The controlling owner of the St. Paul Pioneer Press and dozens of other news publications, the fund manager Alden Global Capital, just was sued by its partner in the investment for withholding so much information that the minority partner suspects Alden of unfair insider dealings and other mismanagement.
For a dispute between two hedge fund managers with a lot of money at stake, the complaint seems surprisingly short of drama. The minority partner, Solus Alternative Asset Management, seems mostly to want current financial statements so it knows for sure what’s going on.
Even the insider dealings the minority partner has questioned, including having a newspaper company invest $158 million into a regional discount retailer and pharmacy chain called Fred’s, really weren’t that surprising.
That’s because we already knew, as I wrote in a column roughly two years ago, that Alden is treating one of the biggest media companies in the country like a big ATM. And it doesn’t seem to care that the ATM will someday run out of money.
The complaint was made in a Delaware court by affiliates of Solus, a New York hedge fund manager that claims to own about one quarter of the equity of a media holding company called MNG Enterprises. Solus is far from a household name, but until Alden started presiding over the decline of a big media company, it had a low profile, too. Both are known as buyers of distressed assets.
That’s not necessarily a disreputable way to make money, by the way. There are several firms here the Twin Cities with good track records investing in distressed assets.
One common strategy is to buy bank loans that seem certain to never get paid back in full. With claims on the assets of a borrower, these bad loans are still worth something. But to a bank whatever asset is left no longer looks like a commercial loan anyway, so it’s happy to just get out.
That’s one way Alden got to be a major investor in the media business. Now it owns a controlling interest in MNG Enterprises, a holding company with more than 200 newspapers and affiliated online publications in 10 states, according to the Solus complaint. The Denver-based company could be considered a corporate successor to MediaNews Group, which in 2007 completed its deal to buy the Pioneer Press, both a traditional competitor of the Star Tribune and more recently a customer for printing and distribution.
Alden did not respond to a request for comment.
One way for distressed asset buyers to make money is to do what they can to stabilize a business, maybe by reworking the balance sheet to get rid of expensive debt. Alden, though, doesn’t appear to have much interest in stability.
To understand its approach, it’s maybe enough to know that unionized employment in St. Paul’s newsroom has fallen from about 150 at the time MediaNews acquired the publication to the most recent count of 46.
Cost cuts have occurred in other departments and not just in St. Paul, of course. Additional job losses so far this year in northern California mean that the unionized Mercury News newsroom staff in San Jose, which peaked at nearly 450 during the 1990s, has declined to fewer than 40. The Denver Business Journal reported Wednesday that 30 percent of the Denver Post’s newsroom staff will be laid off — it currently has about a 90-person staff.
Alden may have had other ambitions when it got into the industry, but what’s unfolding now is called a harvest. That means the owners realize they can’t grow the business in a declining industry anyway, and one of the remaining smart options is to harvest the cash flow.
The task is to pull out cash, whether there’s an operating profit or not. That’s why buildings and other assets have been sold.
That’s the approach you see in this suit in Delaware. It’s important to note that while the Fred’s investment looks disastrous so far, that’s not really what Solus seems sore about. It’s mad that all this money that was generated from laying off editors or selling assets didn’t get distributed to the owners, and Solus had nothing to say about it.
The trick in executing the harvest strategy is going about it in a carefully controlled way. Cut costs too fast and the owner could easily spook employees, suppliers or customers into thinking there will soon be no business left so they may as well move on.
There is certainly evidence in the circulation numbers that customers in the Pioneer Press market are getting nervous. The Star Tribune’s circulation has been declining in the last few years, along with the circulation of other titles in the industry, yet data from the Alliance for Audited Media shows the slide in the Pioneer Press circulation has been steeper over roughly the same period.
Its ability to keep wringing cash from operations through cost-cutting seems to explain why Alden continues to hang onto its media properties. The pool of buyers isn’t a deep one, yet Alden has reportedly indicated that it would consider a bid for any property at a price equal to 4.5 times the last year’s earnings before interest, taxes, depreciation and amortization, a common financial measurement known as EBITDA.
If this is the case, it’s about as simple as the math in finance gets. Bid more than 4.5 times the last 12 months’ cash earnings, and Alden may be a seller. Bid less than 4.5 times cash earnings and Alden likely opts instead for another year of collecting cash flow.
With the trend of declining cash flow, however, the value of the business is going to slip as well. One year later the price will be 4.5 times a smaller number. How long this can go on depends on a lot of things that aren’t easily estimated, including how many loyal customers hang on in markets where Alden has dramatically reduced the expense budget for producing the product.
It’s easy enough to imagine a scenario, though, that has the annual cash flow approaching zero.
Then the business math won’t even require a calculator. Even kids as young as third-graders know that whether the number is four, five or a hundred, multiplying it by zero will always result in zero.