The Chapter 11 filing will allow the Sacramento-based company to keep its 30 newspapers afloat while it reorganizes more than $700 million in debt, 60 percent of which would be eliminated under the plan. If the court approves, it would also hand control of the 163-year-old family publisher to a hedge fund, Chatham Asset Management, its largest creditor.
The publisher of the Miami Herald, Kansas City Star and other regional dailies has been saddled with debt since its $4.5 billion takeover of a much bigger rival, Knight Ridder in 2006. The combination coincided with a digital boom that disrupted the prevailing business model and changed the way news is consumed.
“In 2010, the total revenue for print ads fell below 1950 levels and it has continued to decrease,” said Penny Abernathy, Knight Chair of journalism and digital media economics at the University of North Carolina. “Everyone assumed if you could just make the transition over to digital that things would be okay. But the problem is that as of 2015, Google and Facebook make up about 75 percent of the digital ad dollar in U.S. markets. That’s not enough to sustain the newsrooms McClatchy inherited from Knight Ridder.”
The move comes shortly after McClatchy suspended some pension payments and announced it had hired a bankruptcy administrator to help it secure a government takeover of its retirement plan. In November, McClatchy said it would not be able to make a required $124 million payment to the fund which, as of March 2019, was underfunded by $535 million.
"McClatchy’s Plan provides a resolution to legacy debt and pension obligations while maximizing outcomes for customers and other stakeholders,” Craig Forman, McClatchy’s president and chief executive said in a press release. “When local media suffers in the face of industry challenges, communities suffer: polarization grows, civic connections fray and borrowing costs rise for local governments. We are moving with speed and focus to benefit all our stakeholders and our communities.”
Hints of troubles began to emerge at the turn of the century, as circulation totals and share prices began slipping from their 1990s peaks. But McClatchy weathered early storms better than most: By the end of 2004, the company had notched 20 consecutive years of circulation growth and its share price was the industry’s top gainer for 10 years in a row.
But it was not immune to the Great Recession or the seismic changes of the digital age that powered the rise of Google and Facebook. Newspapers nationwide floundered, struggling to find new paths to profitability, and scores were forced into bankruptcy court or sold off at rock-bottom prices to private equity groups, which took an active role in managing the papers.
Relentless cost cutting ensued, nearly halving the sector’s workforce — from 71,000 in 2008 to 38,000 in 2018, according to Pew Research Center. Consolidation became rampant, closures increasingly common. Today, there are 225 counties across the country without a newspaper, according to Abernathy’s research. Half of all U.S. counties — more than 1,520 — have just one, usually a weekly. Of the nation’s remaining 7,200 newspapers, at least 1,000 are “ghost papers” — meaning they’ve been so hobbled by cutbacks they produce little original reporting — according to a 2019 study from PEN America.
“What you’re seeing with the consolidating occurring among the major chains that own all the dailies is not only a lack of coverage of the region but also a diminishing of the very vital investigative and analytical reporting that looked at problems at the local level, showed people how to mobilize and connect, and helped legislators craft policy,” Abernathy said.
Despite the statistics, the sector’s grim trajectory has gone largely unnoticed by the public. A 2018 Pew survey found that 71 percent of U.S. adults think their local news outlets are doing well financially, and just 14 percent have directly paid a local news source, although subscriptions have become crucial to outlets survival in the era of dwindling ad revenues. Researchers say the lack of a strong subscription base limits a newspaper’s ability to cover the basics — local government, schools and law enforcement — let alone have the resources for accountability journalism and, as a result, it’s the public that suffers.
Meanwhile, hedge funds like Alden Global Capital have made a business out of buying struggling papers and slashing staffs to maximize profits and take advantage of outlet’s most valuable assets — their real estate. Alden owns the nation’s second-largest newspaper chain, Digital First Media, and has overseen drastic cost-cutting at 100 daily papers, causing more than 1,000 jobs to be lost. In a 2018 court case, Alden disclosed it has a series of affiliated real estate companies whose business is focused primarily on efficiently buying, selling, leasing and redeveloping newspapers’ offices and printing plants.
