03-31-10 | Printable Version

Newspaper Bankruptcies: What are the implications?

Ten separate group owners of 165 daily newspapers have filed for bankruptcy protection under Chapter 11 in the past two years. As a result, it is likely that nearly $10 billion in debt will be written off by lenders in exchange for primary ownership positions in those companies.

That makes these lenders, in most cases, essentially the owners of these newspaper companies. JP Morgan Chase and others now have to be included with the likes of Gannett, Hearst, McClatchy, CNHI and Lee Enterprises when discussing today’s newspaper ownership.

These financial types, for the most part, will not impact day-to-day operations, as the newspapers will have their own management teams making independent business and editorial decisions. In some instances separate classes of stock have been established to insure that the lenders do not have any operational control.

However, these lenders will have a say when it comes to making decisions about the long term ownership of the various newspapers.

Don’t look for any immediate changes in ownership structure in the companies emerging from bankruptcy this year. It will take some time for these companies to sort through the various options available to maximize their shareholders’ value. Some of these companies – finding themselves with stronger balance sheets than they’ve had in years – might even make a strategic acquisition.

Bankruptcy laws require that banks generally exit their equity positions within five years. This restriction is not true for the credit companies, hedge funds and private equity groups that also have significant debt/equity positions in some of these companies.

In addition to the difference in time horizon, there also is a distinct difference in the mindset among the banks, hedge funds and private equity groups. The banks most often would like to exit their equity position as quickly as possible, converting their equity into cash to get back to lending. The hedge funds and private equity types have more of an investment mindset, looking for valuation upside to their position.

In the near term, it is unlikely that any of the companies that have emerged from bankruptcy will sell a big chunk of newspapers to raise cash and pay down debt. Currently, there simply are not enough buyers to absorb what would be a flood of newspapers coming on the market in that scenario. Nor is there anywhere close to the amount of financing available to fund that volume of transactions. Thus, the lenders are forced to stay in their equity positions for now while the market sorts things out.

However, this is not to suggest there won’t be an isolated divestiture of a property or two, where a premium price can be generated. Companies may also look to swap newspaper properties.

There are numerous ways for the financial owners to exit the business, but no playbook to follow. The newspaper industry has never gone through anything similar to this.

For the largest of these newspaper companies, an IPO is possible. Of course the perception of newspapers would have to first change in the minds of the public and investment community.

At the current lower valuations, a good argument can be made that newspaper companies could become solid dividend-paying companies at a time when a large percentage of the population begins to look for stable income producing investments for retirement. Coming out of the recession, it appears that newspapers are beginning to see stabilized revenue and cash flow.

There might also be mergers between these large entities as a means of capturing synergies available to a larger company. In all likelihood, a principal shareholder, in this case one of the large banks, would have to drive such a deal and get past the divergent interests represented by the other shareholders.

However it is possible that a hedge fund or private equity company, which has more of an entrepreneurial and investor mentality, might buy debt or additional equity stakes in order to also be the driver of such a merger.

For example, many of the same lenders and private equity companies are now owners in Minneapolis, Tribune Co. and Philadelphia. It is conceivable that this group might drive a consolidation of these companies in order to reduce corporate overhead.

Likewise, a number of the same names show up among the lenders/owners of MediaNews Group and Freedom Communications. A merger of these companies might reduce corporate overhead, and there may be operational synergies to be found with their southern California properties.

Other companies might try to become smaller through divestitures of some of their newspapers, allowing them to both pay down debt and raise capital to eventually buy out the financial shareholders. The current marketplace has proven to still have enough buyers and lenders at modest levels of leverage to make this strategy feasible.

Numerous hedge funds and private equity companies own a piece of the debt/equity of these companies. In the MediaNews deal, for instance, its court filings identified 161 different lenders. Many of these companies that own a small stake are already trying to buy up into a larger position or are entertaining offers to sell their stake.

Is there anything to learn about the current values of newspapers as a result of the implied values of these newspaper companies emerging from bankruptcy? Perhaps.

Generally speaking, companies have emerged from bankruptcy with a restructured debt load representing between 3 and 5 times current EBITDA. Almost every company has had at least 60% of their senior debt wiped out.

Based on the revised debt, it is safe to assume that the lenders and others finalizing the bankruptcy plans are assuming these companies have a current fair market value not much greater than the debt. Thus, in most of these companies the equity does not have much current value. In our experience the market for standalone daily newspaper operations is above these levels.