By The Washington Post · Taylor Telford, Thomas Heath
The Chapter 11 filing will allow the Sacramento-based company to keep its 30 newspapers afloat while it reorganizes more than $700 million in debt, 60 percent of which would be eliminated. If the plan wins court approval, control of the 163-year-old family publisher would be turned over to hedge fund Chatham Asset Management, its largest creditor. The company has obtained $50 million in financing from Encina Business Credit to maintain operations while it undergoes bankruptcy proceedings.
McClatchy's filing foreshadows further cost-cutting and retrenchment for one of the biggest players in local journalism, at a time when most U.S. newsrooms already are straining to cover their communities amid declining ad revenue and dwindling resources. Twenty percent of all U.S. newspapers have closed since 2004, according to a recent report from PEN America, and the sector has shed 47 percent of its jobs.
The publisher of the Miami Herald, Kansas City Star and other regional dailies has been saddled with debt since its $4.5 billion takeover of a much bigger rival, Knight Ridder, in 2006. The combination coincided with a digital boom that disrupted the prevailing business model and transformed the way news is consumed.
"In 2010, the total revenue for print ads fell below 1950 levels, and it has continued to decrease," said Penny Abernathy, the Knight chair of journalism and digital media economics at the University of North Carolina. "Everyone assumed if you could just make the transition over to digital that things would be OK. But the problem is that as of 2015, Google and Facebook make up about 75 percent of the digital ad dollar in U.S. markets. That's not enough to sustain the newsrooms McClatchy inherited from Knight Ridder."
Earlier this year, McClatchy suspended some pension payments and announced it had hired a bankruptcy administrator to help it secure a government takeover of its retirement plan. In November, the publisher said it would not be able to make a required $124 million payment to the fund, which, as of March 2019, was underfunded by $535 million. Now, the company is asking the bankruptcy court to terminate the pension plan and make the federal Pension Benefit Guaranty Corp. the plan's trustee.
"McClatchy's plan provides a resolution to legacy debt and pension obligations while maximizing outcomes for customers and other stakeholders," Craig Forman, McClatchy's president and chief executive, said in a news release. "When local media suffers in the face of industry challenges, communities suffer: Polarization grows, civic connections fray and borrowing costs rise for local governments. We are moving with speed and focus to benefit all our stakeholders and our communities."
Hints of the industry's troubles emerged at the turn of the century, as circulation totals and share prices began slipping from their 1990s peaks. But McClatchy weathered early storms better than most: By the end of 2004, the company had notched 20 consecutive years of circulation growth, and its stock was the industry's top gainer for 10 years in a row.
But then came the Great Recession, and the seismic digital shift that powered the rise of Google and Facebook. Newspapers floundered, struggling to find new paths to profitability, and scores were forced into bankruptcy court or sold off at rock-bottom prices to private equity groups, which took an active role in managing the papers.
Relentless cost-cutting ensued, nearly halving the sector's workforce - from 71,000 in 2008 to 38,000 in 2018, according to Pew Research Center. Consolidation became rampant, closures increasingly common. Today, 225 counties nationwide are without a newspaper, according to Abernathy's research. Half of all U.S. counties - more than 1,520 - have just one, usually a weekly. Of the remaining 7,200 American newspapers, at least 1,000 are "ghost papers" - meaning they have been so hobbled by cutbacks that they produce little original reporting - according to a 2019 study by PEN America.
"The biggest impact of the decline is on communities that are losing coverage each year, the basic news and governments that are going uncovered," said Ken Doctor, a newspaper analyst. "People are becoming illiterate and innumerate in terms of what they know and how they can act as citizens in a democracy."
Yet the sector's grim trajectory has gone largely unnoticed by the public. A 2018 Pew survey found that 71 percent of U.S. adults think their local news outlets are doing well financially, and just 14 percent have directly paid a local news source. Researchers say the lack of a strong subscription base limits a newspaper's ability to cover the basics - local government, schools and law enforcement - let alone have the resources for accountability journalism. As a result, they say, it's the public that suffers.
Meanwhile, hedge funds such as Alden Global Capital have snapped up struggling papers and slashed staffs to maximize profits and take advantage of outlets' most valuable assets - their real estate. Alden owns the nation's second-largest newspaper chain, Digital First Media, and has overseen drastic cost-cutting at 100 daily newspapers, eliminating more than 1,000 jobs. In a 2018 court case, Alden disclosed that it has affiliated real estate companies that are primarily focused on buying, selling, leasing and redeveloping newspaper offices and printing plants.
