By Sam Chapman and Jeb Bing
The company that owns the Daily News in Palo Alto, San Mateo County Times, 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 will soon declare bankruptcy, initiating a proceeding in federal court.
The bankruptcy of holding company Affiliated Media Inc., in the form of a Chapter 11 filing, is the result of inability to pay huge debts accumulated in recent years when MediaNews Corp. acquired many of the papers it now owns.
MediaNews Chairman and CEO Dean Singleton, who founded the company in 1985 and has controlled it since and who, "at one time owned 45 percent of MediaNews Group and currently has 31 percent, will see his interest fall below 20 percent" according to a MediaNews report.
Because Singleton is also chairman of the major U.S. newswire service, Associate Press, and because most 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 major daily newspaper in the Bay Area, the San Francisco Chronicle, is owned by Hearst Newspapers, a major creditor of 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."
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 discuss the plan publicly."
"Giving up interest" could mean that Hearst was one of the shareholders whom Singleton was referring to when he said: "This reorganization does not come without pain. Current shareholders will be losing the value of their holdings."
A story carried in Saturday's IJ (the paper's lowest circulation day) at the bottom of the business section managed to avoid the word "bankruptcy" in its headline and didn't get to it in the story until the third paragraph. The story received similar treatment in the Mercury News.
According to its announcement, Affiliated Media, the holding company for MediaNews, has put together a plan which 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 them for 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."
The short summary 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 them for a better secured loan and a share of the ownership of the company.
In a letter to his employees, Singleton assured them that he will retain control of his 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 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 much 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 this all portend for the future? Dean 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. His answer to a further question about which papers might be combined was: "You can look at the map."
According to industry observer Alan Mutter, the Media News filing, along with one by Morris Publishing Group announced a day earlier, will bring to nine the number of 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 is 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 they (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 pickup 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 while major investors in the company have taken a major bath, the surviving papers may well be better positioned for 2010 than they were for 2009.