As hedge funds overtake media, the Denver Post leads a vocal revolt against 'vulture capitalists'
- The Denver Post has become the face of an ongoing trend in media: hedge funds buy out legacy print publications, which leads to layoffs and cost cutting.
- But Denver Post reporters have pushed back, protesting in their own editorial section and outside of the offices of hedge fund Alden Global Media, which owns the Denver Post.
- As newspapers fight declining ad revenue and print circulation, they fight to find owners that mix business savvy with journalism's civic mission.
The future of print media looks grim. A new PwC report forecasts print revenue will continue to decline through 2022, which doesn't bode well for newspapers that have fought through layoffs and cost cuts in recent years.
The media industry on the whole has suffered as digital-native competitors like Facebook and Google consume increasing shares of advertising revenue. Print publications have been hit especially hard, as digital media becomes the choice medium for news consumption. In the meantime, opportunistic hedge funds and private equity firms have swooped in, buying up ailing newspapers and provoking accusations their profit-focused management styles accelerate the demise of print.
The Denver Post has become the face of this struggle, due to an editorial published in its own pages lashing out against owners, New York-based hedge fund Alden Global Capital.
Coordinated by editor Chuck Plunkett, the editorial labeled Alden "vulture capitalists" and protested a strategy the staff said reduced "the amount and quality of its offerings, while steadily increasing its subscription rates." It accused Alden of hiding behind the "narrative that adequately staffed newsrooms and newspapers can no longer survive in the digital marketplace."
The editorial followed a particularly brutal round of layoffs in April that cut the staff by one third, down 30 from about 100. The Post has cut its staff about 70 percent since Alden and its founder Randall Smith took control in 2011, according to data from the Denver Newspaper Guild.
"Everybody has to do more for less and there are some things we've just had to let go," said Noelle Phillips, law enforcement and public safety reporter for the Denver Post. "There is no room to be innovative with digital or online. You are so busy staying afloat you can't do something like that."
The Denver Post is "not shrinking because of a bad business model – I'm sure that's part of it, but the reason you are getting less paper every year is because of our ownership," said Joe Rubino, a Denver Post business reporter who has worked with the paper for three years.
The Post argues Alden is to blame for the cuts that damage the paper's efficacy, but others say it's an acute case of an illness that has been plaguing newspapers for years.
Newspapers in the digital age
Newspaper circulation has been falling steadily since 1990, when total circulation hit a high of around 62.5 million per day, according to the Pew Research Center. As of 2016, circulation had fallen to about 37.8 million on Sundays and 34.6 million on weekdays.
Since 2013, newspaper revenue has decreased by about 12 percent from $33 billion, and is projected to fall to about $25 billion by 2022 – a loss of almost one-quarter over the decade, according to PwC's media outlook. Newsrooms have shrunk, too. In 2006, about 68,600 were employed in newsrooms, versus about 41,400 in 2015, Pew reported.
So it's no surprise that the Denver Post has been hit by layoffs and restructuring.
But what's curious is the layoffs have continued at Alden-owned Digital First Media, the Post's parent company, even though its newspapers are notably profitable compared with the rest of the industry.
Digital First's financials are not publicly available, but the Nieman Foundation published some figures in May. According to the report, Digital First had operating margins of about 17 percent and revenue of $939 million in 2017. Most major publishers, like the New York Times Co. and Gannett, post operating margins under 10 percent. Digital First's Colorado properties, which include the Post and the Boulder Daily Camera, among others, drove a 19 percent profit margin and $187 million in revenue in 2017.
An investor's take
Alden's approach to managing its news properties isn't so unusual for a hedge fund, according to Fabio Savoldelli, adjunct finance professor at Columbia University.
Sweeping layoffs, office relocation, reorganization and paywall price hikes — while viewed as harsh or extreme to those in the news industry — are all tactics hedge funds are within their right to employ to return value to shareholders. Digital First could even be considered a successful investment, as Alden had one of the top performing hedge funds in 2013, according to Bloomberg.
In some cases, financially oriented ownership can provide a wake-up call to newspaper management.
"Parts of the media and entertainment industry have not moved at the necessary pace to keep up with the disruption occurring in the industry," said Chris Vollmer, media and entertainment advisory leader at PwC. "Private equity or hedge fund owners can create that sense of urgency and accountability, and partner with management to get them on a different trajectory that positions [the paper] for success."
There are different outcomes for different investment strategies in an industry where the core business is declining. For a transformation-oriented company, like the New York Times, cuts are made in declining parts of the business to allow for reinvestment in diversified revenue streams and digital. Short-term investors, like hedge funds, maximize cash flow quickly by cutting heads and costs. If an investor wants a guaranteed profit, it is a much safer bet to cut costs than to gamble on distant future returns.
