McClatchy’s new hedge fund owner followed a similar path with two other media holdings

Chatham Asset Management, which took control of McClatchy Co. on Friday, followed a familiar path to ownership of the nation’s second-largest local news company.

The New Jersey hedge fund began investing in McClatchy in 2009, soon after a recession accelerated the internet-driven loss of advertising dollars across the newspaper industry. By April 2019, Chatham owned almost a quarter of McClatchy’s stock and had become its largest lender.

Last month, a federal bankruptcy judge approved Chatham’s bid to convert $263 million of existing debt into credit, and add $49 million in cash, to buy McClatchy. The $312 million deal will take the 163-year-old company private.

Chatham took controlling stakes in two other media companies in much the same way, turning loans into ownership.

In 2016, the hedge fund swapped $268 million in debt for 65% ownership of Canada’s largest media chain, Postmedia Network Canada Corp. Two years earlier, Chatham and another investor, Omega Charitable Partnership, had taken control of the National Enquirer’s parent company, American Media, by swapping more than $500 million in debt for 100% ownership.

Like much of the media industry, both companies continue to struggle. AMI has tried to sell the National Enquirer after a series of scandals. Postmedia has cut almost 40% of its total work force since 2016, roughly equal to McClatchy’s cuts.

Chatham has not spoken publicly about its plans for McClatchy other than to release statements in support of local journalism. But July court filings drew a sharp contrast between Chatham’s purchase offer for the company and a competing bid from Alden Global Capital, another hedge fund involved in media ownership.

Chatham said it would retain all employees in the transition to a new company and would maintain salaries and benefits for at least a year. Alden “contemplated the elimination of approximately 1,000 jobs” — more than a third of the local news company’s total staff, a filing disclosed.

In McClatchy, Chatham gets a media company that was controlled by its founding family since the days of the California Gold Rush. McClatchy, which prizes public service journalism, operates local news publications in 30 markets, including such storied titles as the Sacramento Bee, the Miami Herald, the Kansas City Star and the Charlotte Observer.

Tony Hunter, a former Tribune executive, takes over as the new chief executive of a company that continues to face formidable financial challenges.

McClatchy cut roughly 40% of its workforce from 2016 to 2019, according to the company’s regulatory filings. That was before the coronavirus pandemic, which one study estimates will cost daily news organizations one-quarter of their advertising revenue through the end of 2021.

Second-quarter advertising revenue at McClatchy was down 46% compared with the same period in 2019, according to the company’s regulatory filings.

“The economic fallout from the coronavirus has turbo-charged the decline” in the industry, according to a study by the University of North Carolina and the Knight Foundation. More than 50 local newsrooms have shut down since April, adding to more than 6,000 news jobs lost since fall 2018.

“We have a changed environment. … Less profit, less cash flow,” said Ken Doctor, who directs the California-based media consulting firm Newsonomics.

Layoffs and other expense reductions have not been unusual in the industry, including at McClatchy. But, unlike some other media companies, McClatchy elected not to cut journalists when the pandemic struck.

McClatchy had already reduced its historical dependence on advertising, providing some financial cushion when advertisers began dropping out during the crisis. McClatchy has also built a community-based funding program that has enabled it to protect journalists.

Job cuts in Canada

In 2018, two years after Chatham obtained its ownership stake, Postmedia cut payroll by 10% through layoffs and buyouts, closed six weekly newspapers and converted three other publications to digital only.

Postmedia, which owns more than 140 media properties including the Toronto Sun and Montreal Gazette, reported a $6.3 million loss on $619 million in revenue in 2019.

The pandemic has only intensified the company’s problems. Postmedia closed 15 weekly papers in April, laid off 30 employees and furloughed 50 others.

Remaining employees earning at least $60,000 a year took pay cuts of up to 30% through the end of July, even as Postmedia said it had qualified for up to $15 million worth of public funding under Canada’s new “emergency wage subsidy” program.

“Everybody’s facing the same pressure of declining advertising revenue,” said Christopher Waddell, a journalism professor at Carleton University in Ottawa. “Postmedia has done a pretty good job of gutting its papers, but that’s in the face of pretty significant losses.”

Waddell drew a distinction between Chatham and Alden, which controls the MediaNews Group chain and owns about a third of Tribune Publishing.

