How the McClatchy and Tronc markets compare geographically
With grim news swirling around the newspaper business, it may not seem like an opportune moment to pursue a major newspaper acquisition.
But media industry analysts say McClatchy’s reported efforts to buy Chicago-based Tronc Inc. could give it a chance to bolster its finances and accelerate what has been a difficult and sometimes painful transformation to a digital media company with a strong footprint in local news.
At current stock prices, Tronc is valued at a little under $600 million, a hefty price. But an acquisition could nearly double McClatchy’s cash generation, giving it a more stable financial platform, said investment analyst Michael Kupinski of Noble Capital Markets in Boca Raton, Fla. McClatchy is laboring under $760.4 million in debt.
“This gives (McClatchy) a better shot at succeeding than going it alone, as McClatchy is now,” said Ken Doctor of Newsonomics, a media industry consulting firm.
McClatchy, which owns The Sacramento Bee and 29 other newspapers, declined to comment for this story.
Last week, Tronc’s flagship paper, the Chicago Tribune, quoted an anonymous source as saying McClatchy is in “early stage” discussions to purchase Tronc. A New York investment firm, the Donerail Group, has already made an informal offer to buy Tronc for more than $700 million, the newspaper reported.
Meanwhile, online news site Business Insider reported that billionaire investor Patrick Soon-Shiong is considering teaming with McClatchy to make a bid for Tronc.
Soon-Shiong recently purchased the Los Angeles Times and the San Diego Union-Tribune from Tronc and still owns 25 percent of the Chicago company.
Doctor said Soon-Shiong’s participation would make it a lot more affordable for McClatchy to buy Tronc: The acquisition price would drop by about 25 percent because McClatchy wouldn’t have to pay for the shares Soon-Shiong already owns. And if Soon-Shiong is willing to contribute a significant amount of cash to the deal, McClatchy could make the acquisition by borrowing $250 million or less, Doctor said.
Doctor said Soon-Shiong appears interested in using McClatchy and Tronc to build a national news organization.
In addition to The Bee, McClatchy owns the Miami Herald, the Kansas City Star, the Charlotte Observer, the Fort Worth Star-Telegram and more than two dozen other local news organizations. Tronc’s properties include the Chicago Tribune, the New York Daily News, The Baltimore Sun, the Hartford Courant as well as the Orlando Sentinel and Sun-Sentinel in Florida.
A combined McClatchy-Tronc operation would own more than 40 local news organizations across the country, providing a larger platform for deploying the collection of digital-media technologies Soon-Shiong controls, including a “predictive analytics” system designed to customize news sites to readers’ individual tastes.
“Patrick Soon-Shiong wants to be a player, he wants to be a player in publishing,” Doctor said. A deal with McClatchy and Tronc “gives him a wider playground for his technology.”
Soon-Shiong declined to comment through a Los Angeles Times spokeswoman. A Tronc spokeswoman also declined to comment.
McClatchy was $3.3 billion in debt after buying the Knight Ridder chain in 2006, just as the economy turned south and most newspapers and advertisers began losing readers and advertisers to the internet. McClatchy has struggled since, with 12 years of declining profits and revenue that have forced the company to make significant cutbacks in staffing.
McClatchy’s latest financial results show the difficulties continue. In the second quarter, McClatchy reported an adjusted net loss of $5.6 million, not including various charges such as severance payments, as revenue fell 9.2 percent. However, the company saw continued growth in online subscriptions and advertising.
“We’re excited to see our investments in our digital transformation beginning to pay off,” Craig Forman, McClatchy’s president and chief executive officer, told investment analysts on the company’s quarterly earnings call.
Forman also pointed to the fact that McClatchy has paid off more than two-thirds of the Knight Ridder debt, and that it recently succeeded in refinancing the remaining $760.4 million in long-term bonds, pushing the earliest maturity date nearly four years to 2026.
The refinancing gives the company “a much longer runway” as it works through the digital media landscape, Chief Financial Officer Elaine Lintecum told the analysts.
Still, outside experts were initially surprised by reports that McClatchy might be interested in a deal that could involve more debt.
“To add more debt, after the No. 1 goal is to reduce debt, is counter-intuitive,” Doctor said.
But Doctor and Kupinski said the deal could make sense.
Although it owns fewer daily newspapers, Tronc is nearly as big as McClatchy in generating cash flow — a key measure of profitability before debt payments and other expenses are factored in. Kupinski said Tronc this year is projected to generate $108 million in cash flow, compared to $131 million at McClatchy. If McClatchy could pull off the deal without taking on a lot more debt, the acquisition would strengthen the Sacramento company’s finances considerably.
“You’d be gaining around $100 million in cash flow, so you could bolster the entire company,” Kupinski said. Because Tronc has practically no debt, the combined company would be better situated to handle its debt payments than McClatchy is now, he said. In Wall Street lingo, McClatchy would be “deleveraging.”
A key player in McClatchy’s future could be a New Jersey investment firm, Chatham Asset Management LLC. It was a crucial partner in the refinancing, lending McClatchy millions so it could buy back bonds that were due to mature in the next few years.
Chatham also owns 20 percent of McClatchy’s non-family-controlled Series A stock, including shares purchased just in the past few days, making it the largest shareholder outside of the McClatchy family. It recently filed a statement with the Securities and Exchange Commission expressing its interest in working with McClatchy on “proposed deleveraging transactions.”