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Analysis

More layoffs loom for Daily Star, 100s of papers as parent chain taken over

Company still pulls tens of millions in revenues, profits from Tucson newspaper

The merger of two chains — Gannett and Gatehouse — will have ripple effects across about 260 daily papers, including the Arizona Daily Star and Arizona Republic, with the company saying there will be more layoffs — including in its already diminished newsrooms.

In what is essentially a highly leveraged buyout, Gatehouse — a national chain known for being even more penny-pinching than the frugal Gannett — is borrowing $1.8 billion to take over Gannett, forming the largest newspaper chain in the nation.

The combined company, which will keep the Gannett name, told employees Tuesday to expect layoffs as the merger deal closed.

"Will there be layoffs? Yes, there will be changes that will involve a reduction in our workforce after thoughtful review," a corporate FAQ provided to employees said. "Throughout the integration process, we're committed to being transparent, timely, and respectful in our communications with you."

Gannett, already a megachain, is the owner of the Republic, and a 50-50 partner with Lee Enterprises in Arizona Daily Star in Tucson.

Both those Arizona papers, and the others owned by Gannett and Gatehouse, as well as those owned by the Lee chain, have been slashed and cut again and again over the past decade, as corporate owners have striven to maintain profits and print newspaper readership and revenues have dropped off a cliff.

Company representatives have said they'll try to not cut reporting jobs, but industry experts have said that pledge is likely hollow.

Both Gannett and Gatehouse have cut reporting staff precipitously over the past several years, as has Lee, the other corporate partner in the remaining Tucson daily — even as executives at the companies have enjoyed large salaries and extravagant retirement payouts.

And the company plans to cut at least $275-300 million in annual costs over the next year. Some industry experts have forecast those cuts may be more than double — up to $500 million knocked off the budget for each year. And the $1.8 billion borrowed from Apollo Global Capital to swing the deal comes with a steep 11.5 percent interest rate.

The staff of the Arizona Republic recently voted to unionize, citing the cuts that have dropped that newsroom from about 425 journalists in 2007 to about 130 today. At the Star, a newsroom of more than 150 has been reduced to about 60 total — a staff smaller than that in the Tucson Citizen newsroom when that newspaper closed a decade ago after having been slowly hacked and throttled by its owner, Gannett.

Analyst Ken Doctor noted that Gannett may slash more jobs than the next-largest megachain has total employees, asking "How much blood is left to be drawn from this stone?":

With headcount amounting to about 50 percent of total expense, most are placing the overall number of FTE cuts at more than 3,000. Some believe the number, over the next year, will come in at somewhere between 3,500 and 4,000. It’s unlikely we’ll know the actual number for awhile, and then only through extrapolation.

For a sense of scale, when this deal closes, McClatchy will be the second largest U.S. newspaper company by circulation, behind New Gannett. It has fewer than 2,800 employees in total. So New Gannett will cut more jobs — perhaps substantially more — than its biggest competitor even has.

At the Star, 60 jobs were lost in the pressroom when the newspaper moved its printing to the Republic's plant on the north edge of Phoenix earlier this year.

While the Tucson paper has hired some fresh new talent over the past year, there are plenty of empty desks in the newsroom at the Star.

Earlier this year, the Star offered buyouts to a dozen of its older newsroom staffers, with a number of veterans taking the offer of a limited severance package, and a group of younger reporters left the paper.

The South Park operation under which the Arizona Daily Star is held is a partnership between national newspaper chains Gannett Inc. and Lee Enterprises, with each holding a 50 percent share. Lee is the publisher of the Star, while Gannett was formerly the publisher of the Tucson Citizen, which ceased printing in 2009 and folded up its small blogging site in 2014.

In 2016, the Star laid off at least nine journalists — about 15 percent of the newsroom staff at the time. In 2011, the newspaper handed 52 employees their walking papers, including about 15 from the newsroom.

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The Star's operation is now so shrunken that the company has put its vast building up for sale, with the newspaper interested in moving to a facility just a tenth of the size if the current plant is ever sold, internal sources said.

While overall revenues have drastically declined in the past decade, and Lee and Gannett have cut expenses to match, the Star is still very profitable. The operation netted about $10 million split between the two partners last year out of $47 million in revenues, with the profits distributed from "all available cash" on a weekly basis. The last year specific numbers were disclosed, 2016, the Star had continued its longstanding pattern of spending about 10 percent of its revenues on newsgathering, including the total salaries of all the reporters, photographers and editors.

Gannett has scheduled a company-wide "town hall webcast" for employees for Wednesday morning, announcing "We look forward to sharing some exciting news."

