SPECIAL REPORT: Is Hometown Ownership Really the Next Big Thing?

By: Mark Fitzgerald and Jennifer Saba There may be nothing new under the sun, but the sudden widespread clamor to return troubled newspapers to local ownership -- after decades of relentless industry consolidation -- at least represents a dramatic change in course.

Nearly a quarter-century after Ben Bagdikian's "The Media Monopoly" failed to stir public revulsion against newspaper consolidation the way other classic muckraking books such as Upton Sinclair's "The Jungle" or Rachel Carson's "The Silent Spring" did for their respective subjects, there's now a great collective pining for the old age of family or independent newspaper ownership.

Bagdikian says from his home in Berkeley, Calif., "If [the owners] understand what a good newspaper can do, both financially and for their city, it will be a very good trend. If they don't have political axes to grind, they will discover -- if they run it as a serious newspaper with staffs that do serious reporting, and have sufficient regional and international reporting -- that metropolitan newspapers are very profitable."

And among industry experts, opinion is growing that this phenomenon might just have legs. "My personal belief is that it's the start of a trend -- and that the trend is going to continue," says Scott Stawski, senior principal at Knightsbridge Solutions.

Just a year ago, the idea that local investors would line up around the block for the chance to buy a metro daily seemed as unlikely as the idea that big chains like Knight Ridder or Tribune Co. would be forced to put them up for sale in the first place. The tipping point for the local ownership boomlet surely came this spring when the McClatchy Co. immediately hung "for sale" signs on 12 dailies it acquired in its purchase of Knight Ridder. When shareholder pressure forced Knight Ridder to "evaluate strategic options," papers such as The Philadelphia Inquirer and The Philadelphia Daily News were considered such dogs by Wall Street and the usual industry observers that the only question seemed to be how long they would languish on the market before McClatchy managed to get rid of them at a fire-sale price.

Instead, a group of Philadelphia investors assembled by public relations maven Brian Tierney ponied up $562 million -- a multiple of 11 times trailing 12-month cash flows -- for the two allegedly ailing dailies. McClatchy, by contrast, bought all of Knight Ridder at a price amounting to just 9.5 times cash flow.

The Philly price left veteran newspaper dealers like William Dean Singleton, whose MediaNews Group offer was rejected by McClatchy in the first round of bidding, scratching their heads.

Speculation that Tribune Co. will sell some of its metros as part of its announced exploration of "alternatives for creating additional value for shareholders" has encouraged crowds of would-be local publishers to emerge, often with unwanted bids.

The Los Angeles Times, for instance, has attracted reported interest from such local billionaires as supermarket tycoon Ron Burkle and Hollywood heavyweight David Geffen. In Baltimore, local developer David S. Cordish has vowed to do anything he can to facilitate local ownership of The Sun. The Abell Foundation, the remnant of the company that owned that newspaper before Tribune's 1986 purchase, has expressed interest almost annually, its president, Robert C. Embry Jr., told the Sun in September. And a family with deep roots -- and pockets -- in Connecticut says it will gather local investors to buy The Hartford (Conn.) Courant if Tribune puts it on the auction block.


Still worth the investment?

Yet moving from chain ownership to local ownership remains rare. "When that does happen, typically it's because the chain has screwed up [the paper] so badly it has to dump it," says one broker who insisted on anonymity.

That's because if a property were hot, potential local buyers wouldn't have a fighting chance. "Generally you will find that if something is attractive, the newspaper groups will be able to outbid everyone else, including private equity funds," says Robert Broadwater, founder of investment firm Broadwater & Associates in Bronxville, N.Y.

Broker Philip W. Murray, senior vice president of the Santa Fe, N.M., firm Dirks, Van Essen & Murray, says that so far the movement to local ownership is more talk than trend. But he notes a big sign that locals and independents are getting serious about newspapers: "It is fair to say that the gap between the values for papers in the private marketplace and those in the public marketplace is as wide as I've ever seen it in the last 10 years." The "private marketplace" refers to transactions that occur among privately held newspaper companies. "I think that buyers in the private marketplace continue to see values in newspapers," he adds.

The values of newspapers in publicly held companies, on the other hand, are restrained by what Murray sees as an overemphasis on the troubles big-city newspapers are encountering. Exhibit A in that phenomenon, he says, is the Knight Ridder acquisition: "I mean, just look what McClatchy paid for Knight Ridder and look at what they sold the pieces off for." When all was said and done, the $2.1 billion McClatchy got for the dozen papers was, like the Philly sale, about 11 times cash flow.


Consolidation pushback

In one way, the explanation for this wave of local speculation is simple. Private equity firms and other investors are flush with cash these days, so they have more than a fighting chance to play publisher when the local paper becomes available.

"The Dean Singletons of the world -- and Dean is a very smart guy -- have to bid according to what [the paper] is going to return," says Greg Knowles, owner of Knowles Media Brokerage Services in Bakersfield, Calif. Very wealthy locals, on the other hand, are happy with lower margins, and willing to pay more to win the bidding.

