Q&A: Jon Chesto explains new Projo owner GateHouse MediaJuly 23rd, 2014 at 2:38 pm by Ted Nesi under Nesi's Notes, On the Main Site
There’s a new media giant in town: New Media Investment Group, GateHouse Media’s parent company, is buying The Providence Journal for roughly $46 million. The deal instantly gives GateHouse, a major force in Massachusetts newspapering, a huge foothold in Rhode Island less than a year after the company exited bankruptcy.
Jon Chesto is managing editor of the Boston Business Journal and a former business editor at the Patriot-Ledger in Quincy, Massachusetts, which GateHouse owns. A close follower of GateHouse, Chesto wrote a perceptive analysis of the Journal deal Tuesday night. He spoke with WPRI.com on Wednesday about the deal and what it means for the paper’s future. The conversation has been lightly edited for length and clarity.
Let’s start with the basics for people down here in Rhode Island. What is New Media Investment Group? What’s its relationship with GateHouse?
New Media Investment Group is a publicly traded company that’s an umbrella group that includes GateHouse and a number of companies that have been acquired by Fortress [Investment Group]. Prior to that it was an affiliate of Fortress that bought the Dow Jones community papers formerly known as Ottaway, and those were sort of the original New Media papers. There have been several papers since.
It’s sort of hard: the GateHouse management and the New Media management are essentially one and the same. New Media is just a holding company. Probably there are some legal reasons I don’t know, and possibly even P.R. reasons, why technically some of these papers are not considered GateHouse papers.
The big change happened last fall, when Fortress put GateHouse through bankruptcy and also acquired these papers as a launchpad for this new, publicly traded company New Media. If you picture it, New Media is the holding company, then there’s GateHouse, and then there are other papers that are underneath that are essentially managed by the same people. They’re really essentially all part of the GateHouse family.
You know a lot about this company. Can you give us a thumbnail sketch of GateHouse’s history?
GateHouse was really created in 2006. Fortress, which is an investment firm in New York, created GateHouse as a publicly traded company. It started with a group called Liberty Group Publishing – I believe a lot of those papers are out in Illinois – and Fortress merged them with two groups in Massachusetts, the Community Newspaper Company (CNC) and the Enterprise News Media Group, which was the Patriot-Ledger, the [Brockton] Enterprise and the Memorial Press group, which is out of Plymouth.
So that happened in 2006, and thus GateHouse was born. Really the plan was to focus hyperlocal, go after papers that are a little bit off the beaten path, and try to buy up papers that still have a relative monopoly on news, and avoid big metros like The Providence Journal because of competition with TV and other media.
They wound up buying a bunch of papers. They took on a ton of debt in 2006 and 2007. It was kind of like the equivalent of buying a lot of real estate right before the crash. They were over-leveraged, and for a long time bankers were circling, they had consultants in, and they were saying, we’ve got to tighten up the ship because you guys are on the verge of bankruptcy. You saw a lot of newspaper companies file for bankruptcy during that time; many of them were over-leveraged for a variety of reasons, some of which were similar to GateHouse’s story, in which they bought a ton, probably overpaid for some, and the bottom fell out of the economy. Meanwhile, print ad sales went down a blackhole and never really returned.
But they never did file for bankruptcy during all of that, and I think the hope was that Fortress, which still had a major equity stake, would somehow buy the bonds and take control as one of the large creditors, and then control the bankruptcy process, and once that did happen they could go into bankruptcy while keeping the existing management in place and not have the company torn asunder in bankruptcy; you never know what can happen in bankruptcy if you don’t go in with a prepackaged plan and have all the creditors on board.
And that’s essentially what happened. Fortress bought enough debt up through last year that they were able to go, OK, we’re going to put GateHouse through bankruptcy and get rid of that debt, but we’re also going to be in control and be in the driver’s seat because we have the majority of the debt. They got the other creditors aboard, and then they started buying again. They have cash flow of tens of millions of dollars a year – it really varies, but they do have cash flow to fund acquisitions, and they borrowed some money.
As you probably saw, last year Wes Edens, who’s one of the head honchos at Fortress, laid out this rather complex plan. The complexity of it was surprising enough, but then he threw in this curveball and said, hey investors, we see a lot of acquisitions out there, the industry’s downtrodden, this is when we should be buying, and we see potentially $1 billion in acquisitions. I thought, oh, that’s just an outside number, a little exaggerated. It’s kind of been moderated somewhat, but over time every once in a while they’ll give you a glimpse of what their goals are, and they’ve been saying $150 million to $300 million worth of deals in a year. With this Projo deal they now have more than $150 million worth of acquisitions within the past year if you start with the Dow Jones Local Media papers last September.
