| Main Feature Story - Friday, January 22, 2010
Feature: Marin IOU
'Independent Journal' parent company to file for Chapter 11
by Sam Chapman
The company that owns the Marin Independent Journal will soon declare bankruptcy, according to sources within the company. The bankruptcy of the paper's holding company, Affiliated Media, Inc., in the form of a Chapter 11 filing, is the result of its inability to pay huge debts accumulated in recent years when MediaNews Corp. acquired many of the papers it now owns, including the San Jose Mercury News, Contra Costa Times, Oakland Tribune and some 50 other daily newspapers, as well as 100 non-daily papers in 12 states. Reports indicate that the filing could occur at the end of this week or next week.
MediaNews CEO Dean Singleton will see his interest in the company—which he founded in 1985—fall from 31 to 20 percent, according to a MediaNews report. Because Singleton is also chairman of the major U.S. newswire service Associated Press and the majority of the daily newspapers in the Bay Area are owned by MediaNews, most of the Bay Area reporting on this story comes from entities that have a direct interest in the story.
To further entwine matters, the largest daily newspaper in the Bay Area, The San Francisco Chronicle, is owned by Hearst Newspapers, a major investor in the Singleton-MediaNews conglomerate. Hearst provided major funding, in excess of $300 million, when MediaNews acquired the Mercury News, Contra Costa Times and other papers in 2006. The Chronicle on Saturday carried a small AP story inside its pages that said in part: "Hearst Corp., which owns magazines and newspapers including The San Francisco Chronicle, has an investment in MediaNews but it was not clear how that would be affected by the bankruptcy."
Some think Hearst Corp. could be "affected by the bankruptcy" in a big way.
A Canadian Press story reported that "The Hearst Corp., and the family of MediaNews co-founder Richard Scudder, are giving up interests in MediaNews, according to a person who had knowledge of the plan but spoke on condition of anonymity because he did not want to discuss the plan publicly."
"Giving up interests" could mean that Hearst was one of the shareholders that Singleton was referring to when he said, "This reorganization does not come without pain. Current shareholders will be losing the value of their holdings."
Industry insider and UC Berkeley journalism instructor Alan Mutter, in his Reflections of a Newsosaur blog, says flatly, "After plowing well over $1 billion into a decade-long effort to salvage its ill-starred purchase of the San Francisco Chronicle, the Hearst Corp. now stands to lose another $317 million in the upcoming bankruptcy of MediaNews Group.... Instead of fixing the long-festering problem, Hearst became not just the biggest loser among the equity investors in MediaNews. It will be the only one. Neither MediaNews chief Dean Singleton nor his longtime business partner Richard B. Scudder will lose a nickel in the bankruptcy, because neither ever put any of his own money into the company, said a MediaNews spokesman. But they aren't unscathed. Each of the MediaNews founders will suffer the complete loss of paper gains that at one point theoretically were worth as much as $500 million per man."
Newspapers owned by MediaNews appear to be downplaying the story. The Marin IJ carried a story on Saturday (the paper's lowest circulation day) at the bottom of its business section that managed to avoid the word "bankruptcy" in its headline and didn't get to it until the third paragraph. The story received similar treatment in the Mercury News.
According to its announcement, Affiliated Media has put together a plan that involves senior creditors trading what is owed them for a share of a "new secured term loan" in a smaller amount but with more collateral to guarantee it. The creditors appear willing to sacrifice a major part of what is owed to them in the hope that a restructured company will be able to survive and grow its value. The alternative may have been that they would lose even more, immediately.
Details laid out in an Affiliated Media press release include the following: "At present, senior lenders to the company are owed approximately $590 million, guaranteed by certain affiliates. The company also owes an aggregate principal amount of $326 million to holders of subordinated notes. By accepting the Prepackaged Plan, senior lenders will trade their existing claims and guarantees for a pro rata share of the new secured term loan, in a smaller principal amount but with more collateral and a more financially sound borrower, as well as ownership of a majority of the new equity of the reorganized company, subject to a gradual dilution as a result of grants of restricted stock. Subordinated note holders will receive warrants for future equity. All existing equity interest in Affiliated Media will be cancelled." What that means is that the company's debt will be reduced from $930 million to $165 million because major creditors, including Bank of America, have agreed to swap what is owed to them for a better secured loan and a share in the ownership of the company.
