So, How Is It In Newspaper Bankruptcy Court These Days?

Philip M. Stone September 10, 2009 Follow on Twitter

Within the past year several newspaper groups, led by Sam Zell’s Tribune, opted for US Chapter 11 bankruptcy protection as the best way to get back onto a sound financial foundation. That means there are going to be winners and losers, and the losers, mostly bondholders, are showing they are not going down without a fight.

So, how are the various bankruptcies faring?

TRIBUNE – It was thefirst to go the bankruptcy route last December and it is still in a real quagmire as the bondholders now are going after Sam Zell personally, asking the bankruptcy judge to let them investigate Zell’s $8.2 billion takeover in 2007, calling it a “fraudulent conveyance”. In other words, they claim the deal left the company so deeply in debt it had little chance to survive in the first place, let alone with what the recession did to cash flow.

What’s probably really going here is that the bondholders don’t like the deal that has been cooked up between Tribune and its senior lenders (the banks). They would take over most of Tribune in exchange for forgiving some $8 billion in debt.  The obvious compromise is to get the bondholders, who hold around 18% of the company’s debt, a bigger stake in the final solution with the banks.  If there is no such deal and the judge allows the “fraudulent conveyance” investigation to go forward it will slow way down Tribune’s bankruptcy exit.

And what about Sam Zell? When Tribune does emerge from bankruptcy will he still lead the company? Stories are flying both ways which means no one really knows. He will lose his $315 million original investment and it is thought he will also have to give up the warrants that allow him to buy 40% of the company for $500 million.

Meanwhile the bankruptcy judge has approved Tribune’s sale of the Chicago Cubs and Wrigley Field for some $845 million. You can see Zell’s fingers in the deal – Tribune will hold onto 5% of the Cubs for very serious tax considerations mirroring what Tribune did when it sold Newsday, keeping 5% so the deal could be considered a joint venture rather than a sale – thus no capital gains tax.

STAR TRIBUNE – The newspaper entered bankruptcy in January, and it has taken advantage of that protection to wring some $20 million in costs savings from 10 unions, and it got the newspaper’s major secured creditors to swap $430 million in debt for control of the company plus $100 million of new debt. All going well the newspaper leaves bankruptcy protection by the end of September.  Big loser is Avista Capital Partners that paid McClatchy some $530 million for the newspaper a couple of years back. It will lose its investment but since Avista is a thriving multi-billion private equity concern there’s not too much damage there after taking the tax losses. Publisher Chris Hartke who had a small holding will be gone and the main lenders have named a new board of directors that includes Gordon Crovitz who was publisher of the Wall Street Journal at the time of the Murdoch purchase.

PHILADELPHIA NEWSPAPERS -- This one continues to provide great theater with the creditors, owed some $300 million and who want to take over the newspapers, fighting every inch of the way with current publisher Brian Tierney who wants to remain in charge and who has hobbled together more investors. He wants to give the creditors some $67 million in cash and property to settle the $300 million in secured debt, but the creditors believe they should do far better than that.  Big day in court is September 15 when the bankruptcy judge announces the ground rules for an auction between the two sides.

The creditors say the full value of their outstanding loans should be allowed in the bidding – something that has been approved elsewhere but no guarantee the judge will do so here – but if the judge does agree with the creditors then they will easily be able to outbid the new financing that Tierney has put together.

So Tierney, who comes from a PR background, is running daily full page “Keep It Local” house ads in the two Philadelphia newspapers and online to convince the community (and the judge) that the newspapers should remain under local control and not convert to outside ownership, especially foreign ownership -- one of the major creditors, for instance, is Citizens Bank which is owned by The Royal Bank of Scotland. The creditors, irked by those ads and fearing they might preclude other bidders, asked the bankruptcy judge to order them stopped, but he refused to do so Wednesday saying he considered it all a sideshow to the real matter at hand – funding the newspapers through bankruptcy. He did suggest, however,  that Tierney and his investors might pay for those ads to keep a level playing field.

Tierney has labeled the banks as “carpetbaggers” – a term not really used since the end of the US Civil war when Northerners, with their then popular carpet bags, scoured the war-ravaged South taking advantage of cheap business opportunities. 

No way of telling if Philadelphians really care about local ownership – the newspapers were owned by Knight-Ridder before Tierney bought them in 2006  and no one seemed really bothered when the newspapers were then owned by an out-of-state group.  McClatchy, who got them in the Knight-Ridder deal, decided it didn’t want to keep these newspapers and Tierney saw the opportunity to take the papers local, getting a group of buddies to put up some $150 million and arranging another $365 million in loans to get the deal done. He has lost his $10 million.

SUN-TIMES – The Sun-Times Media Group entered bankruptcy on March 31 and since then everyone has been waiting for some White Knight to step forward and take the company out of its misery. And he just has. Local businessman Jim Tyree has bid just $5 million for the group plus he has agreed to assume some $20 million in liabilities. Since the company last December valued its assets at around $310 million it could turn out to be a pretty good investment, assuming Tyree has enough capital to actually run the business when the company emerges from bankruptcy. It had a $380 million loss last year.

One problem for Sun-Times is that it has a $600 million tax bill hanging around its neck but the belief is that with a buyer the bankruptcy court will make that tax liability go away. If it doesn’t then liquidation will probably be on the cards.

FREEDOM COMMUNICATIONS – It entered bankruptcy last week facing $770 million in debt. But it has already done a deal with most of its lenders which would forgive about 58% of that debt, giving the lenders control while the current owners, the Hoiles family and two private equity companies,  would end up with just  2%. The Blackstone Group and Providence Equity Partners had paid some $470 million in 2004 for 40% of the company. The bankruptcy proceedings are to encourage those lenders that didn’t agree to the deal to now do so.

There are various lessons to be learned from all of these bankruptcies, but the obvious one would be that it’s all well and good to take out huge loans when things are going well and debt can be handled via cash flow, but what safety nets are in place if the economy turns sour and the cash flow isn’t there to handle those huge payments? Just how much risk is acceptable? No doubt that lesson will be lost once the economy recovers and it’s back to carefree business as usual.