September 15, 2018

The Chicago Tribune reported this morning that McClatchy is in "early stage" talks to acquire Tronc. Really?

McClatchy, as I reported last week, has a market capitalization of less than $70 million and debt of nearly $800 million. Those are not what you might call strong financials. So on the surface, McClatchy does not appear in shape to buy anything much, let alone a company nearly twice its size ($800 million in revenues versus Tronc's $1.5 billion over the last 12 months).

Chatham Asset Management, a longtime principal lender to McClatchy that over the last year also became its largest shareholder, is another story.  The huge and well-established fund has $3.9 billion in assets, as Bloomberg reported in August.

Plus Chatham, unfashionably, likes the prospects of print media companies transitioning gradually to digital news platforms and digital revenues.

And it could bring in like-minded funds or banks to form a new entity to finance the acquisition. 

Business Insider reported this morning that Los Angeles billionaire Dr. Patrick Soon-Shiong, who earlier this year bought the Los Angeles Times from Tronc, is in on the deal.  Soon-Shiong has ample cash and credit himself and is still a big Tronc shareholder, so he might not need much or any help from Chatham.

Chatham is now the controlling shareholder at two other large media companies: Canada's sprawling Postmedia chain and David Pecker's American Media. In both cases, Chatham had a history as an investor and lender, then raised its stake over the last several years.

If you get past the financial hurdles, the combination of Tronc's 10 papers (including the Chicago Tribune and Baltimore Sun) and McClatchy's 30 (including the Miami Herald and Kansas City Star) makes all kinds of sense.

Both companies have experienced revenue losses as print advertising has cratered. But both are now trying for quicker transition to digital-first news operations and building digital audience traffic. Both are late to the party in selling digital marketing services but have growing subsidiaries. And both are pushing to establish paid digital subscriptions as a significant revenue contributor.

The two companies are complimentary, since Tronc is flush with cash after getting $500 million in the Los Angeles Times sale. That balances out McClatchy's unfavorable debt position.

Tronc has neither a strong strategy or ownership stability after Chicago entrepreneur Michael Ferro, who controlled the company and dabbled with expansion strategies based around the L.A. Times, has left his position as chairman of the board and is looking to sell his stake.

McClatchy, as I wrote, is controlled by the McClatchy family, whose shares are in a separate class. And the family has resolutely refused to consider bankruptcy reorganization or being put up for sale.

Besides the advantages of scale that a merger would create, there would be regional synergies. Tronc'ss Orlando Sentinel and Sun-Sentinel in Fort Lauderdale  would pair with the Miami Herald for a strong Florida presence. 

Tronc's recent acquisition of the Virginian Pilot in Norfolk gives it dominance in the Hampton Roads metro, where it already owned the Daily Press of Newport News. That would extend McClatchy's big position in the Carolinas on up into southeastern Virginia.

The two companies are not strangers. For years they collaborated on a Washington and national wire service. Tronc bought out McClatchy's share of the operation, now known as Tribune Wire Service in 2014, but its papers still contribute content. The ranks of the two operations have been depleted some by layoffs and the departure of the L.A. Times, but pooled resources after a merger could fix that.

I have a second reason, an odd detail from my recent reporting on McClatchy, that leads me to believe the "early talks" the Chicago Tribune reported are for real.

I began by calling to set up an interview with McClatchy CEO Craig Forman. He and I had talked at length in 2017 about his plans to pick up the pace of digital transformation. We agreed to get back together and discuss progress in another year or so.

Not possible, I was told. McClatchy is in an SEC-mandated "quiet period" until third quarter earnings are released in about two months, its spokesperson said. Odd. Securities law requires companies to go silent when a major business transaction is in progress. But executives at other newspaper companies (I checked with two) are typically available until a week or two before earnings.

If preliminary acquisition talks have begun, however, then McClatchy absolutely was following securities law in declining an interview.

So my best guess (the principal won't comment) is that the two companies are in merger discussions and may have been exploring that in a more informal way for as long as six months.

Talks do not equate to a deal; other competing bidders could emerge. A deal might not come together for an assortment of financial or other reasons.

But I would say Tronc stalwarts should be prepared for their paychecks — and a lot of direction — to be coming from McClatchy's Sacramento headquarters before long.

Correction:   Tronc owns the Orlando Sentinel and Sun-Sentinel of For Lauderdale. The original version of this story mistakenly said that it was McClatchy.

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Rick Edmonds is media business analyst for the Poynter Institute where he has done research and writing for the last fifteen years. His commentary on…
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