Reporting from Chicago — The newspaper industry is starting to meet its new bosses — the hedge funds and banks that are moving in as rich family owners and starchy executives move out.
Although the objectives of these new owners remain unclear, insiders say the transition period promises more upheaval at newspapers just as they begin to emerge from bankruptcy protection.
Over the last year, bankrupt newspaper companies including Tribune Co., owner of the Los Angeles Times, KTLA-TV Channel 5 and other news organizations, have been overrun by a category of stealthy "distressed debt" hedge funds. These include Angelo, Gordon & Co. and Alden Global Capital, both of New York, and Oaktree Capital Management of Los Angeles.
Their basic strategy: Quietly buy up as much cheap, delinquent debt as possible and then fight it out in Bankruptcy Court for a lucrative settlement that transforms the debt into a large share of company stock.
Experts say it is unlikely that any single fund has amassed enough of a stake to take outright control of one or more publishers. But alliances of like-minded funds and big banks like JPMorgan Chase & Co., which have also received significant chunks of equity through restructurings, could give nontraditional investors like Angelo and Alden unusual clout over a wide swath of the newspaper industry.
Interviews with close observers and people briefed by some of the funds say they tend to see little remaining upside in cost cutting. They also profess to recognize that quality, branded journalism still draws advertisers and therefore is worth preserving.
But because they are opportunistic traders by nature, not long-term owners, their presence is likely to be disruptive. Their objective from Day One will be to seek the most profitable way to turn their investments back into cash. That is likely to mean a restless quest for "value-creating" exercises such as spinoffs, acquisitions, public offerings and other transactions that will keep the newspaper industry in a state of flux.
One area ripe for deals may be Southern California. Before they each filed for Chapter 11 in 2008, Tribune and Freedom Communications Inc. held talks about the Los Angeles Times buying Freedom's neighboring Orange County Register, according to people with knowledge of the situation who were not authorized to speak publicly.
Now that Angelo, Gordon and JPMorgan are likely to emerge as big owners of both companies, these people say, talks probably will resume, and other options for consolidating newspaper assets in the region surely will be on the table.
Neither Chicago-based Tribune nor James Dunning Jr., newly appointed board chairman of Irvine-based Freedom, would comment on the conversations. The sources noted that no talks could resume until Tribune emerged from Chapter 11 (Freedom already has).
But Dunning said Angelo, Gordon, Alden Global Capital and Freedom's other new owners had charged him with exploring ways to boost the company's value so they could "monetize" their investments.
"All things are on the table," Dunning said. "They are highly inquisitive and want us to be also."
Most observers agree that the distressed investment world's interest in newspapers has little to do with what they publish. Unlike the media barons of old, who often basked in the civic influence newspapers bestowed, these funds are economic animals that unemotionally flock to troubled companies where investor sentiment has ebbed to seemingly irrational lows.
The distressed-debt funds are hardly alone. Ever since newspaper industry financials hit bottom a little more than a year ago, conventional stock market investors have sent shares of publishers such as Gannett Co. and McClatchy Co. through the roof.
Chicago's Ariel Investments has taken a ride up through major stakes in Gannett, McClatchy and Lee Enterprises Inc. Last month, JPMorgan said it had increased its Gannett stake to 10.2% from 2.2%.
The assumption behind these investments, analysts say, is that the newspaper industry had gotten so beaten down during the crisis that it became a bargain. Most publishers had cut costs so dramatically that any improvement in revenue as the economy returned to health would fall to the bottom line.
That bet has largely paid off for both conventional investors and the distressed-debt funds, as both the equity and the debt of newspaper companies has soared. Many industry experts agree that the next step in restructuring the sector is the sort of asset shuffling and consolidation that often transforms industries after they've been softened up by a severe downturn.
That's the logic behind the consolidation talk in Los Angeles.
Assuming that Tribune escapes from bankruptcy sometime this year, almost the entire Southern California newspaper market will emerge from the economic crisis cross-pollinated with financial interests more interested in "creating value" than respecting corporate boundaries.
