Lenders become owners

2009-11-30 11:35

San Francisco - Newspaper headlines have skewered money lenders for dubious decisions that stoked the recession. Now the financiers are starting to headline newspapers in a new way - as the owners.

These newspaper novices are taking control through bankruptcy proceedings and giving few clues about their turnaround plans. Their decisions will be crucial because this new age of media ownership is unfolding at a time that could make or break some of the largest publications.

Banks and other financial firms have taken over or are angling to take charge at dozens of newspapers, including four of the nation's 15 largest - the Los Angeles Times, Chicago Tribune, the Star Tribune in Minneapolis and The Philadelphia Inquirer.

The new owners face huge problems. Newspaper ad revenue, the industry's main source of income, is on pace to total around $27bn this year, about $22bn less than three years ago. Newspaper circulation is falling faster than ever.

Finding solutions - such as mining websites for more revenue while newspapers protect what's left of their print franchises - will likely require a financial commitment that short-term owners might be reluctant to make, said Fitch Ratings analyst Mike Simonton. Lenders that take over a company through bankruptcies typically try to sell their stakes within two to three years.

Something different

But there's another way of looking at this transition: The last few years have gone so badly that newspapers need to try something different - and "new blood in the industry" could help, said John Temple, who was publisher of The Rocky Mountain News in Denver when its owner, EW Scripps Co, closed it in February.

A common theme in newspaper bankruptcies is that publishers took on too much debt to pay for acquisitions in better times. Now the banks that financed those deals are hoping to recoup at least some of their investments by forgiving or writing off most of the debt - in exchange for controlling stakes in the publications.

Instead of trying to engineer a turnaround, the new owners could just close the newspapers and auction off their assets. But Simonton doubts that will happen because newspapers don't have a lot of valuable inventory like retailers that have been liquidated.

Instead, the bleak market conditions make it more likely that some newspapers are bound to be owned, even briefly, by bankers such as JP Morgan Chase & Co and financial firms such as Angelo, Gordon & Co, which specialises in buying the debt of distressed companies.

So-called "loan-to-own" investors such as Angelo, Gordon at least have experience taking over companies. Banks don't have much, because government regulations say banks aren't even supposed to own pieces of companies.

The government makes exceptions when banks are exchanging debt for stakes in companies that can't repay their loans - but the banks have to sell those holdings within five years, unless they get a waiver from regulators.

It's a situation banks don't want to be in, said Marc Abrams, a New York lawyer who represented newspaper publisher Journal-Register Co while it was in bankruptcy protection this year.

Exit strategy

JP Morgan leads a group of banks that now own pieces of the Journal-Register, whose newspapers include the New Haven Register in Connecticut and The Oakland Press in Michigan.

"The first question these banks have is: 'What is my exit strategy?"' Abrams said. As part of that process, the bankers will likely try to figure out whether their newspapers have the right management in place and determine how much more money they're willing to sink into the industry, Abrams said.

JP Morgan, which leads a group of lenders including Angelo, Gordon that could become the Tribune Co's new owners, declined to comment for this story. But in a November interview with The Wall Street Journal, the executive who oversees JP Morgan's investments in troubled companies said the bank isn't a hands-on owner.

"We don't necessarily have the time or operational skill-set to insert ourselves into the strategy of a company," said Patrick Daniello.

The incoming owners of ailing newspapers are saying little about how they intend to fix things, leaving it unclear whether they might expand on the cost cutting that has already shredded newsrooms. Besides trimming staffs, some publishers have reduced wages and reduced the frequency or size of their print editions.

At the Star Tribune, for instance, Angelo, Gordon and the rest of the newspaper's new owners are treading carefully. They haven't named a new publisher, though they have signalled they will rely on the insights of industry veterans.

Two of the newspaper's board seats are being filled by Gordon Crovitz, former publisher of The Wall Street Journal, and Michael Reed, CEO of GateHouse Media Inc, which owns dozens of small newspapers. The board chair is Michael Sweeney, who heads a private equity firm and has no newspaper experience.

Difficulties

Brad Patelli, the man overseeing Angelo, Gordon's investments in newspapers, has turned down interview requests since his firm became one of the Minneapolis newspaper's owners in a bankruptcy reorganisation completed in September.

The ownership group includes Wayzata Investment Partners, another private equity firm, CIT Bank and investment bankers Credit Suisse Group. Wayzata, CIT and Credit Suisse all declined to comment.

In his only extensive interview during the past three months, Patelli told the Star Tribune that he envisions holding on to the Minneapolis newspaper for five to seven years - long enough for it to work out its problems.

"It's often difficult being a contrarian," Patelli told the Star Tribune. "We're certainly going into it with our eyes wide open."

At two other newspapers in Angelo, Gordon's sights, The Philadelphia Inquirer and the Philadelphia Daily News, publisher Brian Tierney has been fighting to block his publications' lenders from becoming the new owners.

He believes the lenders' plans - which would oust him - would be damaging to the newspapers because they would leave the company with $85m to $100m in debt.

But he also said banks and private equity firms such as Angelo, Gordon would be bad owners of newspapers because of their secrecy, and because the financiers are likely to be involved in business and government deals that probably would be covered by the newspapers they hope to own.

Optimistic view

"I am not saying these are inherently bad guys," said Tierney, a former public relations executive. "I am just saying newspapers aren't the right industry for them to be involved in."

A more optimistic view comes from William Dean Singleton, chief executive of MediaNews Group Inc, a private company that owns more than 50 daily newspapers, including The Denver Post and San Jose Mercury News.

Singleton, who relied heavily on their loans to expand his company, thinks banks could help newspapers by forcing more mergers that could reduce overhead - by combining production and sharing newsroom staffs, for example.

If the cost-cutting includes layoffs, it would threaten the quality of coverage that already has suffered as publishers jettisoned thousands of reporters, editors and photographers during the past few years.

But Singleton is convinced bankers aren't going to do anything that would make newspapers any less attractive, because that would make it more difficult to sell the publications to the next generation of owners -presuming buyers for newspapers eventually become more numerous.

"They didn't want to hold on to debt forever and they aren't going to want to hold on to the equity forever either," said Singleton, who also is chair of The Associated Press. "When this transition is over, you probably will see newspapers go back into the hands of people who really want to own them."

- SAPA