Thursday, April 29, 2010

Next for Philly papers? Look at Minneapolis

Philadelphia publisher Brian Tierney castigated his creditors a few weeks ago as he sought to fend off their efforts to take control of the newspapers he bought for too much money and then steered into bankruptcy.

But the consequences were not nearly as calamitous as Tierney suggested when some of the same creditors took over the Minneapolis Star Tribune late last year. Though the outcome may vary in Philadelphia, the realities of the marketplace suggest Tierney’s concerns may prove to be unfounded.

Tierney was outbid and effectively ousted as publisher yesterday when Philadelphia Newspapers LLC, the company that owns the Philadelphia Inquirer and Philadelphia Daily News, was purchased for $139 million by a group of creditors led by Angelo Gordon & Co., a New York-based fund that specializes in turning around distressed and out-of-favor assets.

The auction culminated months of bitter feuding between Tierney and the creditors, who the publisher accused (video here) of not being committed to the best interests of the paper, its employees or the community. “It will break my heart if accidental owners take over who don't care,” he told Reuters on one occasion.

After nearly 24 hours of marathon haggling, the creditors indeed broke Tierney’s heart. They handily topped him and the group of prominent Philadelphians he recruited to retain local ownership of the papers – and the job he clung to for more than a year after at least one creditor suggested he be replaced with “adult supervision.”

Befitting his prior background as a successful public relations impresario, Tierney’s stewardship of the Philly papers was consistently passionate. But it wasn’t always selfless. While he was laying off staff and preparing to file for bankruptcy in 2008, he boosted his pay by 38% to $850,000 a year. Tierney subsequently rescinded the raise.

The auction this week cleared the way to bring the papers out of Chapter 11, where they landed in February, 2009, after defaulting on the $412 million in debt that Tierney borrowed when he and his fellow investors inauspiciously overpaid for the properties as the newspaper business commenced its epic decline in 2006. The investors lost a total of $150 million in equity, including $10 million that Tierney contributed himself.

If all goes according to plan, the Philly papers will have only about $40 million in debt when they exit bankruptcy at the end of June, taking enormous pressure off them to achieve hopelessly unachievable profit targets at a time of swiftly sinking advertising sales.

But lower debt won’t relieve the papers from having to produce the exacting profit targets set by their new owners, who, like most financially oriented buyers, will be looking to groom the business for a profitable sale in not too many years.

Only moments after the auction, Robert Hall, a former Inquirer publisher who advised the creditors and will become a top executive of the reconstituted company, told reporters that the new owners would demand concessions from unions to achieve what one insider said was $20 million in savings.

For an approximation of what the future might hold under the new management, the Philly papers can look to the Star Tribune, which was brought out of bankruptcy at the end of last year by another group of creditors led by Angelo Gordon.

While the new regime in Minneapolis has been in place only a few months, it got a cautiously positive review yesterday from media blogger David Brauer of MinnPost.Com.

“If you took a poll, you would find that most people at the Star Tribune – except for the 100 or so who lost their jobs earlier this year – would favor the current ownership over what came before,” said Brauer, referring to Avista Capital Partners, the New York investment firm that bought and over-leveraged the papers in late 2006.

After waves of layoffs under Avista and the staff cut earlier this year under the new owners, “there are big-time scars and pretty deep pay cuts among the blue collar-types,” said Brauer in an interview. “And the newsroom of 250 is only about two-thirds the size it was at its peak.”

But, he added, the company now is “bragging about improved cash flow” and has voluntarily reinstated matching grants for the 401(k) program, including a portion of the plan that requires the company to meet prescribed profit goals.

Because the situations in Minneapolis and Philadelphia are not entirely comparable, the Minneapolis experience is instructive only to a degree. However, those who made it through the “purges” in Minneapolis are breathing cautious sighs of relief, said Brauer.

Contrary to Tierney’s emotional warnings in the days leading to the dénouement, the reality is that newspapers will be influenced far more by the exigencies of the advertising business than the predilections of the particular entity that happens to own any one of them.

For all the affection Tierney expressed for Philadelphia and its newspapers, he could not save them from bankruptcy when the economy collapsed. Had he won the auction and business soared, he could have claimed the credit and reaped the benefit. If he won the auction and business soured, he would have been stuck with the dirty work of cutting jobs, news hole and more.

The new owners in Philly want to make the papers as successful as Tierney hoped they could be. But they also will do whatever it takes to protect their investment. As a rational businessman, Tierney would have done the same.


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