One thing I find interesting, and that you sort of alluded to there, is that the Projo is not what I think of as a typical GateHouse paper. When I was at The Sun Chronicle GateHouse owned all the weeklies like the Norton Mirror and the Mansfield News, though of course they also own dailies like the Patriot-Ledger and the Fall River Herald News. But The Journal is a big statewide daily. How different is this compared to the rest of the GateHouse portfolio?
It is different. This is the first time they’re going after a paper that’s sort of the major paper for a particular state. They’ve got some fairly large papers like in Rockford, Illinois, in Ohio, in Peoria – they do have papers that are not that far off the size of this in communities that aren’t tiny. But really those are kind of the secondary players in those larger metro markets. Of course, we’re talking here about Providence and Rhode Island, but they’re still going after a big statewide paper here, and that is unusual. They’ve not done that before. Projo would be the largest paper in their stable.
I think it’s partly because they see a buying opportunity. I think it’s also just so close to their papers over the border in Massachusetts, particularly Fall River, that they see some synergies with manufacturing. And I think also they instantly get an entire state to market Propel Marketing. Now they can go and say, OK, we’re going to go across the state and hit people with our Propel Marketing pitch. There’s a ton of small businesses in Rhode Island, and they see that as fertile ground.
GateHouse doesn’t have a great reputation in some quarters – some people say they cut papers to the bone and keep staffing levels low. But I’ve talked to others who say they run lean but they’re not as bad as you might have heard. Do you have a sense of what the philosophy is at GateHouse about how they run their papers day to day?
I do think that they are always looking for synergies, how they can save money here or there. I wouldn’t say that they’re going to say, ‘Let’s cut left and right without thinking.’ They tend to make strategic cuts. Say if GateHouse had bought the Telegram & Gazette in Worcester – I don’t think they would have cut a quarter of the newsroom in one fell swoop like what just happened with Halifax.
They do run tight ships, and that does tend to affect the quality. The papers are all a little smaller than they were. But you could almost say that, I would say, about most newspaper companies now. The Boston Globe under John Henry is a very unusual exception to the rule, and I’m sure under Jeff Bezos at The Washington Post that that’ll probably be stabilized to some extent, because you have owners who have the money and the patience to try out different things.
But for the most part the industry itself has been on a downward spiral in terms of staffing. I’d say GateHouse gets a bad rap because they’ve been an aggressive acquirer and so they’ve been sort of in the driver’s seat in terms of cutting. There have been cuts. Their papers are run lean. A lot of their papers just have one or two photographers. I think there’s a thought in their strategy that you have to be thinking more digitally, so there’s more of an emphasis on keeping reporters than some other positions.
There’s also this whole design center project in Austin, Texas, which is unusual in its scope. A lot of newspaper companies have shared copy desks, but to have one that’s national like this – I think they see some savings there by trimming their copy desks. The former Dow Jones Local Media group papers are starting to transition over there. You have some union papers like the Ledger that still has its own copy desk, but I think over time they want to get all their copy desks run to some extent out of this central location in Austin.
That gets to one of the biggest questions people have down here: will there be a ton of layoffs once GateHouse officially takes over? It sounds like you’re saying they’ll be open to cuts if necessary, but don’t necessarily expect a bloodbath.
I would say that there will be job cuts. First you’re probably going to see some of the back-office and administrative cuts. I think if you look at what happened with the Dow Jones group, there was fairly significant job cuts at the Cape Cod Times and the New Bedford Standard-Times, but a lot of that was related to the transition to this central copy desk.
I don’t need to tell you this: the Projo under Belo has had a lot of job cuts over time itself, so it was sort of a slimmer machine than the Dow Jones papers, which generally lived in their own island for a long time. They were part of Murdoch’s conglomerate, just a rounding error. And even when they were owned by Dow Jones they had some relative autonomy. They were a cash cow for Dow Jones at the time, and so they were left somewhat to their own devices.
So you can use that somewhat as a barometer about what’s going to happen at the Projo, but I think they would say, well, they were probably overstaffed. I don’t think I can say that because I feel like every time you cut reporters now it really does affect the quality of the product, but as an executive at a company that looks at what its peers are doing I can see where they’re coming from.
You mentioned labor unions at some of their papers. The Providence Newspaper Guild represents a lot of workers at The Journal. Does GateHouse usually get along with unions?
I think they generally would report in their [SEC] 10-Ks that they have good labor relationships. I believe the copy desk is unionized, so I do think that makes it a little harder to send it off to Austin. But I do think that is the endgame, and I do think as contracts come up for renegotiation GateHouse will say, hey, we want to move more of the copy work here. These newspaper unions were once really powerful, but I’ve just seen it play out here in Massachusetts that the unions do not have the same leverage they once did just because of the declining nature of the print business.
