Release Date: 
05/25/19

Daily Herald's parent company diversifies to offset print declines.

When the Paddock family decided to exit the embattled newspaper industry, it handed over ownership of the Daily Herald's parent to employees.

After a debt-financed buyout of the founding family, an employee stock ownership plan now controls Paddock Publications. Privately held Paddock won't say how much it borrowed or what price it paid for the shares, but those figures will play a big role in determining whether the suburban publisher survives the industry's relentless decline.

"It is now up to us to take advantage of the work of four generations of the Paddock family and management who have created a successful, locally owned media company," Daily Herald Chairman and CEO Doug Ray told employees in a December memo. "Our ESOP accounts should increase in value, if we take the next steps to grow. It is in our hands."

Chicago Tribune employees had similar hopes when real estate mogul Sam Zell engineered a leveraged buyout of the much larger media company in a 2007 ESOP transaction. The largest-ever ESOP acquisition of a newspaper saddled Tribune with more than $13 billion in debt just before the economy collapsed in the Great Recession and newspaper revenues went into free fall. By December 2008, the company had filed for bankruptcy protection, wiping out the ESOP's investment.

"I think it's difficult in an environment with declining values," says Sara April, a partner at newspaper broker Dirks, Van Essen, Murray & April.

Newspaper companies have been shrinking and shuttering nationwide for decades now, as digital juggernauts Facebook and Google siphon off advertising dollars. A recent University of North Carolina School of Media & Journalism study documented the loss of 62 U.S. dailies and 1,749 weeklies since 2004 through closures or mergers. The study underscored vanishing suburban papers in particular, including in the Chicago area.

Annual U.S. newspaper industry revenue was halved to an estimated $27.7 billion by 2017, down from $55.7 billion in 2007, as print advertising revenue dried up, according to Pew Research Center.

Several Daily Herald employees contacted for this story either didn't respond or declined to comment on the record, but at least one said he favored employee ownership over a sale to a financial firm that might gut the company. Ray says the Paddocks didn't seek out other potential buyers. With a goal of preserving an independent community newspaper, management and board members preferred employee ownership to "a sale to a large chain or a financial buyer," Ray says.

The big benefit of an ESOP to any company is the elimination of taxes on profits (though employees still pay taxes later on retirement benefit distributions). There are only a handful of ESOPs in the newspaper industry, mainly at small and midsize papers.

The Cedar Rapids Gazette in Iowa is a success story. Parent company Folience has become "very profitable" since employees gained control seven years ago, says CEO Daniel Goldstein. Folience has more than $100 million in annual revenue and has invested in other unrelated industries, he says, touting it as a model for other newspapers.

As seen in Chicago Business and written by Lynn Marek.