considers more sales of assets including pharmacies, stores and related property.” Freeman welcomed the new appointees in a May 22 press release, while telling the Fred’s CEO and board members he’d just pushed out that he wished them “all the best.”
If this is starting to look like the chop-shop strategy Alden unleashed on DFM papers, it should.
Starting in 2012, Alden sold office and printing plant real estate en masse from DFM’s 200-plus daily and weekly papers across the U.S. That sell-off coincided with Alden’s co-founder Randall Smith buying up $57 million worth of South Florida mansions.
Perhaps it’s only a matter of time before Fred’s headquarters is displaced from its longtime base in Memphis. Alden, which also owns a majority of shares in Payless ShoeSource, is in the process of moving that company’s headquarters from Topeka to Randall Smith’s 40-story Bryan Tower in Dallas, where the rent checks will presumably go to Smith. In a press release, the move was billed as opening an “additional office location.” But Payless has put its Topeka office headquarters up for sale with an asking price of $8.5 million that includes an in-house café and fitness center.
After more than 330 employees lost their jobs in the Payless “turnaround,” the company did not return calls from the Greater Topeka Chamber of Commerce asking how the move to Dallas might affect local jobs.
(For the record, Freeman has never returned this reporter’s requests for comments, nor did he speak to a reporter who showed up at his home in the Hamptons last week.)
From bad to terrible
It’s understandable why shareholders in the publicly traded Fred’s would be alarmed. Fred’s stock went from bad to terrible following Bloom’s resignation in April.
In fact, ever since Alden and Freeman became its stewards, Fred’s stock has been in a freefall. Alden originally bought 9.2 million shares of Fred’s in early 2017 for $158 million. As of May 29, Fred’s was trading at $1.55 a share, making Alden’s share worth a mere $14.2 million today.
We’re talking a loss of $144 million in value. It’s worth mentioning that $144 million could have paid for 480 journalists to stay on the job for at least five years.
This comparison is not some abstract exercise. Recent court filings show the money to pay those reporters — and more — was taken directly from DFM newspapers by Alden as it laid off or bought out thousands of news workers across the U.S.
The filings are part of a lawsuit filed in Delaware by another hedge fund known as Solus. Solus, which owns a minority share of DFM, claims that the newspaper chain and Alden, operating under the business name Media News Group, hid their financials from Solus and secretly siphoned money from the papers into Alden’s own investments, including Fred’s. Alden admitted as much in its response to the court, but maintains its actions were not deceptive or fraudulent.
After both parties in the case agreed to keep all depositions and discovery under seal, they postponed a May trial date until September. It appears a confidential settlement might be in the works, in which case we may never know the full truth of Alden’s secret dealings at DFM.
But the lawsuit did put a crack in Alden’s wall of secrecy. After Solus released details from Alden’s financial statements, the company was forced to admit in court filings that is did indeed set up shell companies that siphoned more than $200 million from the DFM news chain for Alden’s own, unrelated investments.
The disastrous gamble on Fred’s was one of those. Yes, the money to buy Fred’s stock was directly taken — critics might say stolen — from the DFM news chain, according to Alden’s admission in the court filings.
Visualize those Fred’s losses as the cost of hundreds of empty cubicles in newsrooms across the country, and remember that the absence of stories in your hometown paper is helping to pay for Alden’s latest financial fiasco.
It’s been widely reported that Alden is not likely to respond to cries from cities like Denver or St. Paul to sell its papers to responsible local owners. The rationale is that Alden is simply making too much money running its newspaper chop shops to consider selling.
But the landscape is changing. If Alden can’t pay its $220 million loan that’s due this year, and if the financial community finally wises up to Alden’s ethically questionable corporate shenanigans at Fred’s, Payless and DFM, it may not have a choice.