Nonprofits like the Knight Foundation have worked feverishly to help local papers find paths to profitability. The group recently announced it would double its investments in local journalism, committing $300 million to help revive investigative and accountability reporting at the local level over the next five years. But such reinvention is impossible if hedge funds insist on gutting newsrooms at the expense of papers and the public, said Jennifer Preston, vice president of the Knight Foundation.
“[Our multimillion dollar efforts] have been successful in helping leaders at newspapers equip themselves for the future, but they’re not going to be able to make changes if the owners aren’t going to invest in the future because of the heavy debt loads,” Preston said. “We’re working toward solutions but we don’t have solutions in every community around the country that can fill the gaps in local journalism."
When McClatchy set its sights on Knight Ridder, it leaped at the opportunity to enhance its national footprint with a stable of highly respected newspapers — Miami Herald and Charlotte Observer -- among them — known for rigorous investigative reporting and bold storytelling. Knight Ridder’s 32 papers had 84 Pulitzer Prizes among them and was profitable, but it still was grappling with declining circulation and revenue. Bruce Sherman, one of the Knight Ridder’s biggest shareholders, publicly campaigned for a sale. But the company attracted just one newspaper bidder in its auction, leaving McClatchy, which had less than half of Knight Ridder’s revenue in 2005, a clear path to takeover.
“It was the little fish swallowing the big fish,” said Trisha O’Connor, who was the editor of the Myrtle Beach Sun News, a former Knight Ridder paper, for 10 years before retiring in 2010. “McClatchy did absolutely the worst thing you can do, which was buy at the top of the market. They bought Knight Rider and the bottom fell out of newspapers."
Gary Pruitt, chief executive of the Associated Press and the McClatchy CEO who engineered the Knight Ridder deal, declined to comment through a spokesperson.
Soon after the sale closed, McClatchy sold a dozen of its newly acquired newspapers — including the San Jose Mercury News, the Philadelphia Inquirer and the Akron Beacon Journal. Nine of those papers were union shops, according to reporting from NewsReview.
The publisher also failed to maximize its online opportunities, according to former employees. James Asher, the former Washington Bureau chief, said a digital strategy put too much emphasis on local news. One of the last regional newspaper companies with a foreign bureau presence, McClatchy discontinued its foreign operations in 2015 in favor of a strategy centered on regional and political coverage.
“The Washington Post and New York Times doubled down on national and international operations that brought online traffic outside of those cities,” Asher said. “You can make money with wide digital traffic. McClatchy had that same ability with national and foreign bureaus for 30 newspapers and a Washington bureau that was a finalist for Pulitzer Prizes and won a Pulitzer. They could have opted to do what The Post and the Times did, but they decided not to. They emphasized local news and that is causing their demise.”
McClatchy had been in talks with Tribune Publishing Co. about a merger, but they fell apart in 2018. The sticking point was McClatchy’s debt, despite the fact that the company has funneled hundreds of millions of dollars into erasing what it incurred in the Knight Ridder deal. Tribune oversees several newspapers, including the Chicago Tribune, Baltimore Sun, Orlando Sentinel and Virginian-Pilot. Alden Global Capital now holds a 32 percent stake in Tribune.
In November, McClatchy reported a net loss of $305 million on $7 million of income, the majority of which was from a massive markdown of its assets. As of September, the company’s outstanding debt stood at $708.5 million. But there are signs of growth, with the company seeing a 45 percent jump in digital-only subscribers in the past year. It will be guided through the bankruptcy process by its largest creditor, Chatham Asset Management, a private hedge fund which owns about 20 percent of McClatchy’s stock, the biggest shareholder outside the McClatchy family.
The New York Stock Exchange has repeatedly threatened to delist the company because of its paltry share price: 42 cents.