"There is something sad about what's happening with news," Salvodelli said. "[Alden] is just accelerating a trend that has already been there."
Like all businesses, hedge funds must adhere to certain fiduciary duties, which include keeping the fund and its property companies running. But one minority shareholder alleges Alden has violated its duties, making it an unlikely ally of the Denver Post.
A shareholder lawsuit
Minority shareholder Solus Alternative Asset Management, a New York-based hedge fund management company, in March filed a lawsuit to compel Alden to open up Digital First Media's books.
The suit alleges Alden funneled profits from its newspapers into failed investments, and compelled Digital First Media to hold back its financial records from shareholders to hide it.
The suit cites a number of shaky investments, unrelated to media, including a sizable investment in ailing drugstore chain Fred's. At the end of 2016, Alden acquired 9.3 million shares of Fred's for about $17 per share. Fred's, stock was trading at $1.77 per share Monday. In the words of the lawsuit, the investment "does not appear to be doing well."
Alden Global Capital and Solus Alternative Asset Management did not respond to repeated requests for comment.
Hedge fund ownership on the rise
Whether Alden's strategy at Digital First violates the law is for the court to decide. But Penelope Abernathy, Knight Foundation chair and professor of journalism at University of North Carolina, argues the bigger problem is that hedge funds' emphasis on profits threatens the role of news in democracy.
Within the past decade, investment portfolio managers, like Alden, have been buying up newspapers from private owners and traditional media management companies. As of 2014, four of the 10 largest (by circulation) newspaper owners were hedge funds and private equity firms, as well as seven of the top 25 companies (by amount of papers owned), according to Abernathy's report on the trend.
Many of these companies, like Digital First, Gatehouse and Civitas, have little prior experience managing newspapers. As local newspapers wither under falling budgets and thinning staff, Abernathy argues communities lose more than jobs — they lose the educational, community-building and watchdog services journalism provides.
"The fates of newspapers and communities are inherently linked. If one fails, the other suffers. Therefore, it matters who owns the local newspaper because the decisions owners make affect the health and vitality of the community," Abernathy wrote in her report.
Jordan Brechenser, Chief Revenue Officer at the Berkshire Eagle, knows a little something about the impact Alden's management style can have on local news. He has worked with the rural Massachusetts newspaper for about 12 years. For the first 10, the Eagle was owned by Digital First Media, which Alden bought in 2011.
"The 'operating profit rules the roost' mentality of hedge fund-owned media...is damaging for the quality of news and the quality of our products that we are able to put out to our communities," Brechenser said.
He agrees newspapers snoozed on the transition to digital, but said Alden's radical cost-cutting measures were too extreme. In rural communities, cuts get felt and seen a lot, and smaller, pricier papers gradually lose relevance.
Digital First sold the Berkshire Eagle and three other local publications to a group of private investors. The group began re-investing in print, and in about two years have seen a significant uptick in circulation and revenue year-over-year, and have added about 40 jobs.
It may be too short a time to determine whether the business model is sustainable, but Brechenser said he was grateful for the chance to try.
"Digital is the future, so everybody runs as fast as they can, and are dropping print dollars in the process. That is artificial advancement. It was nice to be able to break away from that and see what we can do," Brechenser said.
What will become of the Denver Post?
Immediately following the Denver Post's most recent layoff announcement, rumors swirled that billionaire Phil Anschutz -- who owns several Colorado newspapers and Coachella Music Festival, among other things -- was vying to buy the paper. Another enterprising group of investors in Colorado has scraped together about $10 million to buy the Denver Post.
No agreement has been struck, but Denver Post staff continue to hope, under constant stress of more cuts.
"There is definitely that sense of 'what now?' We are always waiting for bad news," Rubino said. "But I am also impressed with how people are coming together to produce a good product for readers."
In a bid to draw more attention to their plight, Denver Post reporters brought their fight to Alden's headquarters in midtown Manhattan last month. Denver Post reporters aimed to deliver a petition with about 11,000 signatures to Smith and fund president Heath Freeman. The petition urged them to "invest in DFM workers and newspapers, or find a responsible buyer who will." Security prevented the protesters from delivering the petition to Alden's offices.
"I worry the economy will sour and Alden will ramp up its cutting mission. Then the readers will have no reason to support us anymore and the paper will die," Rubino said.
"That's bad for civics, its bad for politics. Even in the short-term, losing a vital news gathering operation would hurt a growing state that could use more reporting, not less, right now," he added.