McClatchy, a Family Newspaper Business, Heads Toward Hedge-Fund Ownership

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The McClatchy family has been in journalism since 1857, when its flagship publication, The Daily Bee, chronicled the latest for residents of Sacramento in the wake of the gold rush. Now, in keeping with a trend that has placed hundreds of American news outlets in the hands of the finance industry, the McClatchy Company and its 30 newspapers are likely to end up the property of a hedge fund.

The publisher of The Miami Herald, The Charlotte Observer and The Kansas City Star filed for Chapter 11 bankruptcy protection in February, after more than a decade of layoffs and plummeting revenue. Bids for McClatchy were due last week, with an auction supervised by U.S. Bankruptcy Court in Manhattan to start on Wednesday.

The company, which is led by the family scion Kevin S. McClatchy and Craig Forman, a former Wall Street Journal reporter and Yahoo executive, is scheduled to inform the court of the winner by July 15.

A likely outcome is that McClatchy, one of the country’s largest newspaper chains and a consistent winner of prestigious journalism awards, will be owned by a New Jersey hedge fund, Chatham Asset Management. Under the deal, McClatchy, a publicly traded company, would go private.

Chatham, which is the principal owner of American Media, the parent company of The National Enquirer, became a large McClatchy shareholder and assumed much of the company’s debt in 2018. In April, McClatchy said Chatham had made a bid to take over the company. Other bidders could emerge at auction time.

“We have continued to engage with a number of parties over the past few weeks and are encouraged to see the interest expressed in McClatchy,” a company spokeswoman said.

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Credit…Fred R. Conrad/The New York Times

Although cutbacks have become all but unavoidable in the ailing newspaper industry, many journalists and civic leaders are rooting for McClatchy to end up with benevolent ownership that will not lead to further cost cuts.

“Profit-driven entities that are not interested in local journalism are not the solution,” said Joey Flechas, a Miami Herald reporter and co-chair of One Herald Guild, the union that represents employees at The Herald, El Nuevo Herald and Miami.com.

Hedge-fund ownership of publications like The Denver Post has led to steep layoffs in newsrooms, making it more difficult for those papers to keep readers informed.

“With anything that’s subject to the market,” said Sree Sreenivasan, professor of digital innovation at Stony Brook University’s School of Journalism, “their way of rewarding and judging the quality of anything is based on metrics and numbers that may not be synced with the reality on the ground and what is even possible, and they may judge newspapers the way they judge widgets, and find them lacking.”

The Great Recession dealt a blow to the industry when readers were already giving up print, a longtime home of lucrative retail ads and classified notices, in favor of digital devices. Google and Facebook came to dominate the online ad market, hampering publishers’ attempts to generate the necessary revenue from digital advertising.

From 2004 to 2019, roughly half of all newspaper jobs in the United States were eliminated as the cumulative weekday circulation of print papers fell to 73 million from 122 million, according to a University of North Carolina study.

Wall Street became a player in the industry more than a decade ago. The New York hedge fund Alden Global Capital — now a media heavyweight through a subsidiary, MediaNews Group, a chain with roughly 200 newspapers — saw opportunities in distressed media properties. With a strategy that led to deep layoffs at The Denver Post and other MediaNews Group publications, Alden has wrung profits from a business that seemed well past its heyday.

In the fall, Alden announced that it had taken a 32 percent stake in Tribune Publishing, the owner of The Chicago Tribune, The Baltimore Sun and papers in nine other major metropolitan areas. Last week, Alden secured a third seat out of seven on the Tribune Publishing board as it seemed to inch closer to taking control. It also has a 7.1 percent stake in another chain, Lee Enterprises, the publisher of The Buffalo News and dozens of other papers.

Two of the largest newspaper chains, Gannett and GateHouse Media, merged last year into a leviathan that publishes more than 250 daily papers, including USA Today, The Detroit Free Press and The Arizona Republic. That deal was financed by a private equity fund, Apollo Global Management. The combined company, called Gannett, is controlled by another private equity fund, Fortress Investment Group, which is owned by the Japanese conglomerate SoftBank.

Credit…Christopher Dilts/Bloomberg

McClatchy’s troubles can be traced back to 2006, when it bought its much larger rival, Knight Ridder, then the second-largest newspaper chain in the United States, for $4.5 billion, plus the assumption of $2 billion in debt. From the time shortly after the merger to the end of 2018, McClatchy’s work force went from more than 15,000 full-time employees to around 3,300, according to public filings. The current bankruptcy plan calls for McClatchy to cut staff further through 2022.

The Knight Foundation, a journalism nonprofit that originated with the family whose Knight Newspapers merged with Ridder Publications to form Knight Ridder, declined to comment for this article. It reported an endowment of more than $2.4 billion in 2019.

Chatham Asset Management, the company that could end up the winner of the McClatchy auction, is led by Anthony Melchiorre. In addition to taking control of the supermarket-tabloid publisher American Media in 2014, Chatham is a major investor in Postmedia, the publisher of Canadian newspapers including The National Post, The Montreal Gazette and The Ottawa Citizen.

Mr. Melchiorre, a Chicago-area native, worked on Wall Street at Goldman Sachs and Morgan Stanley, where he led its junk bond division. He set up his hedge fund in Chatham, N.J., in 2002. Chatham often takes on the debts of struggling businesses that still have good cash flow. American Media and McClatchy fit that profile.

For more than two years, the hedge fund has been trying to unload American Media publications, including The Enquirer. In 2018, American Media announced the sale of The Enquirer to the family that founded the Hudson News chain of newspaper and magazine shops. That deal still has not closed.

Chatham pushed for a sale of The Enquirer and other tabloids after American Media was under federal investigation. The chairman, David J. Pecker, was said to have helped Donald J. Trump’s presidential candidacy through a deal struck with Karen McDougal, a Playboy model who said she had an affair with Mr. Trump. American Media acquired her story for $150,000 and never published it, a practice known as catch-and-kill.

Federal prosecutors gave Mr. Pecker immunity in 2018, and American Media signed a nonprosecution agreement in which it affirmed that it had made the payment to influence the 2016 election.

Mr. McClatchy, the chairman of McClatchy and a great-great-grandson of its founder, said in February that the company had filed for bankruptcy protection largely because of its $1.4 billion pension plan. McClatchy, which Mr. Forman has run as chief executive since 2017, disclosed last year that it did not believe it could make a mandatory $124 million contribution to the plan this year.

Amid the raft of documents in the McClatchy case, there is a letter filed by the mayor of Sacramento asking the bankruptcy judge, Michael E. Wiles, to find local, civic-minded owners of The Sacramento Bee.

“I would urge you to choose a steward for this company that would build on the journalistic traditions of two of the most storied names in the business — McClatchy and Knight Ridder — rather than degrade them,” Mayor Darrell Steinberg wrote.

McClatchy newsroom employees are also hoping the bankruptcy proceedings end with the company in the hands of an owner that cares about good journalism.

“We want to create a world where we’re not saddled by mountains of debt through no fault of our own,” said Mr. Flechas, the reporter at The Herald, “where financial pressures don’t get in the way of us proceeding as a robust newsroom set on informing the public.”

Edmund Lee contributed reporting.

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