Newspaper Ownership Is Turning The Page
In Orange County, The Private Model
A focus group examines issues of the OC Post, the Orange County (Calif.) Register's new bite-sized sister publication. "There's no nine paragraphs of useless stuff," one participant said. "It gets to the point."
By Frank Ahrens
Washington Post Staff Writer
Tuesday, January 16, 2007; D01
SANTA ANA, Calif. -- A quarrelsome newspaper family, fed up with its papers' poor performance, puts the company up for sale. Private-equity bidders step in, letting the unhappy family members cash out with millions of dollars. In the wake of their exit, the papers face buyouts and other cost-cutting measures as they struggle to keep readers.
The scene sounds like the one playing out at the once-mighty Tribune Co., where a boardroom fight has forced the company onto the block and led to the firings of the editor and publisher of its largest property, the Los Angeles Times.
But the events described actually began playing out three years ago and 45 minutes south of L.A. down Interstate 5, at the Orange County Register and its parent company, Freedom Communications.
As such, what happened in Orange County may prove a lesson for Tribune, the L.A. Times and much of the rest of the industry. Declining circulation and advertising revenue are chasing newspapers out of the longtime hands of family and Wall Street shareholders and into the arms of the trendiest owners in the industry: private-equity firms.
Tomorrow is the deadline Tribune has set for bids on its $7.3 billion newspaper and television empire. But enthusiasm for Tribune has been tepid, rousing little interest from publicly traded newspaper companies but plenty from private money.
That unsettles some, who fear that private equity's focus on short-term gain will lead to more cuts and quality reductions in an already shaky industry. But Freedom president Scott N. Flanders said private-equity ownership of newspapers is actually the best idea for this turbulent era.
"Media companies in transition should be private," Flanders said. "When you're privately backed, you have the flexibility to be nimble."
In recent decades, almost all large newspapers and chains have been publicly owned. Now, however, newspapers have fallen into disfavor with Wall Street, which values stock-price growth over almost every performance metric. And newspapers are not growing.
Advertising growth exists only online, yet digital revenue is still less than 10 percent of almost every paper's total revenue. Consequently, public investors have forced companies to sell newspapers and break up venerable chains in an effort to extract value. The result: More papers are falling into private hands, where equity partnerships rule.
Though they are not growing, many newspapers continue to make healthy profits, making them appealing targets for equity firms: small groups of moneyed investors who typically hold their new companies for a few years, urge them to cut costs and create value, and then sell their interest and move on. Some equity firms leave the companies stronger and better-positioned for the future; others do not. Private-equity companies used to be known as leveraged-buyout firms, and some of those were known as sharks.
One of Freedom's owners, Providence Equity Partners, is interested in Tribune, which would give it an unrivaled footprint in Southern California. Another equity firm bought the Minneapolis Star Tribune late last month. Equity firms took a run at the Knight Ridder papers last year before they were purchased by the McClatchy newspaper chain.
In Santa Ana, a two-decade feud among Freedom's owners -- the Hoiles family -- forced the sale of the company. In 2004, two private-equity firms, Providence and Blackstone Group, bought 40 percent of the company for $1.3 billion, including debt. Disgruntled Hoiles family members could cash out; those who wanted to stay were able to keep running the company.
Some have called private money the industry's salvation: no more quarterly earnings reports, no more forecasts to meet, no more stock-price-crazed Wall Street sharpies.
But private money is no panacea.
When private investors buy into a company, they often borrow large sums of money, layering debt upon a sometimes-shaky corporation. Blackstone and Providence borrowed nearly $1 billion to buy into Freedom. Some investors -- though not Freedom's -- pay themselves huge dividends at the time of sale, ensuring they get their money, sometimes at the expense of the new company.
Equity owners also have direct access to company management that large groups of shareholders do not. Morgan Stanley, for instance, holds 7.6 percent of New York Times Co. stock and is pressuring the company to abandon its two-class stock ownership structure. Providence and Blackstone, meanwhile, have four of the 13 seats on Freedom's board.
