Can latest savior save the Sun-Times?

More cuts, more drama and more trauma almost certainly lie ahead for the Sun-Times Media Group now that a civic-minded businessman has stepped forward to buy a company that probably could not otherwise have lasted out the year.

In the latest twist in 25 years of always colorful and often dysfunctional ownership, a group of private investors led by Chicago financier James C. Tyree disclosed an offer on Tuesday to purchase the media company out of Chapter 11 bankruptcy for $5 million in cash and the assumption of some $20 million in unspecified liabilities.

By the time the deal makes its way through the auction mandated by the bankruptcy process – the law requires alternative bids to be invited – the actual purchase price probably will be little more than a token sum.

Assuming no other bidders materialize, the $5 million offered by Tyree will be reduced by adjustments necessary to keep the company’s working cash at the level it was when the deal was struck.

The company lost $3.8 million in July to end the month with a mere $19.3 million in the bank. Given that the auction will take at least the better part of this month, it is likely the company will have scarcely more than $10 million in its coffers by the time Tyree and his partners take control of the business with their newly created STMG Holdings LLC.

Tyree told the Sun-Times that he and his yet-to-be-identified fellow investors plan to pump “tens of millions of dollars” into the company to revitalize the business. They had better be ready with plenty of additional cash, if they have any hope of turning around the heavily overmatched No. 2 newspaper in what increasingly appears to be a 1½ newspaper town.

As detailed previously here, the Chicago Tribune has done a superb job of pressing its advantage as the dominant metro in the market during an economic downturn when cost-conscious advertisers took more dollars out of the budgets allocated to the Sun-Times than to those destined for the Tribune.

To further consolidate its strength, Tribune Co., despite its own Chapter 11 bankruptcy, has leveraged the power of its popular WGN television and radio units, plus a series of publications that complement the flagship paper – not the least of which is the jazzy, free RedEye tabloid that has blown a major hole in the single-copy sales on which the Sun-Times desperately depends.

Tyree, who heads Chicago-based Mesirow Financial Holdings and also chairs the Chicagoland Chamber of Commerce, appears to be motivated in part by the chance to buy a distressed asset on the cheap but probably even more by the desire to rescue an endangered, much-beloved civic institution.

The Sun-Times, where I was city editor in the early 1980s and a consultant in 2007, remains a surprisingly nimble and feisty competitor despite years of sometimes criminal mismanagement and recent rounds of relentless budget cuts.

While Tyree has not commented on his motivations since he surfaced as a potential bidder in the spring, he was quoted in May by the Chicago Tribune as saying he thought he could make a successful business out of whatever revenue the Sun-Times and its 58 suburban titles are able to generate. The business model “has to be a conservative one,” he said, adding: “You just have to be innovative, not tied to the past.”

Based on those statements, it seems fair to suspect that Tyree will do whatever it takes to cut the burn rate at the Sun-Times Group as rapidly as he can so he can begin generating the positive cash flow necessary to undertake whatever print or interactive “innovations” he has in mind to put the foundering business on a solid footing.

The Sun-Times Media Group, whose shares trade for 1 cent apiece on the Pink Sheets and has a market capitalization of $839,820, stopped reporting its financial performance to the Securities and Exchange Commission as of Dec. 31, 2008. But its distress is beyond question. Sales at the end of 2008 had fallen to $323.8 million from $418.7 million as recently as 2006. Worse, the company’s pre-tax loss of $381.3 million in 2008 surpassed its revenue.

The quickest and surest way to cut expenses to boost profitability are the usual ones: Closing marginally profitable titles, consolidating production facilities, reducing staff, shrinking benefits, squeezing newshole, trimming the circulation footprint and outsourcing a variety of activities.

The problem is this: Even though all of these tactics have been employed repeatedly over the years by the Sun-Times and its sister publications, revenues have continued to contract, losses have not been staunched and the hoped-for profits have not materialized.

Can Tyree & Co. succeed where investors like those who bought the Tribune Co., the Philadelphia newspapers and the Minneapolis Star-Tribune soon landed in bankruptcy court?

Tyree and his partners have a major edge over the other recent newspaper buyers because they are not overpaying for the Sun-Times Group or borrowing hundreds of millions of dollars to finance the purchase.

But Tyree and his partners will be challenged in a way that none of the other would-be publishers were.

While every newspaper in the land is struggling to navigate fierce secular declines in readership and advertising in the wost recssion in modern history, all the prior deals involved properties that, though burdened with too much debt, were reasonably successful businesses at the time they were bought.

Although the over-leveraged publications fell short of the exuberant hopes their buyers and bankers had for them, they will exit bankruptcy cleansed of excessive debt and with plausible chances of carrying on as viable companies, assuming any metro newspaper can.

But the story is different at the Sun-Times Group and at the flagship newspaper in particular. By any measure, the Sun-Times Group is not a going concern.

The reason almost certainly is that the Sun-Times itself, the largest revenue generator of the group, may well not be capable of turning a profit under any conceivable circumstances. It has all the overhead of a comparable metro paper without the sort of sales or market position that most of the rest of them enjoy.

While Tyree’s first impulse almost certainly will be to try to save the Sun-Times, he may come to realize that the most “innovative” thing he can do would be to make radical changes in the Sun-Times itself. Those might range from turning the Sun-Times into a free paper, to reducing its publication from seven days a week, to – most radical of all — turning it into an interactive-only enterprise.

If Tyree can stop the bleeding at the Sun-Times and cut the substantial corporate overhead that heavily burdens the business, he could turn his attention to optimizing the operation of the company’s well-positioned suburban properties to make the investment a success.

Ironically, however, he may come to discover that he has to sacrifice the Sun-Times to save the struggling business he set out to rescue.