Audit Notes: Bain’s LBOs, Star Tribune, Wolff on JRC

ProPublica reports that the "turnaround artist" narrative is off

ProPublica’s Jesse Eisinger looks at Mitt Romney and Bain Capital, calling into question the narrative that it was largely about turning around struggling businesses:

Yet in addition, under Romney’s tenure, Bain often sought out solid businesses that didn’t need to be turned around. The reason: Such companies could operate under the burden of the enormous debt that Bain would layer on them.

“They always told us day one: They wanted profitable companies that are doing OK, and they pay what they needed to pay,” says Phillip Roman, who heads up an eponymous mergers and acquisitions firm that was involved in a legal dispute with Bain in the 1990s similar to McCall Springer’s. “There are companies that like turnarounds,” referring to other private equity firms. “That’s another business” from the one Bain was in.

Bain in the 1990s was “doing more [of] the usual leveraged buyout: Buy with a lot of debt, try to increase earnings and sell as soon as possible,” says Ludovic Phalippou, an expert on private equity at the University of Oxford in England. The firm was seeking “mature companies with high cash flow,” he says, with sufficiently stable earnings “to be able to leverage a lot.”

— The American Journalism Review reports on the Star Tribune, making a case that the Minnesota daily has finally found its footing:

Customers now account for roughly 45 percent of the Star Tribune’s revenue, in an industry that once could count on advertising for as much as 80 percent. Klingensmith says the paper has a plan in place to reach a 50-50 balance of customer and advertising revenue over the next two years.

The plan is so simple, so logical and for so long so widely discounted that it almost seems counterintuitive. It is based on principles followed by every industry in America that isn’t a monopoly - that you succeed by giving the customer more not less; better not worse - and you don’t give your product away.

As long as newspapers controlled the means and reaped the enormous benefits of mass advertising in their markets, they were free to ignore those business principles. The Star Tribune still sells ads, needs ads, will sell ads as long as it is practical to sell them. A smaller and smaller number of potential advertisers buy ads.

Customers, Klingensmith says, buy news.

Well, we’ll see. The Strib needs a lot more than 18,000 digital subscribers for the paywall to become a significant revenue stream, but that’s only part of the equation. Slowing the decline of print (and even, temporarily, reversing it) is the other, and digital subscriptions have certainly helped there.

— Michael Wolff writes a brutal column for The Guardian on the Journal Register bankruptcy, noting that it’s “a classic disparity between the way journalists wishfully see their business and the way the people they work for see it”:

The problem, however, was that, so far, the digital strategy had, from a revenue standpoint, not become all that significant to the company - you’d be hard-pressed to find much value there. Or even the prospect of value.

Except, perhaps, PR value. With the bearded, friendly Paton’s umbrella company, Digital First, out front, defended by so many worthies, the notably less friendly distressed-debt guys were tending to the real business, trying mightily to improve the bad deal they had initially made when taking on so much newspaper debt at the twilight of the newspaper business…

Distressed-debt investing is - to the surprise, it seems, of earnest journalists - not about building business, or even saving them. It’s about jockeying for position and improving your deal. It’s about exerting leverage on companies that don’t have the cash to pay you back (whether they make widgets or report the news).

Read my first take on the bankruptcy here.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,