Guild’s KR Bid: Once a Pipe Dream, Now a Possibility

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By: Jennifer Saba

When the Newspaper Guild-Communications Workers of America first backed an employee buyout plan to take over nine Knight Ridder papers, it provoked shrugs and snickers. But then came the early morning March 13 announcement that McClatchy, thought as the underdog in the auction, emerged as the winner. Even more shocking: McClatchy’s decision to drop a dozen Knight Ridder papers as though they were radioactive.

As of last week only a handful of parties, including MediaNews Group, have reportedly taken part in the auction. Only Yucaipa Companies, the private equity firm that is backing the guild’s worker friendly takeout, has stepped up and publicly said it has made an aggressive and competitive bid for all 12 papers.

Now the Newspaper Guild plan is gaining more credibility as this story unfolds. On Wednesday, news emerged that McClatchy had finally agreed to send Yucaipa full financial records to assist in their bidding. This suggestged that the field was, indeed, wide open.

At first, the guild’s strategy didn’t seem solid. In early March, many investors told E&P off the record the guild had no chance of winning any links of the embattled chain, that money-types typically avoid unions at all possible costs.

Now it seems to have at least a fighting chance.

The guild’s first move had been at the San Jose Mercury News. Jack Fischer, visual arts writer and vice president of the local guild chapter, started looking for ways to keep the Mercury News from falling into the hands of an owner who might strip the paper of resources. The idea, he says, involved an employee stock ownership program, or ESOP. In simple terms, it would require the newspaper’s employees to roll over part of their 401K plans to essentially buy the paper.

ESOPs often come up when newspapers go on the block. The most recent example involved employees at the St. Louis Post-Dispatch, who had similar designs to buy out its paper — now in the hands of Lee Enterprises.

Fischer called Christopher Mackin, the founder and principal of Ownership Associates, a Cambridge, Mass.-based advisory firm that specializes in new and established ESOPs, and started the ball rolling.

Fischer and and other officers at the San Jose guild recognized the strategy was too big for them to handle alone. The local chapter didn’t have the necessary funds to pull off a deal of that magnitude, says Fischer, so he approached Newspaper Guild President Linda Foley.

Not only did the national guild line up Mackin’s firm, they also retained Richard May, managing director of Duff & Phelps, a financial advisory company. It created a new acquisition corporation called ValuePlus Media days before the Christmas holidays, formed for the purpose of buying nine papers. By mid-February, Yucaipa Companies had signed on as an investor. At that time, industry analyst John Morton said, “When it comes time to the guild’s participation, money talks.”

Founded in 1986, Yucaipa is best known for its managing partner and co-founder Ron Burkle, a billionaire who made his fortune selling supermarket chains. Burkle claims an eclectic group of friends, a roster including former President Bill Clinton (who serves as a senior advisor at Yucaipa), Sean “Diddy” Combs (Yucaipa shelled out millions as an investor in Sean John clothing), and Michael Jackson (he advised the pop star to sell off his Beatles catalogue).

Yucaipa is known for handling investments, particularly for the California Public Employees’ Retirement System (CalPERS), the nation’s largest pension fund. According to Business Week, CalPERS handed over $760 million to Burkle when they noticed his firm had earned an average annual return rate of 45%.

This would seem to put Yucaipa in the same boat as private equity firms including the Texas Pacific Group and Thomas H. Lee Partners — names that were floated as alleged bidders for Knight Ridder. But what sets Yucaipa apart from its cohorts is that it is “worker-friendly.”

Foley tells E&P, “This is an investor that, unlike other Wall Street-directed investors, sees employees as assets as opposed to liabilities.” Burkle, and by extension, Yucaipa, is known for making socially conscious investment decisions. He told Business Week about his strategy: “‘We’ve gotten great returns by treating people well.”‘

More important, Yucaipa is now prepared to shell out the money for all 12 properties, even the four non-guild papers now on the block, Foley confirmed.

And McClatchy needs to unload those newspapers quickly. Many have speculated that Pruitt had closed-door conversations with potential buyers before the deal went down, although he says otherwise. He stressed to The Street he hopes to sell the papers by mid-summer.

Some of the 12 newspapers– San Jose, Philadelphia, Contra Costa, and Akron — could fetch a multiple of 8.5 times EBITDA, a discount from the multiple McClatchy paid for Knight Ridder (roughly 9.5 times EBITDA), according to Prudential Equity Securities.

Several parties have been mentioned as interested buyers, including MediaNews Group and independent investors. But the guild’s chances are arguably greater since they want to take the whole package. “We have done all the modeling, we are ready to make a bid,” says Foley. “We reached out to [McClatchy] right away.”

The guild has put together a team that includes some Knight Ridder management, and as Foley puts it, they are “ready to step in on day one.”

For now, the guild is still selling the strategy of an ESOP. The bid is not contingent on how many employees are willing to participate, although Yucaipa is prepared to buy the 12 papers outright.

“The employee-ownership thing is a garnish,” says Mackin. “If we get the deal, Yucaipa writes the check to get the deal done. The second stage is for employees to invest alongside with Yucaipa.”

Luther Jackson, executive officer of the San Jose Newspaper Guild, says employees expressed a lot of skepticism in early March during a meeting about the plan. Many were confused or worried about their retirement plans (when in fact an employee does not have to contribute to an ESOP, nor are they advised to hand over their entire 401K) while others had questions about Burkle and Yucaipa.

But now that it looks like they have a decent shot, guild members and now management have started to pay closer attention. “Once McClatchy decided to sell us [the Mercury News], that is when people started to tune in,” Fischer says. “People thought McClatchy was going to be a safe harbor.”

Fischer admits that some employees didn’t want to see the guild running the paper either, although he points out that it would not — it’s only acting as an intermediary. MediaNews Chief Dean Singleton “is not coming to us and asking who would be good in newsroom management,” Fischer adds. “Yucaipa is.”

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