You’ve written about the CEO of GateHouse, Kirk Davis, who visited Journal employees this morning. What can you tell us about him? What’s his background, what’s his approach to running newspapers?
Well, having worked for him at one point when I did work for the Ledger, I do think highly of him. He doesn’t come from the news side, he comes from the circulation/marketing/ad side. That’s his background. He really was a rising star in Enterprise NewsMedia and pretty well-regarded in Massachusetts at the time. I think he ran it pretty well. So he came into the GateHouse fold with that Fortress acquisition I mentioned earlier, and he became GateHouse New England CEO. He was thought of highly and was promoted up the ranks to be COO of GateHouse, and now of course he’s CEO, but reporting really to Mike Reed, who’s the CEO of New Media.
Kirk is in Massachusetts a lot. He has an office in Needham, and he still owns some small papers unrelated, actually – a company in Central Massachusetts called Cracked Rock Media, though his bio says he has no day-to-day involvement, and its subsidiary Holden Landmark.
So he’s a newspaper guy.
Oh, yeah – he loves newspapers. No doubt about that. He really does. And you know, he’s relatively positive about where things are going. He’s hopeful. And you really have to be. There’s so many forces against you that if you don’t maintain some sort of optimism when you’re running a company that’s primarily the newspaper business it can be tough.
Your analysis of the Projo deal emphasized New Media’s Propel Marketing unit as likely a crucial reason why they decided to buy the paper. What’s important about that?
Well, I don’t think it was an accident that the quote in the press release mentioned Propel Marketing. Kirk Davis and Mike Reed really see Propel as a growth engine for the company. It’s based here in Quincy – not at the Ledger; it’s at a separate building in North Quincy – but it’s growing.
If you look at small businesses, you hear statistics that a large percentage of them have virtually no Web presence still. They see that as a huge market opportunity, so Propel is a way to take the ground troops that exist, the ad sales people at various local papers, and then directing them and saying, by the way, sell them this digital marketing service we offer. It’s everything from website design to SEO to how to get your pizza shop on Facebook. It started in 2012, and in 2013 there was about $6 million in revenue. I’d say they’re almost doubling their pace this year.
Whether they can keep it going, well, they have a lot of competitors and they’re going after businesses that don’t have a lot of ad spending. It is unusual to have something of this size and scope among newspapers; I’m surprised more newspaper companies haven’t done it. But of course you have so many other Web firms and P.R. firms that are all over the map trying to get this business.
GateHouse has bought a ton of papers up and down Southern New England at this point – basically my old alma mater The Sun Chronicle is the only independent Massachusetts paper in that area that’s outside the GateHouse fold. What do you think their strategy is? Is it to get a hold on this entire Southern New England market?
They’ve certainly been thinking about that for a long time. I know that Cape Cod and New Bedford were always on their radar because they were sort of misfit children in Rupert Murdoch’s conglomerate. But there was a point, really, where GateHouse couldn’t do any more deals because of what I explained with the market and how it cratered and the way they had too much debt on their books.
I do think that with the Projo they’ve locked up this market almost completely. The Sun Chronicle is sort of an island there, surrounded. I’m sure they’ve looked at that paper over the years. What I don’t know is what it means that the main figure in The Sun Chronicle’s company, Howard Brown, died a few years ago. It’s kind of an odd duck of a company.
Yes – United Communications Corp. out of Wisconsin. They own a bunch of properties out there, plus a couple TV stations outside Buffalo and then The Sun Chronicle here.
Yeah, so I don’t know what their plan is. I’ve said this before – I think The Sun Chronicle is still on GateHouse’s radar screen, and I would not be surprised if they make a play for it, if they haven’t already. That just makes sense. But they already really have that whole region locked up to a large degree. That’s really the only paper south of Boston other than a few small dailies in Rhode Island.
Right, the Pawtucket Times/Woonsocket Call and the Newport Daily News.
Yeah, and they’re really looking more at a digital strategy. Getting The Providence Journal is sort of the crown jewel, and they can get into all those communities with The Providence Journal’s sales force.
Any other thoughts?
I think you hit the main topics. Basically, I see the two big motivations for them as getting that printing plant a few blocks away from the Fountain Street headquarters, and getting a new market for Propel. I think that’s why they were willing to pay a premium – I’m not a newspaper appraiser, but it does seem a little high to me. It’s essentially what John Henry paid for The Globe; the Worcester Telegram & Gazette went for $20 million, which also surprised me a little bit that it was that high, and if you back that up John Henry paid $50 million for The Globe with worthwhile real estate that went along with it.
So they’re paying a little bit more than I expected, but I do see the reasoning. It’s a strategic asset for them in a lot of ways. Like you said, it fits into their geographic footprint like a glove. •
(photo: Boston Business Journal)