But some say there's a larger force at work militating against the corporate consolidation model that has driven the industry for so long.

Knightsbridge's Stawski, for example, argues that Wall Street's demand for earnings-per-share increases year over year is not a model that's working for newspapers anymore: "Any other industry would be doing somersaults [if they had] a 20% pretax profit, but they've not been able to invest in their infrastructure because a decade ago newspapers had a 30% pretax profit and they are under pressure to cut costs -- and those cost cuts are starting to affect editorial, or at least that's the perception."

On top of it, newspapers have been too slow in looking for new growth. "The industry has not been very aggressive in finding new sources of revenue, that is one challenge," says Robert Picard, a noted newspaper economist and editor of the Journal of Media Business Studies. "Wall Street is looking at that and saying, 'What is this [newspaper company] going to have for us in five years?'"

The pushback against consolidation is not simply a newspaper industry phenomenon, says Todd Zenger, professor of business strategy at Washington University in St. Louis. Consolidation has been oversold, he says, largely because its benefits are clear, but its drawbacks are not. "Consistently, executives overestimate the gains they are going to get from consolidation," he explains. "They overestimate these synergies, these economies of scale. Or, more accurately, they underestimate the disincentives and dis-economies of scale created by increased size, by new corporate structures, by changing incentives. Because it's fuzzier, it's human."

Spreadsheets cannot measure, for instance, the loss of a sense of substantially contributing to the success of the enterprise when ownership changes from an independent to a diffuse chain. Under local ownership, Zenger says, "my line of sight is pretty clear in how I can influence this paper, its profitability, or the impact of its reporting, whatever the outcome being measured. But when [a paper] is embedded in this huge entity, that's a lot harder to see."


Freedom from The Street

This thinking inspired Richard L. Connor to make a play for the Wilkes-Barre, Pa., Times Leader, one of the 12 papers McClatchy put on the block after it acquired Knight Ridder. As Connor sees it, he knows the ins and outs of the market -- since he was the Times Leader's president and publisher from 1978 to 1986.

When he got word that McClatchy was divesting its stake in Wilkes-Barre, Connor drummed up local investors and the Dallas-based private equity firm HM Capital Partners LLC to buy the paper for $65 million. While based in Fort Worth, Texas -- Connor is also chairman of Texas Community Newspapers -- he is now splitting his time between the coal town and cow town. "Wilkes-Barre has never been far from my mind and heart," says Connor, who is now the Times Leader's editor and publisher.

Connor believes his paper is better off under someone at the local level, as opposed to a "big corporation with centralized controls." One of the advantages is that he and his managers make all the decisions from Wilkes-Barre: They don't have to get on the horn with corporate, once located across the country, to get things done. "I think Wilkes-Barre was a very small piece of Knight Ridder and did not get the attention it might have deserved," he says.

Another luxury: The whims of the market are no longer a factor. "We are not worried about Wall Street," Connor says. "We're building a business that is already strong and making it stronger."

Neither Connor nor HM Capital would disclose the structure of their deal. Private equity firms are not known for the long haul -- they usually make a purchase and flip it three to five years down the road. HM Capital declined to be interviewed for this story, but a source close to the Wilkes-Barre Publishing Co. said that Connor and the firm are independent of each other. "We don't have specific targets except to make more money than the previous year," Connor adds.

The paper is already benefiting financially from the new owners. Connor disclosed that the Times Leader made more money this September compared to the same period a year ago, and it's saving money by locally outsourcing its payroll and health benefits.


The Philadelphia experiment

There was little doubt that Knight Ridder, McClatchy, and The Street viewed the Philly papers as anchors weighing down an already-burdened ship. Unlike the other nine or so papers, McClatchy CEO Gary Pruitt knew immediately that the company was going to have to dump three: the Saint Paul (Minn.) Pioneer Press (due to antitrust issues), the Inquirer, and the Daily News.

But Brian Tierney, who ran Philadelphia's biggest ad agency and then sold it to the world's second-largest ad firm in 2001, saw promise. The Philly papers, he says, "are an underleveraged asset that could be enhanced. I also saw the importance of these publications."

Tierney believes he can draw upon his expertise as an ad man and local know-how to boost the papers' sagging results. For starters, he says the industry as a whole has been too static with advertising since sales calls are antiquated and callers often arrogant. He plans to remedy that by setting up sponsorships and pushing the papers and its niche publications to target households. Labor also comes into play: He wants to change the framework of guild agreements formed in the early 1990s to better reflect today's business conditions. If he has his way, that includes not having to pay employees on the advertising side time-and-a-half for taking out potential clients after hours.

