Owners Up to It?

By: Mark Fitzgerald And Jennifer Saba When the housing market crashed, banks and other lenders became the reluctant owners of tens of thousands of homes. Now, the newspaper industry's crisis is forcing financiers to become equally reluctant publishers.

Banks, hedge funds and other secured lenders fueled the newspaper buying binge early this decade ? a debt-heavy spree that paid off neither for the lenders nor the borrowers. That debt's sheer mass overwhelmed publishing companies, forcing unhappy choices on the lenders.

They could, of course, try to sell at a time when newspaper values have utterly collapsed, and recover pennies on the dollars of their investment. For lenders, the independent valuation of the sprawling SunTimes Media Group for its bankruptcy auction in October was

instructive: Huron Consulting determined the chain's assets had a book value of $359.2 million and a sales value of just $54.3 million, before fees.

Or secured lenders could, in effect, foreclose on the newspapers that can't make their debt payments or whose debt levels breach covenant terms.

In any case, for the smart money operators who bet big on newspapers, this has turned out to be the classic Hobson's choice ? which is to say, no choice at all.

Just since December 2008, at least 10 U.S. newspaper companies have filed for Chapter 11 protection. Most entered bankruptcy court with agreements in hand, so-called prepackaged bankruptcies, that give their creditors control of their businesses. JPMorgan Chase & Co., for instance, finds itself in the awkward position of publisher. When companies like Journal Register Co. couldn't pay back their debt, the bank was suddenly thrust into the position of owner. Media companies, according to The Wall Street Journal, make up a "sizable portion" of troubled assets now owned by JPMorgan.

And it's likely that once the biggest, most complicated or most contentious of the bankruptcy cases ? among them, Philadelphia Newspapers, Freedom Communications and Tribune Co. ? are settled, the creditors will have majority ownership stakes in those publishers as well. But once they become owners, what's the next move for banks and private financiers?

Mavericks need not apply
"People get afraid, just as when their home gets foreclosed, that the lenders are going to do something dramatic. And the answer is ? not really," says Carlyn Taylor, a senior managing director who leads FTI Consulting's national communications, media and entertainment practice and is CEO of its investment bank subsidiary.

FTI is one of the go-to players when secured lenders find themselves directing newspapers through bankruptcy or restructuring. Right now, FTI is working on nine newspaper bankruptcies or restructurings, either for the company under present management or for its creditors. How these accidental publishers operate their new companies depends in large part on what kind of lender they are, Taylor says.

Private equity firms like to put senior partners on the board of directors "and dig in and call the shots a lot," says Taylor. Hedge funds that bought newspaper debt also tend to be more hands-on because from the start they regard debt as a form of equity. Sometimes they want their own partners on the board, but not in all cases ? and they may come in with their own ideas of improving cash flow.

Hedge funds also "tend to be a little less patient" than private equity, Taylor observes. While private equity looks to get out of investments in three to seven years, she says, hedge funds "have a shorter investment horizon."

Traditional banks generally don't put their own insiders on the board, but are "very cautious" about who they name as representatives. The most passive are the securitization pools, the so-called CLOs, (collateralized loan obligations), which often are obliged by their charter to just sell when things go south at a paper ? which puts downward pressure on newspaper valuations.

Stacking the board
But Taylor and others who have seen this scenario play out say no matter what approach secured lenders may take to selecting board members, when it comes to operating their new newspaper company, these accidental publishers are going to look for experienced executives.

"Secured lenders, especially banks, are very smart people, but they're not big risk-takers," she says. "It's not like they're coming in with a big thesis to shake up the management team." Restructuring takes time, and the lenders get to evaluate the strength of the management in place.

Their dream team? "They'd much rather have a management team that is respected and is changing with the times, and recognizing that while there are some revenue declines on the print side, there are good opportunities on the online side."

That may sound counterintuitive, says Brian Ferguson, a private equity investor with Anthem Holdings who has been kicking the tires of recent newspaper properties up for sale, including the Austin (Texas) American-Statesman and, prior to its demise, Denver's Rocky Mountain News.

"I think there is a school of thought that if management would have been performing effectively, [the buyers] wouldn't be there in the first place," Ferguson says. Not so, he adds: "The papers we have looked at generally have had good management teams and are victims of circumstance beyond the control of management."

