Experts are sounding the alarm that a possible recession could threaten the beleaguered newspaper industry, whose two highest cost centers – labor and paper distribution – have soared to the aftermath of the pandemic.

why is it important: A recession would create “an almost perfect storm for local news,” said Tim Franklin, senior associate dean at Northwestern University’s Medill School of Journalism.

  • “In a recession, ad revenue is always under pressure, and often in a recession you see that affected first,” Franklin adds. “But there is certainly concern about whether consumers will reduce their (subscription) spending.”

Driving the news: The newspaper economic outlook is sobering for private equity investors who are usually eager to eat the big chains.

  • Alden Global Capital has dropped its bid for Lee Enterprises, at least for now, in part due to rising interest rates and a tougher market to fund deals, sources told Axios.
  • Alden quietly sold part of its stake in Lee in April, shortly after a Delaware judge upheld Lee’s rejection of both Alden board nominees in February.
  • The company held a 6.3% stake when it launched its tender offer and announced a 4.7% stake in April.
  • Alden’s $24 offer, which was previously challenged by Lee’s management as too low, now looks attractive relative to Lee’s current share price of $18.
  • Alden declined to comment.

Data: Yahoo Finance; Graphic: Axios Visuals

Between the lines: Alden’s offer may be dead for now, but that doesn’t mean she can’t relaunch it later.

  • However, the company would likely need more support from other investors in this economic environment.
  • “I don’t know if Lee is going to command a stock price of $24 at this point, so that may make it more attractive for them to come in,” Franklin said.
  • “But at the same time, Alden, by its nature, is very focused on short-term earnings and short-term cash flow,” Franklin says. “And so between rising inflation and potentially a market downturn, that might scare them away from an acquisition right now.”

State of play: As newspapers continue to see increases in digital subscriptions, losses from the pandemic and residual debt from recent mergers continue to drive cost-cutting measures.

  • USA Today owner Gannett introduced a series of cost-cutting measures last month, just two months after laying off 400 people. Its CEO told investors on his Nov. 3 earnings call that those moves have helped the company improve profit margins, but Gannett doesn’t expect revenue growth to resume until 2024.
  • Last year, Alden acquired Tribune Publishing — owner of the Chicago Tribune, New York Daily News and other local newspapers — and immediately offered buyouts as a cost-cutting measure. Attrition, as well as not filling these positions, has reduced these papers.
  • McClatchy’s advertising revenue and consumer revenue were both “weakened” last quarter, according to an internal memo sent to staff by the company’s CEO obtained by Axios. Ads growth was impacted by macro factors, while subscription growth was impacted by “continued print subscriber attrition and slowing digital subscriber revenue growth.”

Be smart: A recession today could be just as devastating as the Great Recession of 2008, but for different reasons, says Matt DeRienzo, editor of the Center for Public Integrity, a nonprofit news organization.

  • Many more newspapers are now owned by large investment companies that seek to maximize their profits without investing heavily in their long-term growth.
  • “Any further slowdown or pressure on that (earnings) puts more local newspapers in a situation where the hedge fund has exploited everything and it’s no longer becoming profitable for them, so they’re shut down,” DeRienzo said.

what we watch: Regional newspaper chains and family newspaper groups are beginning to buy newspapers from large chains that are trying to reduce their footprint to reduce costs.

Yes, but: These transactions have still not been enough to prevent the newspaper industry from shrinking.

  • More than 360 newspapers closed between the end of 2019 and May 2022, as reported by Axios. The country is on track to lose more than a third of its total publications by 2025.

At the end of the line : “I think the recession will be very detrimental to small, undercapitalized newspapers and will have similar consequences for over-leveraged groups,” said James McDonald of Access Global Advisors, a seasoned newspaper transaction adviser.

  • “Unlike the pandemic, there will be no rescue funds to support their balance sheets. We could see either a high number of closures or a large number of mergers and acquisitions transactions in an effort for owners to obtain what they can of their assets.”