In a letter to his employees, Singleton assured them that he and company president Joseph Lodovic IV will retain control of the company and that "you'll see no changes in your operation. Our plan allows for trade and other business vendors to be paid in the ordinary course of business. The company is current on all vendor payments, and we expect to remain so. We have adequate cash to fund all of our operations in a normal fashion."
The bankruptcy will be filed under the provisions of Chapter 11 of the Bankruptcy Code, which is commonly used when a debtor proposes a plan of reorganization to keep its business alive and pay creditors over some extended time. This one is of the increasingly popular "prepackaged" variety, meaning that most senior creditors have agreed to a reorganization plan and to reduce/restructure what is owed to them before the case is filed in federal court. The advantage of a prepackaged filing is that there are fewer decisions for a court to make, fewer negotiations with creditors and the proceeding can usually be completed more quickly.
Singleton had reported in a December 2009 memo to employees that he planned to restructure the company's debt in the first quarter of 2010, but made no mention of possible bankruptcy. MediaNews, which claims to be the nation's second largest newspaper publisher by circulation, was reported throughout 2009 to be unable to meet debt payment deadlines and to be in the process of talking to creditors, including Bank of America, about a way to rework its debt.
MediaNews papers, including the IJ, have gone through multiple waves of layoffs and cost cutting in recent years, which included, among other things, outsourcing their production of advertising to India. Downsizing has been common throughout all print publications, including magazines, for a number of years as the industry has struggled with a severe recession, declining circulation and migration of significant amounts of advertising revenue to the Internet. What does all this portend for the future? Singleton, newspaper consolidation maven extraordinaire, has an answer. In a Wall Street Journal story on the planned bankruptcy filing, he is quoted as saying that dealing with the company's debt allows him to lead newspaper-industry consolidation. He wants to be aggressive in merging newspapers. His answer to a further question about which papers might be combined was: "You can look at the map." We have looked at the Northern California newspaper map and see 37 newspapers already owned by MediaNews. Unfortunately, for readers more consolidation means less journalism and fewer voices to describe and interpret our world.
According to industry observer Alan Mutter, the MediaNews filing, along with one by Morris Publishing Group announced a day earlier, will bring to nine the number of daily newspaper publishers forced to file for bankruptcy because of unsustainable debt they acquired just prior to the Great Recession. Others include Freedom Communications (Orange County Register), Heartland Publications, Journal Register Co., Minneapolis Star Tribune, Philadelphia Newspapers LLC, Sun-Times Media Group and the $13 billion Tribune Co., which operates the Chicago Tribune and the Los Angeles Times.
The horizon is not entirely bleak for daily newspapers, however. A story in industry trade journal Editor and Publisher (which itself recently folded, then surfaced again under new ownership) reported last week that "Newspaper stocks have come back so far from their parlous state a year ago that the sector now ranks among the market's best performers...Zacks Investment Research Chief Equity Strategist Dirk Van Dijk says newspapers now rank seventh-best among 206 industries tracked by the Chicago-based firm. Two stocks—Gannett Co. Inc and the New York Times Co.—are now given No. 1 ratings in its stock evaluation system."
However, it's all relative: "Newspaper stocks across the board are trading at or near 52-week highs, and some have rebounded spectacularly since hitting all-time low prices in the winter of 2009. Gannett's share price, for instance, is up 103 percent from a year ago. Stock in the McClatchy Co. sunk below $1 a share last year, and only narrowly avoided being delisted by the New York Stock Exchange. A year later, McClatchy shares have soared 322 percent. Still, newspaper stocks remain near historic lows. McClatchy shares in January of 2005, for instance, traded for around $60. On Wednesday, McClatchy shares closed at $5.06.... While [newspapers] may never return to their glory days, that doesn't mean that they are all going to go extinct in the near future, either. Most have greatly reduced their costs over the last year, so just a small pick-up in revenue should lead to large gains on the bottom line."
So while the MediaNews bankruptcy may not be the exceptionally good news it was portrayed as in the company's publications and major investors in the company have taken a bath, newspaper cost cutting industry-wide appears to have produced companies with healthier bottom lines. Surviving papers may well be better positioned for 2010 than they were for 2009.