Alden has drawn heavy criticism from journalists and industry-watchers for slashing payroll at the San Jose Mercury News, Denver Post and other papers to increase profits.

With the Postmedia papers, Chatham “is just trying to keep them going, to keep them running, by cutting their costs,” Waddell said.

Postmedia’s CEO, Andrew MacLeod, told The New York Times that the cuts were “all natural outcomes of a legacy business that’s been in structural decline.” Chatham, he said, does not get involved in the company’s day-to-day operations.

Chatham does not have complete control of Postmedia. Although it owns about two-thirds of the company’s stock, Chatham has only about a third of the voting power because of a two-tier structure that dilutes the weight of the hedge fund’s shares.

Chatham’s $4 billion business

Chatham’s leader, Anthony Melchiorre, 53, is a Chicago-area native and high school football star who earned degrees from Northwestern and the University of Chicago. After a stint at investment bank Morgan Stanley, he left New York and founded Chatham in Chatham, N.J., in 2003.

Hedge funds invest dollars contributed by multiple individuals or institutions. But unlike pension funds or mutual funds, they tend to cater exclusively to the wealthiest of investors, those comfortable with aggressive, often risky bets.

Chatham’s investors form an elite club. The hedge fund and its 28 employees manage $4 billion worth of investments for just 17 clients, according to a document filed with the Securities and Exchange Commission in August.

Its track record is exceptional. Chatham has earned average annual profits of 10%, significantly above the hedge fund industry average, according to Bloomberg news.

The fund’s clients have included CalPERS, California’s giant public employee pension fund, and state pension funds in New Jersey and Ohio. CalPERS is getting out of the hedge fund business but still has $220 million invested with Chatham. That investment is being liquidated.

Not all of Chatham’s high-profile bets have paid off.

The hedge fund owned 28% of the Revel, the tallest hotel-casino in Atlantic City, and lost millions when the Revel filed for bankruptcy for a second time and closed in 2014, just two years after it opened.

Scandal at the National Enquirer

Four years after exiting bankruptcy in 2010, the National Enquirer’s owner was in financial trouble again. Chatham stepped in.

Chatham, one of American Media’s primary lenders, and Omega Charitable Partnership took ownership of the company in August 2014. The price: $2 million in cash, $12 million in new loans and the assumption of $513 million of existing debt that had been held by Chatham and Omega.

David Pecker, AMI’s CEO at the time, said the deal would give the Florida-based publisher the foundation to pursue an “assertive growth path.” Two years later, when it took control of Postmedia, Chatham installed Pecker on the board of the Canadian company.

In July 2017, Pecker dined at the White House with President Donald Trump, a longtime friend. Melchiorre accompanied Pecker, multiple media outlets reported.

Less than a year later, the relationship between Pecker and Trump would bring Melchiorre and Chatham considerable grief.

In 2018, federal and local prosecutors in New York were investigating allegations that, in the waning months of the 2016 presidential campaign, the Enquirer paid $150,000 to buy the silence of Karen McDougal, a former Playboy model who claimed to have had an affair with Trump.

Prosecutors were looking into whether the deal amounted to an illegal campaign donation.

In a non-prosecution agreement with the U.S. Justice Department, AMI acknowledged that it made the payment.

The Enquirer association brought additional embarrassment when Amazon founder Jeff Bezos, who also owns the Washington Post, accused the Enquirer of blackmailing him with lewd photos in an attempt to stop the Post from investigating AMI.

Chatham had had enough. In April 2019, AMI agreed to sell the tabloid for $100 million, reportedly because of Melchiorre’s disgust over the scandals.

More than a year later, AMI still owns the Enquirer, generating speculation that the sale is dead.

The Enquirer and other AMI businesses have been clobbered by the economic effects of the pandemic. AMI received a Paycheck Protection Program loan of between $2 million and $5 million, according to federal records.

On Aug. 21, Chatham merged AMI into another Chatham-owned company, a Georgia-based warehousing and logistics company, and renamed the publishing company A360 Media. As part of the deal, Pecker was removed as CEO and named “executive adviser” to A360 Media.

This story was originally published September 4, 2020 at 8:24 AM with the headline "McClatchy’s new hedge fund owner followed a similar path with two other media holdings."