McClatchy, among the largest newspaper chains in the country, has gone bankrupt. Presumably, hedge fund Chatham Asset Management will take the controlling interest in the company. Based on what Chatham and other smaller holders get as ownership stakes, they may have the opportunity to make money quickly if they can sell off McClatchy’s biggest properties for enough money.

According to a story in the Sacramento Bee, one of McClatchy’s papers, “first lien” bondholders led by Chatham will get debt worth $218 million, with a payout of 10%. It is not clear what subordinated debt holders will receive. Likely, this will be some level of equity. If Chatham could get much more than $218 million for the McClatchy papers, would it take it? There is a chance the properties are worth much more than that. For this to work financially, the Pension Benefit Guaranty Corporation would need to take over McClatchy’s pension obligations.

McClatchy’s largest and most valuable papers are the Kansas City Star, Fort Worth Star-Telegram and Miami Herald, as well as its cluster of papers in central California and its two large newspapers in North Carolina: the News & Observer in Raleigh and the Charlotte Observer.

What are the papers worth? McClatchy does not break out revenue or operating income by paper, so the best way to estimate value is to compare to what papers of similar size in large cities have sold for recently. The most visible of these were the Palm Beach Post and Palm Beach Daily News, which were sold to Gatehouse Media for $49.25 million in March 2018. Gatehouse has since merged with Gannett to create the largest newspaper chain in the country.

The Austin American-Statesman was sold to Gatehouse at about the same time it bought the Palm Beach properties. The price tag for the Austin property was $47.5 million.

Are McClatchy’s largest papers worth as much as those in Palm Beach and Austin? If so, Chatham could collect nearly $100 million in exchange for just two of its papers.

The largest newspaper deal recently was the sale of Warren Buffett’s BH Media Group to Lee Enterprises for $140 million in late January. The deal also came with a very favorable loan from Buffett to Lee. Data from BH Media show it had revenue of $373 million last year and EBITDA of $47 million. McClatchy’s financial reporting is complicated. Its 2019 revenue run rate should be about $600 million. Its EBITDA, which it adjusts, will be about $80 million. On paper, at least, McClatchy is the more valuable company.

Chatham’s biggest problem, beyond the falling McClatchy revenue, is that management has squeezed almost all the costs it can to remain viable in terms of newspaper content. This means further efficiencies only come with papers that are sold to others in close proximity, which allows for other efficiencies. The exception is the cost of McClatchy’s management and Sacramento, California, headquarters, which is well into the millions of dollars.

24/7 Wall St. recently looked at how this might work for McClatchy’s major papers:

 One issue for buyers is whether the government will allow two large papers in adjacent markets to be held by a common owner. As the newspaper industry implodes, that is certainly a possibility. If so, McClatchy would have ready buyers for its California newspaper group, the Fort Worth Star-Telegram, the Miami Herald, and its papers in North Carolina.

The Fort Worth paper is just miles from the Dallas Morning News headquarters. The Dallas paper is the sole daily property of small publicly traded company A.H. Belo Corp. (NYSE: AHC). Belo is considered fairly successful. It has a market cap of $62 million. That is impressive for its revenue, which was probably $200 million last year. The two papers would have the chance for significant consolidation of expenses.

The Miami Herald would be attractive to two companies. Tribune Publishing Co. (NASDAQ: TPCO) owns the Orlando Sentinel and Sun-Sentinel in Fort Lauderdale. Gannett Co. Inc. (NYSE: GCI) owns papers on the east coast of Florida, particularly the Palm Beach Post, St. Lucie News-Tribune in Fort Pierce and papers further north in St. Augustine and Jacksonville.

The Kansas City Star is close to Topeka, where Gannett owns the Topeka Capital-Journal.

The Sacramento Bee, Modesto Bee, Merced Sun-Star and Fresno Bee are all close to the several papers owned by privately held MediaNews Group, particularly its properties clustered around San Francisco, which include the Bay Area News and the Mercury News in San Jose.

McClatchy’s New & Observer in Raleigh and the Charlotte Observer are relatively close to the Winston-Salem Journal, which was just bought by Lee Enterprises Inc. (NYSE: LEE). The Fayetteville Observer, owned by Gannett, is also nearby.

Chatham may not sell all or a portion of the McClatchy properties, but it may be financially advantageous to sell at least some of them.

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