Sidebar: The oracle of MediaNews
A speech given last September by MediaNews CEO Dean Singleton now seems almost prophetic.
Addressing the National Conference of Editorial Writers in a speech covered by his own Salt Lake City Tribune, Singleton is reported to have said that "motives for newspaper ownership have shifted over the years, from those who wanted to cover news and write opinion to those who came to view newspapers as purely financial investments. Now banks are becoming 'accidental' stockholders. To reduce debt, more newspapers are likely to seek bankruptcy court protection, while others try to convince banks to swap debt for ownership stakes in their companies."
We can see now that this is exactly the path he was on.
And further, Singleton predicted: "Whether by supervision of the courts or by negotiation to convert some debt to equity, America's banks will own a large position in the newspaper sector going forward. Get used to it." He was foretelling the story of his own company. While the proposed bankruptcy deal announced by MediaNews indicates that Singleton and his management team will be able to appoint four of the seven members of the new company board and retain control of the company, deals such as this are not so simple. A Bank of America-led group of 116 banks and 49 bondholders will own 80 percent of the second largest newspaper company in the nation.
The problem for readers is that financial institutions don't want to be in the business of journalism. What they want is the maximum return on their distressed investment, which may not bode well for healthy journalism. In the same story, Singleton comes back to one of his favorite theme—consolidation—in predicting how banks (as newspaper owners) will behave. "Singleton said lenders will seek to recoup their investments by pushing newspapers to consolidate," reported the Tribune. "Through mergers, banks will eliminate expensive corporate overhead and allow papers to improve their financial performance without hurting readers or advertisers."
Consolidation among Bay Area MediaNews properties has certainly been the order of the day, as it has in other parts of the industry. Whether readers and advertisers are unscathed in the process is the subject of much debate. One thing is known. Banks are not permitted to own parts of companies except in cases such as the MediaNews bankruptcy, when their stake is due to a swap for debt. In such cases federal law requires that they divest their ownership within five years.
According to an Associated Press report quoting Marc Abrams, a New York lawyer who represented newspaper publisher Journal-Register Co. while in bankruptcy protection, "The first question these banks have is: 'What is my exit strategy?'" Their decisions are not based on criteria related to what produces high-quality journalism and sustainable publications, but on how they can extract as much equity as possible as quickly as possible from the investment.
The highly regarded Knight Ridder newspaper company, which included the San Jose Mercury News and Contra Costa Times, came to an end when Florida investment manager Bruce Sherman, who owned some 19 percent of the company's stock, decided his return on investment wasn't as high as he wanted. He effectively forced a sale of the company and its dissolution. The irony here is that MediaNews acquired Bay Area Knight Ridder newspapers by incurring major debt that has now put MediaNews itself in a similar situation of being dependent on the financial calculations of non-newspaper company owners mostly interested in selling and recovering as much of their investment as possible. And in the restructured MediaNews empire with its 54 daily newspapers and 100 non-daily papers in 12 states, the banks and bondholders will own 80 percent of the company, more than four times the percentage Sherman owned of Knight Ridder.
The financial picture in the broader daily newspaper publishing business is not rosy. Respected credit rating company Fitch Ratings in a 2009-10 report noted that while "the worst of the advertising downturn has passed, Fitch believes that daily newspapers are likely to be left behind in an ad recovery. Fitch expects revenues to be down again off very easy comparable periods due to permanent shifts in advertiser sentiment and excess ad inventory that will plague the industry for years to come." Just last week in an analysis of the McClatchy Company, Fitch said that "large newspaper companies are not likely to be able to comfortably sustain and repay debt at more than 1x leverage [debt equal to more than one times annual operating profits]. Newspaper companies that do not transition their revenue base and cost structure may not generate sufficient free cash flow to support or repay any level of debt on the balance sheet."
Industry veteran and UC Berkeley journalism teacher Alan Mutter observes in his blog, Reflections of a Newsosaur, that "seven of the publicly traded companies are burdened with debt ranging from 2.9 to 14.7 times their operating earnings." The list includes such majors as Gannett, McClatchy and New York Times. Mutter goes on to note that three newspaper companies have already emerged from bankruptcy. In each case the CEO who incurred the disabling debt that forced the bankruptcy was no longer around in the restructured company. Singleton could be the first to survive, albeit with greatly diminished holdings in his company.—Sam Chapman
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