(Bloomberg Opinion) -- When last we left Alden Global Capital LLC and its 39-year-old managing partner, Heath Freeman, they had just purchased the Boston Herald, the struggling tabloid that competes with the Boston Globe. The $12 million purchase took place in March; within a week, to the surprise of absolutely no one, Alden Global announced that it would lay off a quarter of the staff.
This, of course, is Alden Global’s MO. It buys up newspapers — more than 90 so far — but unlike Jeff Bezos at the Washington Post, the firm isn’t doing it to revive them. Instead, it cuts and cuts, and then cuts some more, until there’s little left but a carcass. Speaking truth to power, the importance of the Fourth Estate to a functioning democracy, the idea of bearing witness — none of that matters to Freeman and his fellow hedgies at Alden Global. Their only goal is to suck out cash and redirect it elsewhere. At the Herald alone, those first layoffs were followed by more, until its staff has shrunk from 240 employees to about 100. No one thinks it’s done shrinking.
If Freeman spoke to the press — he never has, so far as I can tell — he would likely justify his strategy by saying that he was deploying the cash he generates from his newspaper pillaging for investments that can earn higher returns. Just one problem: Alden Global’s non-newspaper investments have done horribly. To judge from recent events, the hedge fund’s treatment of some of these holdings is as heartless as its treatment of its newspapers. We’re going to focus our attention today on those non-newspaper investments.
Alden Global was founded by a Wall Street billionaire named Randall Smith, whom the New York Post once labeled “the grandfather of vulture investing.” In 2007, Smith hired Freeman away from a more genteel firm, mentored him in the ruthless ways of vulture investing, and then handed Alden Global over to him.
Smith also owned a real estate development company, Spire Realty, that operated primarily in Texas. Among its holdings is Bryan Tower, a Dallas skyscraper that was built in the early 1970s by the great Texas developer Trammel Crow. Smith and his son Caleb, who is a partner at Spire Realty, renovated the tower shortly after buying it in 1998.
It’s now 20 years since the renovation, and the building is getting a little long in the tooth. Inevitably, tenants are starting to look for shinier quarters. Thus it was that last month, Baylor Scott & White Health Obligated Group, the largest health-care system in Texas — and the building’s biggest tenant — announced that it would be moving out in 2020 for a new headquarters building going up in one of the city’s hipper neighborhoods.
Within days, Morningstar Credit Rating put Bryan Tower on its “watch list,” citing the possibility that a $61.9 million loan might default. “Without Baylor’s rent, the property’s cash flow would decrease below breakeven and raise the risk of term default,” Morningstar warned.
Joe Ruff, Spire’s president, quickly responded that there was nothing to worry about. “We have no intentions of defaulting on the note,” he said, pointing out that that company was already in “talks” with a potential tenant “of similar size.”
In fact, Bryan Tower had already landed a tenant a few months earlier: privately held Payless ShoeSource Inc. The company, long based in Topeka, Kansas, went through bankruptcy in 2017. Upon emerging, it set about outsourcing its information technology department, laying off 235 employees, and putting its headquarters up for sale. When the Greater Topeka Chamber of Commerce called the company to find out what was going on, its calls were not returned.
In May, Payless announced it was moving its headquarters to — you guessed it — Bryan Tower in Dallas. Why? In a news release, the company said that “the Dallas location will further enhance and support the company’s global brand,” whatever that means. Perhaps more pertinent is the fact that among the consortium of Wall Street firms that took Payless private in 2012 was none other than Alden Global. In other words, it appears that Payless abandoned Topeka to help bail out one of Randall Smith’s real estate investments. Since that announcement in May, by the way, there have been additional layoffs.
As for the “potential tenant” Spire was in talks with, about a week ago, Meagan Nichols, an editor with the Memphis Business Journal, noticed that Fred’s Inc., a regional pharmacy chain based in the city, was posting executive job openings in Dallas. Fred’s, she pointed out to her readers, not only doesn’t have an office in Dallas; it doesn’t even have any stores there. You have to drive an hour and a half, to Tyler, to find the nearest Fred’s.
As it happens, Fred’s is Alden Global’s biggest single investment; after a flurry of recent purchases, it owns a third of the company. After some activist-style agitation, Freeman was installed as chairman in September 2017. Within seven months, he had fired the chief executive and installed, as “interim” CEO, Joe Anto. Anto came from Digital First Media, the company that runs Alden Global’s newspapers. A third board member, Sam Rossi, is the current chief executive of Digital First Media.
They are definitely not retail whizzes: For most of the time Alden Global has owned Fred’s stock, it has been a disastrous investment. At $20 a share in December 2016, it fell to $1.38 by last June. (It has since rallied a bit, to above $3.) According to the journalist Julie Reynolds, who covers Alden Global closely, several class action law firms are sniffing around, hoping to file a securities fraud suit.
In May, Fred’s added two new board members. Both of them are real estate experts. In a recent conference call, Anto said the company was planning to sell “portions of our vast real estate portfolio.” The company has already unloaded its small specialty pharmacy operation, which was a free service designed to help elderly customers. Anto has also said Fred’s is considering selling off some of its retail branches “in an effort to improve earnings and cash flow,” according to Forbes.
Seeing all this, Reynolds drew the obvious conclusion: “If this is starting to look like the chop-shop strategy Alden unleashed on DFM’s papers, it should.” Sure enough, in late October, Fred’s announced that it was laying off 80 employees — bringing its Memphis head count from 440 at the start of 2017 to 153.
And then there’s the likely shift to Dallas, which, like the Payless move, will help shore up Smith’s skyscraper while abandoning a city where the company has been based since the 1950s. A few days ago, a spokeswoman for Memphis Mayor Jim Strickland told the Memphis Business Journal that the mayor “certainly doesn’t want Fred’s to move out of Memphis. The mayor’s had several conversations with Fred’s representatives,” she added. “It’s a work in progress.”
All I can say is, don’t hold your breath, Mr. Mayor. As he has proved time and again, Heath Freeman couldn’t care less about the communities where his companies do business. That’s become his trademark. Your time will be better spent looking for a new tenant for Fred’s soon-to-be empty headquarters.
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Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is co-author of “Indentured: The Inside Story of the Rebellion Against the NCAA.”
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