Employee stock ownership plans (ESOPs) have long been used to try and reinvigorate distressed companies, particularly in the airline and steel industries. But one private equity firm is hoping to use the structure in the buyout of 12 daily newspapers, fallout titles from McClatchy & Co.’s purchase of the Knight Ridder chain. Last month, McClatchy paid $4.5 billion (€3.7 billion) for the chain’s portfolio of 32 papers.
While a number of investors are eyeing the cast-off papers – including high-profile organs like the Philadelphia Inquirer, the Philadelphia Daily News, the San Jose Mercury News and the St. Paul Pioneer Press – some insider talk has speculated that Ronald Burkle’s Yucaipa buyout shop could acquire the papers. The firm, which focuses on deals with some sort of an organized labor component and has made several investments in US grocery store chains, has submitted a bid for the entire lot.
There is competition, particularly from smaller players looking to acquire individual papers. In Philadelphia, Minneapolis and Monterey, regional investor consortiums are looking at buying their local papers. One mid-sized newspaper chain, MediaNews Group in Denver, is eyeing a few California papers to add to its Bay Area holdings.
But Yucaipa has settled upon an interesting strategy for its bid. The private investment firm is working with employees at eight of the papers; it has said it will allow paper employees to invest in the papers via a new company called ValuePlus Media, with the employees eventually taking over as Yucaipa sells out its shares. Two of the papers on the block already have employee stock ownership plans in place.
In the 1980s and early 1990s, the gambit was often used in the distressed space – with mixed results. For instance, pilots and mechanics at United Airlines agreed to an employee stock ownership plan, as have steel workers at the Weirton Steel. In the former situation, the employees became increasingly disillusioned as the stock sank (United eventually filed for bankruptcy in 2002), while the employee-owned steel company was eventually bought out by International Steel Group, the steel platform helmed by turnaround investor Wilbur Ross.
Still, despite the rocky precedent, some feel the employee stock ownership plan could work – especially in the case of the McClatchy papers. Compared with distressed-prone industries like airlines and steel, newspapers can be reliable revenue generators. In particular, well run papers (or papers that are able to cut costs, anyway) can generate steady cash – though a wise investment, it is not something that is always rewarded in the public markets.
But the newspaper play is not the only ESOP-private equity deal in the pipeline. A manufacturing union in Ohio – the International Brotherhood of Electrical Workers 1985 – is reportedly talking to a private equity firm about a buyout of vacuum maker Hoover from its owner, appliance maker Maytag. The move could allow employees to invest in the company or take a wage cut in exchange for equity in the company.
“The big difference between Hoover and CWA [is] at Hoover you’ve got a failing company,” Harley Shaiken, a labor professor at the University of California Berkley, told the Washington Post last week. “Here, it’s not clear that papers are failing. Many are successful.”