Chain newspapers continue death spiral — but those who lead them down still reap rewards

The Arizona Daily Star has been left exposed and its staff is about to pay the price. That's not because of the online onslaught, changing readership patterns or a revolution in revenue modeling.

Fine, it is about all that — but the Star’s parent company, Iowa-based Lee Enterprises, has saddled what remains of local for-profit print journalists with too much additional weight that leaves their newsroom huffing, puffing and trailing the pack.

And here come the jackals ...

Gatehouse Media and its private equity owner has merged with and/or taken over Gannett, Inc., and created the largest newspaper chain in the country. Gannett owns half the Star because it used to own the Tucson Citizen. Lee and Gannett jointly ran both businesses under the banner of Tucson Newspapers Inc. The Citizen was throttled to death a decade ago but Gannett held on to its half of the partnership. Now Gatehouse — a jackal among the hyenas of newspaper chain ownership — is taking over and layoffs are in the offing across all of the news organizations it's gnawing on (including up in Phoenix at the Arizona Republic, which is solely owned by Gannett).

The Daily Star may not be hit right away. Under the joint-operating agreement, layoffs were announced independently between Lee and Gannett. Gannett layoffs didn’t hit the Star and Lee layoffs didn’t affect Citizen staffing. However, both businesses were run jointly and the Star is now the only game in town. The bottom line is still the bottom line and numbers are everything to the "new" half-owner.

This move also means that Lee Enterprise's stock price will be competing against the New Gannett behemoth, which will slash, slash and burn, burn at an even faster pace to keep its share price high. Lee will be pressured from within and without.

The facts are chilling for those who know how important newspapers have been to creating informed communities:

• The number of print newsroom employees across the country dropped by nearly half between 2008 and 2018.
• Print circulation — still one of the major sources of revenue for newspapers — is falling rapidly. The Arizona Republic saw its print readership drop by 30 percent in just the last two years.
• Over the past 15 years, more than 1,800 newspapers have closed – 1 in every 5 across the country.
• Revenue at the Star has fallen to just about a third of what it was a decade ago — $50-ish million yearly, but just a small slice of its former glory.
• The Star has maintained a healthy profit margin — 20 percent, down from 30 percent a decade ago — and also kept up the standard chain newspaper practice of putting just 10 percent of overall (and shrinking) revenues into actually committing journalism.

The Star is more vulnerable than it should be to an owner with a more penny-pinching reputation than "old" Gannett. I didn't think that was possible.

My thoughts turn to the unsuspecting reporters in the newsroom who don't know what's coming and will someday be out on their asses as the fevered pace of newsroom cuts show little sign of ebbing.

What's going to hit them isn't their fault but if we're looking for people responsible for the Star's especially precarious position, just look upwards.

The people responsible for the Star’s precarious position — former Lee CEO Mary Junck and others on her team — were rewarded for their efforts. I may piss some people off with this but that kind of no-risk, high-reward executive model is the heart of the real white privilege, that informs the rest of it.

It's their world. You just get to work in it — if you are lucky enough to still please them.

Charging into debt

This is what a giant, termination-worthy screw up looks like.

At the end of its fiscal year in 2004, Lee Enterprises was an Iowa-based newspaper chain with $600 million revenues and a stock price of $45 per share.

Then company leaders decided to buy the Arizona Daily Star’s parent company, Pulitzer Newspapers, but that meant debt – gobsmacking debt – to get the $1.3 billion deal done.

That debt has strangled Lee and the Daily Star for the better part of two decades.

According to their most recent quarterly report on file at the U.S. Securities and Exchange Commission, Lee still owes more than $400 million in debt. That includes a $374 million dollar payment due creditors in March 2022. That’s a problem for a company with $543 million in annual revenue.

Carrying that much debt is a nifty trick considering the company also brags to the stock-shopping public that they have retired more than $1 billion of debt since 2005. The total sale price was $1.47 billion. Lee has spent 14 years using all its available resources to pay off said debt and still owes $454 million.  

While this has been going on, they have more debt-per-earnings before taxes, debt and amortization (EBITA, in CorporateSpeak) than any other media company in the country.

Opportunity cost

Lee hasn’t been able to make the investments necessary to switch over to the digital production in a big bold way. Lee admits as much in its 2018 annual report:

"Our operating revenue may be materially adversely affected if we do not successfully respond to the shift in newspaper readership and advertising expenditures away from traditional print media and towards digital media. Significant capital investments may be needed to respond to this shift."

In 2018, Cannell Capital, a Jackson Hole, Wyo.-area asset management group owning 6 million shares of Lee stock, made a run at the chain’s management team.

A page from their PowerPoint presentation sums up the firm’s thought on the matter: “A board revamp is not one of the few important things for Lee Enterprises, Inc. It is the only important thing.”