On the upside, private-equity owners can offer management an agility rarely seen at comparably sized public companies. One recent day between lunch and mid-afternoon, Flanders put in preliminary bids on a $60 million asset and a $90 million asset without calling his board of directors.
Also, Blackstone agreed to maintain its stake in Freedom until at least May 2009, a move that shielded the company from the practice of some equity firms, which cash out quickly to turn a fast profit.
Equity firms tend not to be long-term investors. When they buy into a company, they have an eye on its eventual sale -- usually within five to seven years -- hampering hopes for long-term security. The good news is, by acting in their own self-interest to ensure their highest payout at sale, equity funds can increase the company's value.
For instance: Blackstone and Providence have agreed to spend to improve the Freedom papers' Web and multimedia efforts, which offer the highest potential for advertising growth, Flanders said. A potential buyer of a newspaper chain would not consider one without a robust Web presence, goes the funds' thinking.
Neither Providence nor Blackstone would comment for attribution.
Providence and Blackstone (and Hoiles family shareholders) are compensated via a quarterly dividend based on 1 percent of the company's equity value in 2004, or about $13 million per year, said a source familiar with the deal who declined to be identified because Freedom is privately held. Profit at Freedom's Metro papers group, which includes the Register, was $104 million for 2005, a 10 percent increase over 2004, the fourth straight year of double-digit growth. Profit was about 22 percent of revenue, better than at most publicly traded newspapers. This came despite a drop in the Register's daily circulation, from a high of 354,843 in 1991 to 287,204 now.
Register journalists who have come from publicly traded newspapers say that even though their paper does not face Wall Street's quarterly demands, it sometimes feels like it does.
In October, the Register lost about three dozen employees through buyout offers. The "voluntary severance program" was followed up by an October e-mail to staffers from Freedom executive N. Christian "Chris" Anderson III, who wrote, "If all approved program applicants accept their severance agreements, we won't have to have any large-scale layoffs."
Flanders said the buyouts were related to the general industry slump and were not required by Freedom's investors, but newsroom staffers could not help but see a connection.
"There is no illusion that we are immune to market pressures because our company isn't traded on a stock market," said Andrew Galvin, a Register business reporter.
Half of Flanders's job is running Freedom. The other half is figuring out how to buy out Providence and Blackstone and return the paper to full family control. Flanders would not offer specifics on how to buy out the equity firms, but one obvious method is to raise revenue through new advertising initiatives.
"When an industry is under siege, revenue streams need to be considered that were heretofore considered sacrosanct," Flanders said.
Flanders offers up the experience of former L.A. Times publisher Mark Willes as an example. Under Willes, the paper brought an ethical scandal on itself in 1999 by publishing a magazine about the newly opened Staples Center arena and splitting ad revenue with the venue, breaching the editorial-advertising wall. "No one would bat an eye at that today," Flanders said, though he added it was important to maintain Freedom's journalistic standards. "Mark Willes was ahead of his time."
Another way to increase value is the creation of new revenue streams, such as the OC Post, a daily paper that launched in August.
The OC Post is a shrunken version of that day's Register -- a tabloid-size paper that takes articles from the Register, slashes them into briefs and asks a time-crunched public to buy it for $19.99 per year. The idea was prompted by research that found a frightening number of readers were only a few payments away from canceling their subscriptions to the Register.
"Without the OC Post," said Register editor Ken Brusic, "we had no safety net."
Thus far, the six-day-per-week paper has picked up more than 15,000 subscribers.
Freedom hasn't stopped there, as evidenced by the focus groups the OC Post held in its sleek, glass-lined conference room last month, when it paid several people $150 each to say what they thought of the new paper.
A facilitator led one group page-by-page through an issue of the OC Post, asking about features and articles, as pages were displayed on flat-screen TVs around the room. At one point, they homed in on an OC Post feature called Weird News -- a wire-service compendium of offbeat items. Earnestly, the facilitator asked the group, "Is it the right amount of weird news being presented or should it be the whole page?"
Just as earnestly, one of the participants answered, "I think it's the right amount of weird news."
