Illustration: Sarah Grillo/Axios

McClatchy, America's second-largest newspaper chain, announced Sunday that Chatham Asset Management, a New Jersey-based hedge fund, will take over the company's assets as a result of its bankruptcy auction.

Why it matters: It's the latest step in the gradual dismantling of an industry that used to be controlled by local families with civic roots and has now largely passed into the hands of bottom-line-focused private equity managers.

  • The Sacramento, Calif.-based McClatchy newspaper chain, home to publications like the Kansas City Star and the Miami Herald, was one of the few remaining local newspaper companies that hadn't yet been taken over by a big investment firm.

Details: The agreement will allow McClatchy in the third quarter of 2020 to transition out of Chapter 11 bankruptcy protection, which it filed for in February following a financial emergency related to its pension obligations.

  • Prior to the auction last week, Chatham was McClatchy’s largest investor and creditor. It's been an investor in McClatchy for over ten years.
  • Chatham owns roughly $4 billion in assets. Within the media industry, it also owns majority stakes in Canadian newspaper chain Postmedia and American Media Inc., the publisher of the controversial American tabloid the National Enquirer.
  • McClatchy owns 30 papers nationwide, and operates a handful of digital-only local news websites with funding from Google.

The big picture: McClatchy's bankruptcy restructuring ended 163 years of family control of the newspaper chain, and handed it over to the company's creditors, led by Chatham.

  • Aside from the pension crisis, McClatchy — like most local news companies — was facing financial headwinds for years related to the decline of newspaper consumption and print advertising.
  • To get ahead of the industry's woes, McClatchy bought its bigger newspaper rival, Knight Ridder, for $4.5 billion in 2006, saddling the company with billions in debt.
  • Those troubles have been exacerbated by the coronavirus pandemic, which has resulted in thousands of layoffs and furloughs within the media industry, including at McClatchy.

Be smart: McClatchy's transition away from family ownership is a common theme among local media outlets that have struggled to survive the digital era.

  • Shortly after the 2008 financial crisis, hedge funds and private equity firms began buying up distressed local newspaper companies, eager to apply cost-cutting measures across dozens of papers that could help them squeeze margins for profit.
  • Prior to the merger of two publicly traded newspaper companies last year, Gannett and GateHouse Media, more than half of the largest newspaper chains in America were owned and operated by investment firms, according to a new report from Penelope Muse Abernathy at the Hussman School of Journalism and Media at the University of North Carolina at Chapel Hill.
Data: UNC School of Media and Journalism; Note: Investment firms include New Media/GateHouse, Digital First Media, CNHI, Civitas, tronc/Tribune, BH Media, 10/13 Communications; Chart: Andrew Witherspoon/Axios

Be smart: Many investment companies, located in faraway cities, have little interest in the civic impact of the journalism, and are more concerned about how to maximize profits from the distressed assets or turn them over.

  • For thousands of communities across the U.S., the absorption of publicly-traded newspaper companies, like McClatchy, over the past two decades has resulted in local news "deserts," where communities are left without any major paper at all.
  • Communities in the South and in rural areas have been hit particularly hard by the crisis. Increasingly, cities have also been impacted.

What's next: The proposed agreement will be finalized with the U.S. Bankruptcy Court in the coming days, according to the announcement. The hearing is currently scheduled for July 24. The deal will also be subject to approval by the U.S. Department of Justice, although it's unlikely to face much much objection.

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