By Julie Reynolds
In the second half of a scathing new study titled “The Expanding News Desert,” the University of North Carolina’s School of Media and Journalism lays bare the devastating effect hedge funds and other investment firms are having on the American newspaper.
I’d normally paraphrase to provide a quick summary, but I think the report’s original text is worth including here (emphasis added):
The investment firms introduced a new way of thinking about the business management of newspapers and their journalistic mission, which often ran counter to the historic practices of traditional print newspaper companies. The standard operating formula often included aggressive cost-cutting, the adoption of advertiser-friendly policies, the sale or shuttering of under-performing newspapers, and financial restructuring, including bankruptcy.
At the most extreme, their strategies have led to the closure of hundreds of local papers and diminished the important civic role of newspapers in providing reliable news and information that helps residents of a community make important decisions about governance and quality of life issues.
…This raises a number of questions about the future of local newspapers, which have historically been the prime source of news and information in communities throughout the country.
That’s the big-picture version of the report by UNC’s Knight Chair in Journalism and Digital Media Economics, Penelope Muse Abernathy. Among Abernathy’s disturbing findings is the fact that 1,300 U.S. communities have completely lost news coverage. At least 900 communities have lost all news coverage since 2004, the report says.
Among other hedge fund owners of newspapers, the study examines Digital First Media, noting that it has shut down or consolidated 21 papers in the last four years.
Abernathy compares DFM’s unheard-of profit margins to those at similar-sized newspaper chains: “Digital First newspapers brought in $939 million in revenue in 2017 and had an operating income of $159 million. This compares to GateHouse, the largest newspaper chain in the country, which had $1.3 billion in revenues in 2017 and an operating income of only $34.6 million.”
In other words, GateHouse earned much more total revenue than DFM, but netted much less profit. The report notes that other large chains, including Gannett and tronc/Tribune, posted only “single digit margins” in 2017.
This description of Digital First’s extreme profitability flies in the face of DFM executives’ recent claims that its margins were merely average.
“We’re sort of in the middle,” DFM president Joe Fuchs told a group of Denver Post reporters in June. But as the UNC study shows, DFM’s profit margin may well be the highest in the industry.
Fuchs also told staff at that June meeting that budget cuts would level off after DFM executives “ripped off the Band-Aid” by laying off more than 30 newsroom employees last spring in Denver. Asked if more layoffs were coming, Fuchs said, “The intent is no, given the view that we have of the business over the next three years.”
Despite Fuchs’s claim, at least 36 positions have been cut at 12 of its union papers since April, and DFM’s newly acquired Boston Herald continues to bleed staff, starting the year with 240 employees and now counting around 100, Publishers Daily reports.
The staff that remains isn’t well paid. DFM employees in newsrooms across the country have had only one raise in ten years — a modest 3 percent. But DFM’s owner, Alden Global Capital, doesn’t seem to be feeling the pinch.
Spending, but not reinvesting
In fact, Alden is on a big spending spree.
Just last week, the hedge fund spent more than $2.7 million buying additional stock in the floundering Fred’s pharmacy chain. Alden had already plowed $158 million into Fred’s before the stock lost most of its value. (Alden has admitted in court documents that it siphoned that $158 million directly from DFM newspapers.)
The new infusion of cash into Fred’s isn’t helping the employees there, either— the company announced 80 people will be laid off by Oct. 28.
But the hard times didn’t stop Alden president Heath Freeman and former DFM execs Steve Rossi and Joe Anto from extracting pay and bonuses from Fred’s totaling nearly $1 million last year. ($953,208 to be exact). It’s enough to run a small-town paper’s newsroom for a year.
And that’s only what they’ve extracted from Fred’s. Because Alden’s other major investments — including DFM newspapers and Payless ShoeSource — are privately held, the salaries, profits and perks Freeman and his associates take from them aren’t publicly reported. But it’s clear that Alden is applying its usual vulture strategy with Payless.
Today, the national shoe store chain begins an auction of its headquarters in Topeka, with starting bids at $1.25 million — well below Alden’s original asking price of $8.5 million. (The company’s headquarters is being moved to a Dallas building owned by Alden’s co-founder Randall Smith.) More than 350 employees have been laid off since Alden took over the bankrupt chain, and last week 35 positions in the merchandising department were eliminated or transferred to Texas.
The fact that DFM/Alden continues to expand its investments while its papers and staff fight to survive doesn’t surprise Abernathy.
“At a time when many newspapers are struggling to maintain single digit profit margins, both New Media/GateHouse and Digital First are vying with one another to buy more papers, whereupon they immediately introduce a round of cost cutting in an attempt to extract double-digit returns,” she reports.
“Despite calls from journalists and community activists to sell the Digital First papers, Alden Capital has given no indication that it is ready to exit the newspaper business since Digital First is producing double-digit profit margins that offset losses in other divisions.”
Abernathy hints that such expansion efforts may not last, though.
“The managers of these funds promised shareholders they had the golden touch and would be able to quickly turn around the fortunes of mature enterprises through a combination of cost cutting and innovative business practices,” she writes. “But the turnaround has proved to be harder than expected, and 2018 may well be a pivotal year for the newspaper industry as these newly minted media barons decide whether to head for the exit or increase their stake.”
Digital First employees, who recently protested their stagnant wages with desk signs proclaiming “Inflation happens; Raises should, too” and “Invest in us,” are hoping DFM will soon decide to “head for the exit” by selling to responsible local owners. But with the cash cow still producing double-digit profit margins, that exit may not come as soon as employees hope.