Nonprofits such as the Knight Foundation have worked feverishly to help local papers. The group recently announced it would double its investments in local journalism, committing $300 million to help revive investigative and accountability reporting at the local level over the next five years. But such reinvention is impossible if hedge funds insist on gutting newsrooms at the expense of the publications and the public, said Jennifer Preston, vice president of the Knight Foundation.
The foundation's multimillion-dollar efforts "have been successful in helping leaders at newspapers equip themselves for the future, but they're not going to be able to make changes if the owners aren't going to invest in the future because of the heavy debt loads," Preston said. "We're working toward solutions, but we don't have solutions in every community around the country that can fill the gaps in local journalism."
Founded in 1857, McClatchy was primarily a regional newspaper company until it set its sights on Knight Ridder. The company leaped at the opportunity to enhance its national footprint with Knight Ridder's stable of highly respected newspapers - the Miami Herald and Charlotte Observer among them - known for rigorous investigative reporting and bold storytelling. Knight Ridder had 32 papers with 84 Pulitzer Prizes among them and was profitable, but it still was grappling with declining circulation and revenue. Bruce Sherman, one of Knight Ridder's biggest shareholders, publicly campaigned for a sale. But the company attracted just one newspaper bidder in its auction, leaving McClatchy, which had less than half of Knight Ridder's revenue in 2005, a clear path to a takeover.
"It was the little fish swallowing the big fish," said Trisha O'Connor, who was the editor of the Myrtle Beach Sun News, a former Knight Ridder paper, for 10 years before retiring in 2010. "McClatchy did absolutely the worst thing you can do, which was buy at the top of the market. They bought Knight Ridder, and the bottom fell out of newspapers."
Gary Pruitt, chief executive of the Associated Press and the McClatchy CEO who engineered the Knight Ridder deal, declined to comment through a spokesperson.
Soon after the sale closed, McClatchy sold a dozen of its newly acquired newspapers - including the San Jose Mercury News, the Philadelphia Inquirer and the Akron Beacon Journal. Nine of those papers were union shops, according to reporting from NewsReview.
The publisher also failed to maximize its online opportunities, according to former employees. Tony Ridder, a member of the Ridder family and chief executive of Knight Ridder at the time of the sale, said McClatchy erred in not taking any of Knight Ridder's corporate or digital staff.
"It was generally recognized that Knight Ridder was the leader in the Internet space and trying to build up that kind of business," Ridder said. "I was disappointed they opted not to take any of our digital or corporate people just for institutional knowledge. When we bought newspapers, we worked with the people that were there and we generally kept the publishers."
James Asher, the former Washington bureau chief, said the digital strategy put too much emphasis on local news. One of the last regional newspaper companies with foreign bureaus, McClatchy discontinued its international operations in 2015 to concentrate on regional and political coverage.
"The Washington Post and New York Times doubled down on national and international operations that brought online traffic outside of those cities," Asher said. "You can make money with wide digital traffic. McClatchy had that same ability with national and foreign bureaus for 30 newspapers and a Washington bureau that was a finalist for Pulitzer Prizes and won a Pulitzer. They could have opted to do what The Post and the Times did, but they decided not to. They emphasized local news, and that is causing their demise."
McClatchy had been in talks with Tribune Publishing about a merger, but that fell apart in 2018. The sticking point was McClatchy's debt, even though it had erased hundreds of millions of dollars of what it incurred in the Knight Ridder deal. Tribune oversees several newspapers, including the Chicago Tribune, Baltimore Sun, Orlando Sentinel and Norfolk's Virginian-Pilot. Alden Global Capital now holds a 32 percent stake in Tribune.
In November, McClatchy reported a net loss of $305 million, the majority of which was from a massive markdown of its assets. As of September, the company's outstanding debt stood at $708.5 million. But there are signs of growth, with the company seeing a 45 percent jump in digital-only subscribers in the past year.
It will be guided through bankruptcy by its largest creditor, Chatham Asset Management. The hedge fund owns about 20 percent of McClatchy's stock and is its biggest shareholder outside the McClatchy family.
McClatchy will probably be delisted from the New York Stock Exchange, something that has been threatened before because of the company's paltry share price. It was trading at 75 cents a share at close Wednesday.