Sacramento sheriff attacks McClatchy, as company’s pension and debt burdens pile up

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Scott Jones, the sheriff of Sacramento County, could barely hide his glee: His nemesis The Sacramento Bee and its parent, The McClatchy Co., are in serious financial trouble, with the company’s stock price collapsing and talk of bankruptcy in the air.

“It is clear that when they abandoned any semblance of remaining journalistic stock they had, in favor of the sensationalist agenda-driven journalism that they are today, their other stock predictably followed,” Jones said Thursday in a Facebook post.

Jones has sparred with The Bee over numerous issues, including the newspaper’s success in winning a court order forcing the sheriff to release thousands of pages of disclosures about disciplinary proceedings against his deputies. The Sacramento County Deputy Sheriff’s Association posted a video, also on Facebook, crowing about McClatchy’s problems.

Suddenly, it seems, everyone is talking about McClatchy’s future. A week ago the Sacramento-based company, the nation’s second-largest newspaper chain, said it’s facing a potential cash shortage. The news touched off speculation about the publisher’s future, including a potential sale of the company.

And, for the first time since its finances began deteriorating more than a decade ago, the company is publicly contemplating the possibility of filing for Chapter 11 reorganization.

It said last week that it has begun talks with its largest debt holder, New Jersey hedge fund Chatham Asset Management, about restructuring more than half of the publisher’s daunting debt load. Separately, it has approached the federal Pension Benefit Guaranty Corp. about taking over its pension plan — a move that, if successful, would alleviate the need to contribute $124 million into the plan next year.

The twin disclosures have left the owner of The Sacramento Bee and 29 other papers at a financial precipice. In a filing with the Securities and Exchange Commission, McClatchy said it might have to file for bankruptcy if it can’t offload the pension plan to the government, make a deal on its debt with Chatham, or both.

“We are considering a restructuring that will allow us to potentially find a long-term solution to our pension and debt structure,” McClatchy chief executive Craig Forman said on a conference call with investment analysts last week. “We cannot assure you that these efforts will be successful.”

McClatchy’s problems come as much of the newspaper industry struggles in the internet era and the transformation to digital publishing. On Tuesday, Tribune Publishing Co. — the Chicago newspaper chain that’s reportedly been talking with McClatchy about a merger — reported that its largest shareholder has sold his 25 percent stake to Alden Global Capital, a New York hedge fund that owns 200 papers and is known for cost-cutting.

McClatchy said it approached the government about the pension plan after the Internal Revenue Service rejected McClatchy’s request for a three-year waiver on its required pension contributions. Without the waiver, McClatchy is due to pay $124 million into the plan next year, a sum that “greatly exceeds the company’s anticipated cash balances and cash flow,” McClatchy said in a prepared statement.

Bankruptcy doesn’t mean the company’s 30 papers would close. The company would almost certainly come out of reorganization with at least some of its $708 million in debt written off. The debt is a legacy of McClatchy’s $4.5 billion takeover of the Knight Ridder publishing empire in 2006.

Yet in bankruptcy, McClatchy could surrender much of the control over its destiny.

“You are basically throwing yourself at the mercy of the court,” said Ken Doctor, head of a media consulting firm called Newsonomics. “Once you get into that process, you’re not quite sure how it’s going to end.”

As for the comments from Jones on Thursday, McClatchy West Regional Publisher Gary Wortel said: “What Sheriff Jones and the Deputy Sheriff’s Association say about our watchdog journalism is wrong. The Bee has been a leading independent local news organization and credible news source since 1857 and will continue to serve this community for decades to come.”

McClatchy family losses

Doctor and investment analyst Craig Huber, of Huber Research Partners in Connecticut, said the McClatchy family, which maintains controlling interest in the company, would probably lose much of its investment as a result of a bankruptcy or an out-of-court restructuring.

“The McClatchy family would most likely get pushed aside here, in a bankruptcy,” Huber said.

Kevin McClatchy, chairman of the company’s board, couldn’t be reached for comment. Elaine Lintecum, McClatchy’s chief financial officer, wouldn’t comment on how bankruptcy or out-of-court restructuring would affect the family’s investment in the company.

The McClatchy family — whose patriarch, an Irish immigrant named James McClatchy, helped found The Bee in 1857 — owns about 30 percent of the company’s total shares. It controls about 80 percent of the voting power through its ownership of a class of stock with extra voting rights.

With the stock closing Thursday at just under 33 cents a share, the family’s holdings have fallen by about $4 million since McClatchy announced it was attempting to restructure its debt and potentially offload the pension plan.

Lintecum said McClatchy hopes to learn by March whether the PBGC will agree to take control of the pension plan and continue payments to retirees. She said most of its 20,000 retirees wouldn’t see an “adverse impact” on their pensions from a takeover by the federal agency.