And if there are management changes, the replacement isn't likely to be the stereotypical head-chopper ? or the New Media wiz kid Twittering during business meetings.

"Private equity has focused in the past on finding and backing managers who have deep domain experience in a given sector," says Jim Friedlich, a partner at New York-based media investment firm ZelnickMedia. "We haven't yet seen evidence that investors are looking far afield from the newspaper industry to help run their newspapers. There will, however, be growing emphasis on the need for senior management and board members with significant expertise in digital media, local search, paid-content business models."

Management measuring up?
With very rare exceptions, creditors-turned-publishers realize operating a newspaper is less about acting as a glamorous modern-day Citizen Kane and more about mundane details.

"When you are a publisher, you need to worry about newspaper prices and how you maintain your distribution fleets ? that stuff is not fun," says Anthem Holdings' Ferguson. "The mystique is going to wear off in three weeks, because you have to make sure you're taking care of your advertisers and making sure the papers are porched."

Beware of anyone who declares he is going to "start running this place like a business," Ferguson advises: "The idea that you are going to walk into a newspaper boardroom and sell the new concept of selling more ads, more subscriptions and cutting costs as some 'eureka' moment is ludicrous."

Which is not to say that newspaper managers should expect little change at all ? especially true if a hedge fund that invests in debt takes over, FTI Consulting's Taylor says. Newspaper managers in those cases usually have to explain themselves in the types of measurements favored by financiers, she advises.

"The financial community that invests in debt is different from those that invest in equity, in that they tend to be very analytic-driven, and focused on management that can provide metrics," adds Taylor.

Except for production departments ? where "measure, measure, measure" has been a mantra for more than two decades ? metrics haven't been newspaper management's long suit. That's especially true in editorial, but even, Taylor notes, in places like advertising sales. "You don't want to cut the quality, but you can optimize processes, even if the product is content," she says.

Board certified
At the very top of the corporate structure of newspapers, lenders of all stripes lean on executives with extensive newspaper experience when they install boards of directors at the companies they suddenly control.

"Most understand that they are not operators," says one newspaper executive who insisted on anonymity, as did several other executives on both sides of the financier/newspaper relationship who spoke to E&P for this story.

"They have plenty of ideas and suggestions, and that's great," he says. "They should, they're the owners. But they find the industry experts to fill those [board] spots."

Indeed, with newspaper busts a boom business at the moment, some executives are reluctant to discuss their roles publicly for fear they will be perceived as speaking out of school about distressed companies. Familiar names are turning up on post-bankruptcy boards.

Currently on the board of Journal Register Co., for instance, is John Paton, chairman and CEO of the nation's largest Spanish-language newspaper publisher, ImpreMedia LLC.

Jeremy Halbreich is not only the CEO of the new Sun-Times Media Group that emerged from a bankruptcy auction, he also chairs the board of American Community Newspapers, which was taken over by its lenders. On the board with him are former Community Newspaper Holdings Inc. CEO Richard Franks, veteran Michigan newspaper publisher Frank Shepherd, and Jeanette Tully, the broadcast veteran who also serves on Journal Communications' board.

When the Minneapolis Star Tribune emerged from bankruptcy, the lead secured lender, Angelo Gordon & Co., one its new owners, brought on to the board former Wall Street Journal publisher L. Gordon Crovitz and Michael Reed, CEO of community publisher GateHouse Media.

The newspaper figures are natural choices, says FTI Consulting's Taylor: "I assume that the lenders there, for instance, like what Mike [Reed] is doing at Gatehouse so they want those things to be cross-fertilized into the Star Tribune."

Even with alternative weekly chains, new owners are turning to old hands.

When Atalaya Capital Management won the bankruptcy auction for Creative Loafing, which publishes six alt-weeklies including the Chicago Reader, it packed the board with experienced newspaper executives like former Los Angeles Times Editor Jim O'Shea and former New Times President/COO Michele Laven, and the former president of The Des Moines Register, Richard Gilbert, as Creative Loafing's interim CEO.

"Secured lenders who own newspapers didn't intend to be owners," Taylor adds. "They're not going to bring in total outsiders."