Breaking down DFM execs’ claims, one at a time

 

By Julie Reynolds

Digital First Media needs to pillage its newspapers in order to make them better — that’s the essence of the business strategy described by DFM president Joe Fuchs when he recently spoke with employees of the Denver Post and several California newspapers.

What he actually said was this:

“The whole notion here is to nurture the newspaper business. Right-size it to be sure, within the economics, take what cash flow can be taken, diversify into other assets to provide overall stability and financial success for the entire company.”

Fuchs called this a “Warren Buffett” tactic of DFM’s hedge fund owner, Alden Global Capital. He was referring to the concept of investing in other, profitable businesses in order to bolster newspapers during hard times.

On the surface, it sounds reasonable. In fact, diversification is a strategy that’s worked for newspapers big and small. For example, the owners of one independent hometown paper, The Pilot of Southern Pines, North Carolina, invest in telephone directories, business trade shows and other ventures that help sustain the newspaper.

Although Fuchs claims this is DFM’s plan, it’s never actually happened. Alden has admitted to taking millions from DFM papers, placing the funds in a shell company and investing them in the Fred’s Pharmacy chain, where it promptly lost nearly all the money.

But the cash flowed in one direction only: from the papers and into unrelated businesses. Even when its outside investments did turn a profit, Fuchs’ “nurturing” of the newspaper business never occurred.

It also smells a bit fishy that these investments were not even made under DFM’s business name, MNG Enterprises. The shares in Fred’s were bought by Alden, after it extracted the cash from DFM.

“It’s not a bad strategy to develop other businesses” to support journalism, says analyst Ken Doctor of the Harvard Nieman Lab. “There’s a logic to it if they are preserving local reporting.” The problem, he says, is Alden has not reinvested in its papers.

“You’re not really diversifying, you’re stealing capital,” Doctors says, adding that he uses the term “stealing” metaphorically, not in the legal sense. “Show us the proof. Where is it that you’re helping your newspaper business? We don’t see it. Their claims of wanting to improve their businesses don’t hold water.”

 

“Ripping the Band-Aid” and the “plateau”

Alden’s “diversification” efforts to “nurture” the news were not the only nuggets of confusing information DFM’s top executives shared with employees last month in their first-time effort to appear more transparent.

Upper management of the chain told Denver Post staff on June 19 that the company decided to “rip off the Band-Aid” when it undertook drastic layoffs that resulted in a loss of 30 people this spring from the Post’s newsroom alone. (Farther west, scores more have been laid off in DFM’s Southern California News Groups and the Bay Area.)

“The decision was made around should we do it piecemeal, or get it over with?” Fuchs told the Post employees. “And I know that sounds like an awful thing to say… But we decided — management and ownership and the board decided — that the way to go about this was to face up to it, do our right-sizing that we hope then we would get through this tough period.”

Asked if layoffs would continue, Fuchs told employees, “The intent is no, given the view that we have of the business over the next three years.”

Fuchs, joined by COO Guy Gilmore, suggested that the near-constant layoffs and buyouts of the past several years were a short-term problem that’s now leveling off.

Except it isn’t.

Union representatives at DFM papers around the country say layoffs are continuing, and still more are taking place at the chain’s non-union papers.

The recent layoffs, combined with a rush of departures, has left newsrooms like Denver setting new records for abysmally low staffing levels.

Denver’s NewsGuild representatives reported in early July that newsroom employees totaled 60, including 44 Guild-represented positions — a new low compared to roughly 250 total when Alden took over in 2011.

This low figure is partly due to DFM’s profound morale problem. The Post’s opinion page editor Chuck Plunkett resigned May 3 in frustration over censorship of a column critical of Alden.

Besides Plunkett, at least 18 other Denver newsroom employees have resigned since Alden’s aggressive swath of layoffs on April 9. One group of nine who recently left the paper, including senior editors Larry Ryckman and Dana Coffield, joined a soon-to-be-launched competing news site, the Colorado Sun.

An additional nine have resigned since the April layoffs, with at least four of those leaving for other publications.

While the departures have hurt the Post, it’s possible Alden’s bean counters are reveling in the unexpected boost in cash flow. Right now, the Post has 60 people doing the work that 250 did seven years ago.

To be clear, the Post is advertising to fill some positions. Fuchs and Gilmore said they’ve currently budgeted for 73 newsroom positions, adding that five of those usually remain open at any given moment.

It’s not just Denver taking the hits. The very day of the meeting, employees learned that DFM’s paper in Loveland had a layoff.

In the past two months — after DFM/Alden “ripped off the Band-Aid” — DFM’s Michigan papers laid off their publisher, Jeannie Parent, plus several other employees, including two in advertising.

The Philadelphia region just lost three to buyouts — a reporter at the Trentonian, and ad sales reps at the Delaware County Times and Pottstown Mercury. There was also one reporter laid off at the Delaware County Times.

In late May, The Los Angeles Business News reported that the Long Beach Press-Telegram had only one reporter left to cover a metro area of 465,000.

That was after three employees — city editor Melissa Evans, reporter Jeremiah Dobruck, and longtime columnist Tim Grobaty — quit on the same day, announcing they would start a rival news site. Since then, the local investors backing them have bought a small competitor, the online Long Beach Post, promising to reinvigorate it.

 

Of margins and dividends

If employees hoped to find some clarity about DFM’s ample profits (and where that money actually goes), Fuchs and Gilmore disappointed.

They did acknowledge the company’s profit margins fall within the 15-20 percent range, more or less corroborating Doctor’s recent report that DFM took in a 17 percent margin last year.

But Fuchs and Gilmore strongly disputed Doctor’s assertion that such margins are among the highest in the industry, claiming their profits were in a “middle range,” (and this despite a company-wide email by the company former CEO Steve Rossi stating DFM’s performance was among the industry’s best.)

Doctor compared DFM’s 17-percent profit margin to other chains and found it was double nearly all of them, with a few exceptions like The New York Times, which he says earned around 13 percent.

Even the newspaper chain GateHouse, also known for draconian staff cutting, is earning around 12.5 percent margins, Doctor said. “12.5 and 17 are far different. And (GateHouse is) clearly reinvesting a lot more. It isn’t just the number, it’s the number and the reinvestment.”

One confounding statement Fuchs made several times during the “transparency sessions” was that Alden founder Randall Smith does not draw a dividend. Asked if Smith used DFM profits to buy mansions in Florida and the Hamptons, Fuchs replied, “There has not been a dividend sent up from MNG that in any way shape or form would be the basis for any of that. It’s just plain not true.”

Fuchs’ artful wording seemed to imply that Smith does not draw profits from DFM. But one needn’t take a dividend to extract profits, and for hedge funds like Alden, there are many ways to make money.

“With a private company, you make your money by allocating the profits among the partners,” Doctor said. “Management fees are extracted. Profits themselves are taken out. The fact that there’s not a dividend, I don’t understand why that would be significant. They’re taking profits out, we know that.”

Fuchs did acknowledge that Alden made money from selling off its newspapers’ real estate through a shell company called Twenty Lake Holdings.

“Number one,” he told employees, “Alden or any of their peers doesn’t get involved in something to lose money.”