There’s A New Buzzword In Newspaper Speak: 'Prepackaged Bankruptcy'

Philip M. Stone January 20, 2010 Follow on Twitter

Within days of one another comes word that two private newspaper companies are seeking prepackaged Chapter 11 bankruptcy protection which means the deals have already been done with lenders on what the ownership of those companies will be after their reorganization.

It’s different from a normal Chapter 11 proceeding à la Tribune or the Philadelphia Newspapers because with privately held Morris Communications, based in Florida, and  Affiliated Media, the parent company of MediaNews, based in Colorado, the managements and lenders are already agreed on the post-bankruptcy structure and they just need the bankruptcy judges to make everything official meaning the bankruptcy proceedings should be completed in fairly short order. Freedom Communications, owner of more than 30 daily newspapers, filed a similar prepackaged bankruptcy plan back in September.

In the case of MediaNews, Chairman William Dean Singleton and President Joseph J. Lodovic are being left in charge via a special class of shares, they’ll even be able to name four of the seven board members, but they will be restricted to owning no more than 20% of the company, whereas before they owned up to 45%.The lenders, led by Bank of America, are exchanging much of the debt for equity so they’ll end up with 80% of the new shares, the old shares being cancelled. MediaNews owns 54 daily newspapers as well as more than 100 non-daily newspapers, Web sites, television and radio broadcasters.

Out of the MediaNews door goes Hearst Corporation that  Singleton had enticed into various investments to help him buy newspapers over the years and Hearst is thought to be writing off about $400 million – no doubt there will be plenty of  tax advantages there. Also gone will be Richard Scudder who partnered with Singleton to buy the first MediaNews newspaper in 1983.

Singleton actually comes out of this personally in pretty good shape. He still gets to run and control the company even if his actual ownership equity is reduced. And with debt reduced from some $930 million to around $165 million the finances are manageable with the company thought to be worth around $200 million at today’s prices.  The bankruptcy filing is expected either this week or next once all the “i’s” are dotted and the “t’s” crossed.

Morris had reached a deal with most of its lenders to swap $278.5 million of old debt for $100 million in new debt and had positive votes representing 98.7% of the debt and 92.7% of the holders. But to finalize the deal without going into bankruptcy  it needed 99% acceptance and thus by falling short the bankruptcy filing became necessary. Bankruptcy is mandatory for some bondholders who have loan insurance  that pays out only in event of a bankruptcy, so Morris, publisher of 13 daily newspapers, filed for prearranged bankruptcy on Tuesday.

Compare all of that with Tribune, for instance, that has now been in bankruptcy for more than a year with little idea when it will emerge because of the infighting going on between various lenders let alone with management. Chairman Sam Zell says he hopes Tribune will emerge within six months, but nothing is for sure.

And then there is the continuing bloody war going on with Philadelphia newspapers that entered bankruptcy last February. Current management is locked in a fierce battle with their lenders on the way forward, whether there should be an auction, and whether lenders can use their existing debt as currency as part of that auction. So far the lawyers are getting real rich, appealing bankruptcy court decisions to other  federal courts, and then back to bankruptcy court it all goes. Now everyone is awaiting a judgment on the way forward by the chief bankruptcy judge in Philadelphia but he has not indicated when that will come down.  

Compare that mayhem with prepackaged bankruptcy and it doesn’t take a genius to see the preferable way forward.

McClatchy, another newspaper group that the “shorts” were betting on as a bankruptcy candidate, actually got some good positive news from the Fitch credit rating agency last week. It no longer believes McClatchy is a bankruptcy candidate, prepackaged or otherwise. Fitch says it has placed $2 billion of McClatchy debt under “Watch Positive” meaning the company’s chances of reorganizing its debt are improving and can probably be negotiated. McClatchy’s debt is rated currently as deep junk, and will continue that way even if upgraded, but at least there is now a very public respected view out there that McClatchy could escape Chapter 11. Its share price shows that confidence, too, rising from a $0.35 low in March to more than $5 today.

Competing newspapers are co-operating more and more with one another in ways previously thought unthinkable to improve their cost structures and stay away from bankruptcy court .  They are, for instance, printing their competitors’ newspapers which means one doesn’t have to invest in new presses while the other gets more use, and money, out of existing presses; they are delivering one another’s newspapers -- witness The Dallas Morning News distributing some Ft. Worth Star-Telegram newspapers and vice versa and now comes word that in parts of Florida that Gannett and Scripps newspapers will be doing the same; and there is a lot of news sharing going on.

It’s a whole new world out there in Newspaper Land that will no doubt continue even after the economy recovers.