While enthusiastic about his new title of newspaper owner and publisher, Tierney has his work cut out for him. Despite the due-diligence process, he says he found the operations in disarray once he was given the keys to the papers. In terms of talent -- and as Tierney phrases it, the "human capital" -- his expectations were exceeded. What he didn't like was how each division ran like small fiefdoms. "I was a little surprised how a business this big with talented people could be so poorly run," he adds.

Just a month after E&P interviewed Tierney for this story, he was starting to show the same strains of running a big metro paper that Tony Ridder once faced. Proving that local owners are not immune to market functions, Tierney issued a memo to employees in mid-October calling for cuts. (At press time, the guild and management were still in contract negotiations). Cash flow dropped in half from $100 million in 2004 to a projected $50 million in 2006. "The dramatic revenue decline will prevent us from meeting our bank obligations if we don't take absolutely critical actions on the cost side of our business," Tierney wrote.


Private-ownership pitfalls

Employees at beleaguered big-city dailies demanding their corporate owners return the paper to locals should be careful what they wish for. "Some of the worst newspapers in the country were owned locally," warns John Morton, a newspaper analyst with Morton Research in Silver Spring, Md. "They were beholden to local establishments and sacred cows. A lot of that has gone away with chain ownership."

The Daytona Beach (Fla.) News-Journal, controlled by the Davidson family, was sued over such issues by its minority shareholder, Cox Enterprises. Cox filed a suit against the News-Journal Corporation in Orlando alleging the "misuse of corporate funds and wasted assets," according to court documents. At the heart of the issue: Cox Newspapers President Jay Smith never knew that the paper shelled out $13 million for naming rights to a local arts center with ties to the Davidson family.

Under Florida law, the Davidsons agreed to purchase Cox's shares in the company. They said it was worth about $29 million; Cox wanted $145 million.

The district court found the shares to be worth $129 million and delivered this rebuke to the Davidson family: "The record indicates that the predominant factor motivating defendants in their various activities was their personal interests in the arts," wrote U.S. District Judge John Antoon II. (Ultimately, the corporation, not the Davidson family, will pay the amount. News Journal Corp. is filing an appeal.)

In Tippen Davidson's eyes, local ownership only benefits the community when there's a "personal stake." When asked if he thought that $13 million was an excessive amount to pay for naming rights, as the court found, and if it presented a conflict of interest, Davidson -- the paper's CEO -- says, "We thought it was a very important community benefit, and we had it in our power to give."

Some local owners will put money into a newspaper, says newspaper economist Picard, but "there are others who use it for their own agenda."

When Wendy McCaw purchased the Santa Barbara (Calif.) News-Press from The New York Times Co. in 2000, there was a sense of hope that she would be a good local steward of the paper. "I personally feel that private, local ownership allows the News-Press to feel our community's pulse and better fulfill the needs of readers, advertisers, non-profit organizations and employees," McCaw wrote in an e-mail to E&P. "I remain firmly committed to good journalism. It is why I bought the paper in the first place."

Six years into it, McCaw is embroiled with her employees over union organization spurred by allegations of meddling in the newsroom. Several reporters and editors left the paper in July in a very public and noisy fashion, and have called for subscribers and advertisers to boycott the newspaper.

As of mid-October, the fracas continues: "While I have always felt that union representation is not in the best interest of employees, the paper or the community, the workers in the newsroom voted in the Teamsters," McCaw wrote. "This is very disappointing."


The heat is on, regardless

Local ownership is not necessarily the antidote to Wall Street, often singled out as the poison of the industry. Stripping the Street from the picture doesn't mean an owner has no one to answer to financially. "Chances are if you are buying a paper, you have to borrow a load of money, particularly for larger papers," says Broadwater. If you miss a payment or if the EBITDA does not line up, he adds, "the bank owns you."

Ken Doctor, an affiliate analyst with Outsell, a research company in Burlingame, Calif., says that locally owned papers could be at a disadvantage since it will be harder to go after national ad dollars, adding that "technology is a big issue."

And the fact remains that the newspaper industry -- no matter who owns the Daily Miracle -- remains in flux. Local owners have to make that transition, just like every other newspaper.

"It's way too simplistic to say that these [locally owned newspapers] can take a longer-term view," says Rick Edmonds, a researcher and writer with the Poynter Institute. "I think it's created flexibility and the ability to invest in the newsroom, circulation, and zoning, and do all kinds of things. However, the individually owned newspapers face all the same pressures on circulation and advertising competition."

Which means local owners could be buying long-term headaches. Knightsbridge's Stawski warns that the trend toward local ownership or -- more likely, in his opinion, companies going private -- will be the realization that operating a newspaper in a traditional way is not sustainable. Circulation and readership look to be heading downhill permanently, and newspapers' advertising franchises are likely to come under more, not less, pressure.

"Local ownership groups could be happy with 5% or 10% margins, but eventually even local ownership is operating under a business that is fundamentally changing," Stawski adds. "If they don't make wise fundamental changes, they'll find themselves where some large, publicly traded chains have wound up."