Why the Orange County Register’s bold experiment hit the skids

Debt doomed Aaron Kushner's dramatic expansion strategy, financial documents show

Aaron Kushner’s massive investment in The Orange County Register—one I argued a year ago was “the most interesting—and important—experiment in journalism right now”—has gone all pear-shaped.

The Register is laying off or buying out up to 100 journalists from its massively expanded newsroom and reducing page counts by a quarter, “to align our cost structure with what we now know we can achieve in revenue growth,” Kushner wrote last week in an email to the newsroom.

The layoffs and buyouts follow personnel moves earlier this year that resulted in the departures of four top editors along with 32 others in the newsroom.

All this amounts to a dramatic, 180-degree reversal for the Register, which had been closely watched around the newspaper industry for its contrarian strategy of rapid expansion based on the idea that newspapers’ problems stemmed in large part because they were cutting themselves to death.

As part of the strategy, Kushner had nearly doubled the size of the Register’s newsroom, adding 170 journalists, while bulking up the physical paper, increasing page count by more than half. He expanded its community sections, created innovative marketing programs, bought the Riverside Press-Enterprise, and launched newspaper wars in Long Beach and Los Angeles, opening competing editions in each city.

From the beginning, Kushner said it could take years for his plan to pay off and that he was investing for the long term. But the question then became: was Kushner’s group adequately capitalized to invest for the long term? The answer is clearly no.

Kushner and his partners bought Freedom Communications, the Register’s parent company, in 2012 for $50 million and the assumption of pension liabilities. We now know that was a highly leveraged deal, financed with $45 million in debt, presumably of the very high interest variety.

Those numbers comes from a November presentation, obtained by the OC Weekly to potential investors in Freedom, which provides a trove of financial information that helps explain why the operation has run aground.

Kushner and his partners immediately began selling several businesses, including the Colorado Springs Gazette, and used the $42 million proceeds to pay down more than half of that debt. They also spent $33 million shoring up the company’s underfunded pension plan, according to the presentation. That implies that they dipped into Freedom’s cashflow to do so.

So, Freedom aggressively paid down long-term obligations while it was, at the same time, dramatically increasing operating expenses by adding a total of 400 jobs and print production costs. Without a capital cushion, something had to give.

Critically, as the investor presentation shows, it also loaded up on super-high-risk debt—again—to buy the Press-Enterprise. Its pitch to investors offered a whopping 10 percent interest plus 8 percent payment-in-kind loan, which is a kind of balloon payment paid when the investment term ends. This at a time when the average junk bond yields a near record low 5 percent.

That kind of high-wire financing leaves no room for error.

Probably the most interesting part of the investor pitch is the growth it projects for the Register last year. It projected a 16-percent increase in circulation revenue and a whopping 17-percent jump in advertising, which would move revenue from $119 million in 2012 to $139 million in 2013. Trouble is, those were estimated numbers for 2013, not final ones, and it’s unclear what those estimates were based on. Freedom and the Register didn’t respond to requests for comment.

If the Register increased circulation and ads at even half that level—remember, those numbers are still falling in much of the rest of the industry—it would be a major achievement.

And it may even have happened. In his newsroom memo, Kushner wrote that revenue has grown at the Register, with circulation money up in double digits and ad sales up, as well. That’s a big deal. But clearly whatever growth there was was not enough to support the expanded-newsroom strategy.

Since parent Freedom Communications is private, it hasn’t had to offer any specifics. Transparency would do the company some good right now.

There were always clear problems with the Kushner thesis. Northeastern University’s Dan Kennedy writes that I had “hailed their print-centric approach,” but that misreads what I actually wrote in an article that was, after all, headlined “An ink-stained stretch.”

The bet on better journalism was always the key to success, not the emphasis on print itself. The company’s neglect of the digital side of the business was always troubling. As I wrote, the company may have been emphasizing print, “[y]et the most conceivable future for newspapers, 10 or 20 years hence, is one in which they have converted print and hybrid subscribers to digital-only subscribers, shedding much of the cost of production and distribution. The Register will pick up few digital-only subscribers at $30 a month, particularly when its website and tablet apps are so weak. If the bet is truly on content and not the medium, digital will require serious investment, too.”

That’s still true. And by investment, in this case, that meant equity, not debt.

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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 rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.