CalPERS’ Hedge Fund With 34% Stake in National Enquirer Parent Alleged To Be “Parking” Rather Than Selling (Updated)

Update August 24, 2019, 7:46 PM EDT:

On August 7, the New York Post revised the July 11 article that we quoted in this July 15 post. Our excerpt in the article below included the only part of the article that the Post changed, which removed the phrase “parked transaction”. This paragraph replaced the New York Post’s paragraph that appears as the 15th paragraph in the original version of this post:

And more than one industry veteran questions whether Cohen wants to keep the Enquirer or whether he is only helping out an old pal, David Pecker, the CEO of AMI, who guided the embattled National Enquirer and other celebrity magazines from Us Weekly to OK!

Back to the original version of the post:

CalPERS got some bad press earlier this year as a result of being caught out as holding a 34% stake in the National Enquirer’s parent company, American Media Inc., right after the scandal broke over AMI’s threat to Jeff Bezos to publish some pecker pix.

As we wrote at the time, “What about ‘passive investor’ don’t you understand?” In our mind, the scandal wasn’t that CalPERS owned something embarrassing, but that it could do nothing about it even though it had committing itself to exiting all hedge funds years ago, including CalPERS’ dedicated Chatham “Eureka” fund that owned 34% of AMI (four Chatham funds own 78% all together; the CalPERS Eureka fund has the biggest stake).

AMI is a garbage barge, and not just in terms of its content. As we wrote in February:

It is taking CalPERS an awfully long time to get out of Eureka, and that suggests whatever is left in the fund is overvalued, because if Chatham could get out at its reported value or higher, it would have done so by now. By contrast, when CalSTRS had a hissy fit about Cerberus owning Remington, CalSTRS was finally allowed to exit after two years (Cerberus did not liquidate its fund’s stake in Remington, and was holding that bag when the gun maker filed for bankruptcy in 2018).

CalPERS’ holding in Chatham, the fund that owned the American Media stake, was down to $261 million at the end of June 2016, $235 million as of June 2017, and according to the Los Angeles Times story, “over $200 million” in 2018. That means the eventual writedown could be big enough to be hard to hide and lead to another round of bad press.

American Media is still a financial mess, From Bloomberg:

The closely held American Media Inc. — led by the president’s longtime friend, David Pecker — recorded a $31.5 million loss in the six months that ended Sept. 30, according to documents reviewed by Bloomberg. That marked an improvement over the previous year, but nonetheless brought the company’s total losses over the last 5 1/2 fiscal years to $256 million. AMI owed about $203 million more than its assets were worth.

So whatever of that >$200 million value that CalPERS is still apparently claiming for Eureka that is attributable to the American Media investment should be written down to zero. I have a sneaking suspicion that most and potentially all of what is left in Eureka is the American Media stake. Not only is that consistent with the fact that CalPERS is still stuck in that fund, but CalPERS would have huffily said that the American Media portion of its remaining stake in Eureka was bupkis if that were the case.

A Bloomberg report this June had a Chatham source saying that CalPERS had rejected bids for its AMI stake above where its assets were valued. Given AMI’s negative net worth and its lack of earning prospects and vanity value, we were skeptical of the notion that anyone would pay real money for it and wondered what CalPERS was smoking to be rejecting bids that would leave it supposedly reporting a profit on its investment.

We also got the occasaional e-mail that CalPERS’s interest in Chatham had been sold, which was inconsistent with press reports, such as a Bloomberg story in June.¹ It said that Chatham had announced in April it was selling AMI to James Cohen, who is the CEO and owner of Hudson News, for $100 million, but there was no report that the deal had closed (which while you cannot prove a negative, is pretty strong evidence the deal had not been consummated). We were still gobsmacked at the idea that anyone with an operating brain cell would pay money for AMI.

It turns out our suspicions were correct. Not only has AMI not been sold, but the deal with Cohen isn’t even remotely arm’s length. Props to the New York Post for this account:

Could Anthony Melchiorre’s Chatham Asset Management be readying a bid to buy out Jimmy Cohen’s Hudson News magazine wholesale distribution business?…

Cohen agreed to buy a second Chatham trophy asset, the National Enquirer, for $110 million in mid-April….

Despite frequent press mentions that the deal was concluded, it has not been finalized — and probably won’t be until the end of the summer, said one source with knowledge of the deal. The Enquirer is owned through Chatham-owned American Media Inc.

And more than one industry veteran thinks the Enquirer has all the earmarks of “parked transaction,” with Cohen the newsstand king helping out an old pal, David Pecker, the CEO of AMI, who guided the embattled National Enquirer and other celebrity magazines from Us Weekly to OK!

In fact, insiders say Chatham dearly wants to unload the Enquirer, which drew federal scrutiny for its role in paying hush money to two women who, in the run-up to the 2016 election, claimed long-ago flings with Donald Trump.

So is Chatham selling AMI at an inflated price to Hudson, with the Hudson purchase price then inflated to wash out the AMI overpayment? And does Chatham think it can fool people by saying it sold AMI when it’s apparently going to own it again, just not as directly as before? Paging Matt Pierce, the Los Angeles Times reporter, who unearthed that CalPERS had a stake in AMI. Or maybe CalPERS will try the novel strategy of coming clean before it is caught out.

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¹ This was from people in CalPERS’ orbit, and they’d heard it second hand, so we could never figure out if this was the result of CalPERS’ spin or sloppy press reports.