Among the concerns the investors holding more than 6 million shares of Lee stock raised was how the company’s "lack of innovation is confounding in the face of a media environment that has changed massively.”

Will Lee be able to pay the $454 million in debt in a couple years? Don’t hold your breath. The original deal called for a shot of red ink that could not be repaid and the company had to go through bankruptcy in 2011. That’s when they took on more debt to stay alive and keep publishing.

The Star remains profitable – returning about 20 percent margins that mean millions of dollars in profit each year for the corporate owners – but the numbers are sinking. Not that those profits do the Star any good. They’re just sending them all back to Davenport, Ia., and McLean, Va., to pay for the privilege of being owned by Lee and Gannett — and shipping those profits out of town on a weekly basis, in fact.

And this has cratered the company’s stock price. Prior to the merger, Lee stock traded in the mid-$40s. Today a share will set the buyer back a cool $1.84.

For God's sake, fire the schools writer. That will fix things.

Harvest time

But wait, there’s more: Tucson Newspapers Partnership is a bit of a stand-alone operation within Lee and now sitting across the ownership table are new people reporting to a private equity firm.

Gatehouse is controlled by Fortress Investment Group, a private equity firm based in New York City. Private equity firms are known for doing two things related to newspapers and retail chains: Buying them cheap and loading them up with debt, paid for in part by slashing jobs.

Their attack on newspapers was pretty brilliantly summed up by the New Republic:

"Because newspaper earnings have fallen, they are cheap for private equity firms to buy. These firms can then juice profit margins by cutting staff. Meanwhile, the debt prevents newspapers from reinvesting profits into rebuilding their newsrooms. Instead, staff cuts continue as papers try to meet impossible profit goals. And because staff cuts prevent papers from covering important local issues—or, sometimes, even just the basics, like city council meetings and sporting events—circulation drops further, making them irrelevant and unattractive to other buyers."

And that's who the New Gannett answers to as they sit at the ownership table alongside Lee reviewing the Star's budget year after year. Just how aggressive will Fortress bosses demand the New Gannett be?

What highlights Lee's mismanagement over the years, is that the two companies swooping into Gannett's perch both endured rough times during the past decade. Gatehouse is just six years out of bankruptcy itself and Fortress got waylaid by the Great Recession badly enough to be featured in Vanity Fair.

Lee's staff are even more vulnerable than most newsrooms. The deal to buy Pulitzer blew up in Lee's corporate face but the people responsible kept their jobs and got promoted. Junck was promoted. The Lee CFO, Carl Schmidt, who looked at the Pulitzer deal and said “yeah, that pencils” was allowed to retire gracefully in 2015. Junck’s handpicked successor, Kevin Mowbry, now runs the daily operations under Junck’s visionary perch as chairwoman of the Lee board.

The point is, there will be newsroom reporters who bare the brunt of Lee’s calamitous leadership, while the leadership pats itself on the back for negotiating difficult times.

Warning: Columnist’s rant ahead

This is what I mean by white privilege and more precisely white membership. Why isn’t Junck held accountable? It’s bad form to hold CEOs and corporate directors accountable. If they were worthy of accountability, they wouldn’t be directors, now, would they? Nope. “There was a recession no one could see coming. There was a changing industry. There was a perfect storm. It’s not our fault. Other companies saw it coming you say? Others went through bankruptcy? Eh. Yak, yak, yak, whatever. ”

Retail white privilege is doled out in dribs and drabs to protect the real game, which is “white” social promotion into the upper reaches of unaccountable power. Supreme white privilege is the real game for the truly esteemed. The name of the game is social promotion for the privileged.

The average CEO is average and therefor interchangeable but they pull down astronomical pay and their board never says “we can import a European CEO to do the job for half the price.” The bad ones get platinum parachutes.

So long as we’re discussing Gannett, take Craig DuBow. He ran the company into the ground as revenues were cut in half and the stock price fell by more than 80 percent. He was allowed to retire in 2012 with a $37 million severance package, which works out to nine years of salary.

What’s more of a vulgar display of power than the entitlement to reward without any risk?

I use quotes for “white” because membership doesn’t require its ranks be white and male. The club “just happens to be” white and male, as a legacy of former injustice. Dems da breaks. Life’s not fair. Membership only requires that applicants accept risk-free rewards of a select few over yonder and on high.

This ain't capitalism. This is a burgeoning oligarchy.

A robust free press is necessary for neutral application of the law and neutral application of the law is necessary for a free market. These things are kind of important.

There’s more money to be harvested from the Star with layoffs than simply maintaining profits. The risk will remain on the shoulders of democracy and the people who work to defend it.

Meanwhile, Dylan Smith, Paul Ingram, yours truly and the rest of the team that makes the Sentinel tick will stick it out, pounding away on keyboards, holding a light to the unaccountable.

Because when the public doesn't know what it doesn't know, anything can seem plausible.