Gannett fended off earlier takeover

In May, Gannett fended off a takeover bid by Digital First Media, another cost-slashing newspaper chain. But while that $1.3 billion deal was rejected by the company's board, the Gatehouse merger was attractive enough to corporate leaders to accept.

The hedge fund behind the hostile bid by DFM, Alden Global Capital, announced Tuesday that it had instead taken a 25 percent stake in Tribune Publishing, making it the largest shareholder in that chain. Tribune owns the Chicago Tribune, New York Daily News, Baltimore Sun and Orlando Sentinel, among other newspapers. Alden, which owns the Denver Post and Boston Herald under the DFM banner, along with more than 100 other local news outlets, has faced a federal probe this year for investing $250 million in workers' pension assets in its own hedge funds.

The "new Gannett" will control, post-merger, about 260 newspapers and hundreds more weekly publications in 47 states. Gannett also operates a chain of 165 newspapers and 40 magazines in the UK as Newsquest.

The combined company will own one of every six newspapers, and print about 30 percent of all newspapers sold in the U.S. each day.

From a Brookings report on the merger:

Both Gannett and GateHouse have a reputation for cutting staff across their newsrooms. In the past two years alone, the number of employees at Gannett has fallen by one-fifth. The merger will likely entail another round of layoffs for local newspapers across the country to achieve the aggressive cost savings put forward by the companies’ executives. No one knows for sure just how many employees will be laid off in the wake of the merger, but estimates put the number between 3,500 and 4,000. There are 37,900 newsroom employees employed by U.S. newspapers today. If the expected layoffs occur, that will mean a significant reduction of the nation’s total newspaper workforce.

Over 2,000 American newspapers have ceased production in the last 15 years, leaving millions of Americans without a vital source of local news. But a city or town doesn’t need to lose a newspaper to feel the effects of the local journalism industry’s decline. Of the newspapers remaining, many have laid off reporters, reduced coverage, and pulled back circulation. Discussing the merger between Gannett and GateHouse, the chairman and chief executive of New Media said that the merger will help in “sustaining journalism in hundreds of markets across the country.” However, the newly combined company is not likely to pursue this end by making additional investments in the production of original news content and the workers who produce it; observers such as The Washington Post’s Margaret Sullivan predict that it will simply lead to more cuts.

The New York Times broke down how the merged company will be owned by a Japanese investment bank —

The supersize version of Gannett has a byzantine corporate structure. It will be managed, under an agreement that lasts two more years, by Fortress Investment Group, a private equity firm in Manhattan. Fortress was the entity that controlled New Media Investment Group, the parent of GateHouse Media.

Fortress, in turn, is owned by SoftBank, the Tokyo conglomerate founded by Masayoshi Son, a brash executive who had a friendly meeting with Donald J. Trump in December 2016, when Mr. Trump was the president-elect. (Mr. Son was also a driving force behind the all-but-final megamerger of Sprint, a SoftBank-controlled company, and T-Mobile; that deal won regulatory approval after a lobbying campaign that included company executives staying at the Trump International Hotel in Washington.)

The new heads of the combined operation told the Gannett-owned USA Today on Tuesday that they're looking to the lead-generation approach of companies like Yelp and Angie's List, rather than continued advertising revenues.

Gatehouse's Mike Reed, who'll head the new merged corporation, told the newspaper that he's confident the company can achieve its cost-savings goals "without deep newsroom cuts."

Time will tell.

"Follow the money," analyst Doctor wrote:

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When I first wrote about this potential union back in July, the estimated annual cost savings — “synergy” — to be derived from a merger was “something like $200 million.” By August, it was “$200 to 300 million.” Then it was “$275–300 million.” Now, talk has gone to $400 million and beyond, into the range of nearly half a billion dollars.

What does that mean? Almost certainly, even more reduction in headcount than had been anticipated. (Executives declined to comment on the amount the synergies they’re now eyeing.)

How much? In any room of eight people at a current GateHouse or Gannett operation, one is likely to see her job gone in 2020. One in eight would add up to 3,450 of the combined companies’ 27,600 jobs. Some observers expect that the final total to be higher than that. And the company won’t wait for the first of the year to begin layoffs: With immediate savings a priority, expect those anxiety-inducing conversations to begin right after Thanksgiving.

Those layoffs may well be on top of those already going forward in current Gannett newsrooms. As Gannett finishes its regular budgeting for 2020, its newsrooms can expect 3 to 5 percent cuts in their budgets, sources tell me.

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A 'for sale' signed appeared outside the Arizona Daily Star offices in August.

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