Tuesday, March 31, 2009

Sun-Times outlook dire; break-up possible

The financial condition of the Sun-Times Media Group is far more dire than that any of the four newspaper companies that have preceded it in bankruptcy.

The company’s bankruptcy filing today signals that management may be planning to break up the Sun-Times Group by selling a number of its 59 Chicago-area publications – if buyers can be found.

Unlike the four other newspaper publishers that were at least marginally profitable when they filed for bankruptcy in recent months, the Sun-Times in 2008 lost $344 million on sales of $324 million, according to an affidavit submitted in connection with its Chapter 11 petition in a federal court in Delaware.

Absent expense reductions of unimaginable proportions, the company would appear to be headed for an even deeper loss of $381 million in 2009, according to projections based on the details contained in the affidavit.

Because the 2008 loss dwarfs the approximately $100 million in cash that the company had on hand at the end of September, the company would be seriously under water even in the unlikely event the Internal Revenue Service rescinded the entire $510 million tax bill that the company gave as one of the reasons for seeking bankruptcy protection. The tax lien dates back to the criminal mismanagement of the jinxed company by Conrad Black and David Radler.

In filing for Chapter 11, the Sun-Times joined its cross-town rival, the Tribune Co. in seeking protection from its creditors. The Tribune is listed in the Sun-Times bankruptcy papers as being owed $614,618 for the newspaper-delivery services it has been providing in recent months.

Beyond Tribune, the other publishers now operating under Chapter 11 are Minneapolis Star Tribune, Journal Register Co., and the Philadelphia Newspapers LLC. They filed for bankruptcy because they were not making enough money to service the heavy debt levels they took on. The Sun-Times, on the other hand, is losing money and appears to have exhausted its cash reserves.

Based on financial information in an affidavit filed by general counsel James D. McDonough in support of the bankruptcy petition, it appears the Sun-Times operating loss could grow substantially in 2009.

McDonough said the company fears its ad sales may plunge 30% this year on top of a 13% drop in revenues between 2007 and 2008, thus putting the company’s top line at approximately $226 million for 2009. To offset some of the anticipated $97 million drop in sales this year, the company has identified $60 million in savings, according to the affidavit. Even if the cuts were fully implemented, however, the company’s loss for the year would rise to $381 million.

In apparent recognition of this untenable trend, the management of the Sun-Times evidently intends to begin trying to sell off assets to raise cash.

While the company did not name the publications targeted for potential disposition, its 59 titles include such dailies as the Chicago Sun-Times, the Southtown Star, Aurora Beacon News, Elgin Courier-News, Joliet Herald News, Lake County News-Sun, Naperville Sun, and Gary-Merrillville (IN) Post-Tribune. The company also publishes numerous weeklies through Pioneer Press and Fox Valley Publications.

The Sun-Times retained Rothschild Inc., an investment banker, to attempt to sell the properties under Section 363 of the U.S. Bankruptcy Code. The section enables a company operating under bankruptcy protection to sell assets in a way that leaves them free and clear of such obligations as the IRS lien.

In ideal circumstances, a Section 363 sale can be accomplished in a matter of months, according to attorney Daniel M. Glosband, a bankruptcy specialist at Goodwin Proctor LLP in Boston. The bankruptcy court would distribute the proceeds of any sale among the company’s creditors, including the IRS.

While the sale of the assets through the bankruptcy court would make them more appealing than they otherwise would be, there is reason to question the strength of the market for newspapers.

No serious buyer for all or part or the Sun-Times group has emerged since it was put up for sale more than a year ago. The outlooks for both newspapers and the economy have deteriorated significantly since then.

To date, papers like the Miami Herald and Austin American-Statesman have attracted no acceptable offers for their respective owners, the McClatchy Co. and Cox Enterprises. The San Diego-Union Tribune is scheduled to be sold for a price reported by the Wall Street Journal to be $50 million, even though its real estate is conservatively believed to be worth twice as much.

Thus, the Sun-Times Group faces twin challenges: It not only has to find acceptable buyers but also has to generate enough cash to stay in business until those deals can close.


Blogger Steve Ross said...

The memorandum did not include balance sheet and income statements. But from EDGAR I see that for the first 9 months of 2008 (the last 10Q filed) there's a noncash charge of more than $209 million -- writeoff of goodwill (the premium paid over book value for acquisitions, mainly). So on a cash basis, things are not as dire as they appear from the chapter 11 filing memo. There also appears to be an interest accrual on the IRS lien.

My guess is that the court will be somewhat upset at the vagueness of the filing memo and unavailability of current statements. The last 10Q was unaudited.

My guess: They'll have enough steam to stay in chapter 11.

6:56 PM  

Post a Comment

<< Home