Chatham, meanwhile, controls about $425 million of McClatchy’s debt and has viewed itself as an ally in McClatchy’s efforts to improve its financial footing. A year ago, when McClatchy was reportedly trying to buy Chicago-based Tribune, Chatham filed statements with the SEC saying it was interested in working on deals with McClatchy. It owns 20 percent of McClatchy’s stock, making it the largest shareholder outside the family.

The hedge fund, which controls $4 billion in assets, gained some unwanted notoriety over its controlling interest in American Media, the former owner of the tabloid National Enquirer. American Media acknowledged paying $150,000 in hush money before the 2016 election to keep former Playboy model Karen McDougal from disclosing an alleged affair with future president Donald Trump.

Chatham’s manager, Anthony Melchiorre, was reportedly disillusioned with the tabloid’s actions and forced American Media to sell the Enquirer and two sister publications, the National Examiner and the Globe. The three publications were sold earlier this year for a reported $100 million to the founder of Hudson Media. Under Chatham’s control, American Media still owns such magazines as Men’s Journal and Us Weekly.

Chatham owns other media properties, including marketing and communications company R.R. Donnelley & Sons. Chatham didn’t return calls seeking comment.

On Monday, another major shareholder emerged at McClatchy. Bluestone Financial Ltd., an investment firm in the British Virgin Islands, revealed it owns nearly 12.2 percent of McClatchy’s stock, calling the company an “attractive investment opportunity.”

McClatchy earnings, print changes

In an earnings report, McClatchy said last week it had made considerable progress toward becoming a digital-first company: Its base of digital-only subscribers jumped 45 percent in the past year, to 199,000. McClatchy’s quarterly cash flow — a rough measure of profitability — increased for the first time in eight years, albeit mostly through cost-cutting, according to company executives.

McClatchy has hired FTI Consulting Inc., a specialist in corporate restructuring; the Evercore Group investment bank; the Groom Law Group, a law firm that focuses on pension issues; and Skadden Arps Slate Meagher & Flom, a law firm known for its bankruptcy work.

In a note to investors, analysts Thomas Hartman and Vishal Merani, of S&P Global Ratings, said bankruptcy would likely occur sometime before next September – when the “vast majority” of the $124 million pension payment is due. “We view McClatchy’s capital structure as unsustainable due to its high debt burden and modest cash flow generation, without a clear path to significant improvement,” the S&P analysts wrote.

Forman, the McClatchy CEO, said the company is hoping for help from Congress, which is considering a bill that would give companies greater freedom to defer pension contributions. But that isn’t a certainty.

“We view timely legislative relief as a low probability,” wrote the S&P analysts, Hartman and Merani.

If McClatchy does file for bankruptcy, it will surely try to work out debt-restructuring agreements ahead of time to keep the time spent in Chapter 11 to a minimum, said Doctor, the media analyst.

Tribune suffered from a “great degree of paralysis” after filing for bankruptcy in 2008, Doctor said. By the time it left bankruptcy, five years later, it had sold its TV stations as well as the Chicago Cubs.

By contrast, when GateHouse Media filed for bankruptcy in 2013, it had already settled with major creditors. The company, now one of the major newspaper chains in America, spent just two months in bankruptcy.

“You want it to be as packaged and controllable as possible,” Doctor said.

GateHouse and news giant Gannett have now merged, combining the two largest newspaper chains under one umbrella. The new company owns USA Today and more than 200 local newspapers in 39 states. The merger could mean an additional $400 million in cuts for the merged company, or a loss of more than 3,400 jobs among its 27,600 employees, Doctor has reported.

Merger with Tribune?

As its financial pressures have intensified, Doctor said he’s been told McClatchy has resumed discussions with Tribune on a potential merger. Previous discussions fell apart last December after Tribune, then known as Tronc, walked away from the table, he said.

Doctor said a deal with Tribune would make a lot of sense for McClatchy because it could spread its debt over “a much larger cash flow. The (combined) company would be in much better shape than McClatchy is.”

But he said he’s been told Tribune won’t make a deal until McClatchy is able to pare down its debt significantly. Tribune “would prefer a cleaner balance sheet,” Doctor said.

Tilden Katz, a Tribune spokesman, declined comment.

As important as McClatchy’s debt load is, the company’s inability to make its upcoming pension contributions has become an issue that must be resolved soon. Having the federal pension guaranty agency take over McClatchy’s plan would help alleviate the company’s cash crunch. Lintecum said the company hopes to receive an answer from the agency by the end of March.

The agency “strives to keep companies and pension plans together,” the agency said in a written statement about the McClatchy situation. “When that isn’t possible, we stand ready (to) step in and ensure that current and future retirees continue to receive their pension benefits.”

According to its website, the agency guarantees “basic pension benefit,” subject to legal limits; that guarantee only applies to benefits earned before the plan was turned over to the feds.

For most retirees and current employees who are covered by McClatchy’s “qualified” pension plan, “we don’t believe their ... pension benefits will be adversely affected,” Lintecum said.