Banking on a turnaround
Banks to take ownership of MediaNews while CEO Dean Singleton gives mixed signals on future of MediaNews papers
As Bank of America assumes ownership of the second largest newspaper company in the nation, what does the future hold for MediaNews' Bay Area newspapers, including the San Jose Mercury and Palo Alto Daily News?
Carefully orchestrated to hit the news wires at the beginning of a holiday weekend — the time PR experts advise clients to release damaging news in order to minimize coverage — the parent company of the San Jose Mercury News, Palo Alto Daily News and almost every other daily newspaper in the Bay Area except the San Francisco Chronicle announced last Friday afternoon it would file for bankruptcy protection.
Subscribers of the 54 daily newspapers owned by Denver-based and privately held MediaNews had to read their Saturday papers very closely to even notice the announcement, much less understand its significance. Buried in the business section, the Mercury News' headline was, "Mercury News parent swaps debt for equity."
The story read more like a routine business restructuring than the unprecedented shift in ownership to lenders that are owed almost a billion dollars.
"It gives us breathing space to create a new model for the newspapers we publish," the story quoted MediaNews Chairman and CEO Dean Singleton, also the founder and — until now — major shareholder.
And while the "pre-packaged" bankruptcy keeps him at the helm and offers him and other managers up to a 20 percent ownership interest, Singleton and business partner Richard Scudder will lose the company they started in 1985 and built into the second largest newspaper chain in the nation.
The bankruptcy plan will give 80 percent of the ownership to Bank of America and the 115 other banks and 49 bondholders owed money, but allows Singleton to control and appoint a majority of the board, at least for now.
Until the actual bankruptcy filing in federal bankruptcy court in Delaware, expected "soon," details are limited to those contained in MediaNews press releases and the interpretation of that information by industry and financial analysts.
It is expected that the banks will seek to sell off their stake in the company as soon as possible, but the state of the newspaper business may make that difficult.
What the bankruptcy and ownership change means to readers or employees is unclear, other than the probability of further consolidations and staff cutbacks to further improve profits — including potential impacts on the MediaNews-owned Bay Area papers. (See map.)
While the Jan. 15 bankruptcy announcement and the story in the Mercury News emphasize there would be nothing but positive affects on current operations, as the pressure from the massive debt is relieved, Singleton contradicted that in a statement to the Wall Street Journal in which he said further consolidations were essential to satisfying the banks that will own 80 percent or more of the company.
"You can look at the map," Singleton said when asked which newspapers, apparently referring to those areas — such as the Bay Area and Southern California — where MediaNews has multiple papers in overlapping or adjacent markets.
On the Peninsula, MediaNews has already made consolidations. The Mercury News now relies on news reports from Daily News reporters for its local coverage and both the Daily News and San Mateo County Times frequently carry stories and advertising from the Mercury News.
The Daily News contracted from five editions to one. Most editing and production has been centralized in the East Bay and advertisements are produced in India.
Singleton told employees in an e-mail last Friday, "We expect all of our daily operations to continue without disruption, with employees receiving normal salary and benefits, suppliers being paid, advertising being placed and newspapers being printed and delivered as usual. No layoffs, sale of newspapers, facility closings or consolidations are anticipated as a result of the financial reorganization announced today."
He described the bankruptcy restructuring as a "non-event for readers and advertisers." (To read the full text of the announcement and e-mail to employees, go to www.PaloAltoOnline.com, under the MediaNews story headline.)
Mercury News President and Publisher Mac Tully declined to comment for this story.
The bankruptcy filing is not a surprise to those who have watched the MediaNews chain grow increasingly laden with debt as the company went on a buying binge of newspaper after newspaper nationwide, culminating in the 2007 purchase of several Knight Ridder papers, including the San Jose Mercury News and Contra Costa Times.
The bankruptcy and assumption of ownership by the lenders will reportedly slash the company's debt from $930 million to $165 million.
The actual bankruptcy is being filed by a heretofore little-known entity, Affiliated Media, Inc., identified as the holding company of MediaNews.
A "pre-packaged" bankruptcy is one in which most debtors have agreed in advance to the terms, instead of the usual filing of a bankruptcy and then addressing the terms of the payment of debts.
Other than Singleton and his longtime partner, Richard Scudder, the apparent big loser is Hearst Corporation, owner of the San Francisco Chronicle, which had invested more than $300 million in MediaNews to enable MediaNews to acquire several former Knight Ridder publications in 2007. In a complex three-way deal, Knight Ridder was sold under investor pressure to longtime California publisher The McClatchy Company, which then resold to MediaNews the Mercury News (including the Palo Alto Daily News and sister papers), Contra Costa Times, Monterey Herald and St. Paul Pioneer Press.
Ironically, because Singleton is also chairman of the major wire service, Associated Press, and because most daily newspapers in the Bay Area are owned by MediaNews, most regional reporting on the bankruptcy comes from entities directly affected.
The entanglement of the Chronicle as both a competitor and an investor through its parent Hearst Corp. may also be affecting coverage. The Chronicle Saturday only carried a small Associated Press story on inside pages that said in part: "Hearst Corp., which owns magazines and newspapers including The Chronicle, has an investment in MediaNews but it was not clear how that would be affected by the bankruptcy."
The bankruptcy will be filed under provisions of Chapter 11 of the U.S. Bankruptcy Code, commonly used when a debtor proposes a plan of reorganization to keep the business alive and pay creditors over an extended time.
Prepackaged filing means there are fewer decisions for a court to make and fewer negotiations with creditors, resulting in a faster completion of the bankruptcy.
Singleton reported in a December 2009 memo to employees that he planned to restructure the company's debt in the first quarter of 2010, but made no mention of possible bankruptcy. MediaNews, which claims to be the nation's second largest newspaper publisher by circulation, was reported throughout 2009 to be unable to meet debt-payment deadlines and to be in the process of talking to creditors, including Bank of America, about a way to rework its debt.
MediaNews papers have gone through multiple waves of layoffs and cost cutting in recent years, which included outsourcing their production of advertising to India. Downsizing has been common throughout all print publications, including magazines, for a number of years, as the industry has struggled with a severe recession, declining circulation, and migration of many readers and advertisers to the Internet.
For the future, Singleton told the Wall Street Journal that dealing with the company's debt allows him to lead newspaper industry consolidation. He said he wants to be aggressive in merging newspapers, but responded to a follow-up question about which papers might be combined with just, "You can look at the map."
The MediaNews filing, along with one by Morris Publishing Group announced a day earlier, will bring to nine the number of daily newspaper publishers forced to file for bankruptcy because of unsustainable debt they acquired just prior to the great recession, according to Silicon Valley-based industry observer Alan Mutter. Others include Freedom Communications (Orange County Register), Heartland Publications, Journal Register Co., Minneapolis Star Tribune, Philadelphia Newspapers LLC, Sun-Times Media Group and, the $13 billion Tribune Co., which publishes the Chicago Tribune and the Los Angeles Times.
The horizon is not entirely bleak, however. A story in industry trade journal Editor and Publisher (which itself recently folded then surfaced again under new ownership) reported last week that "Newspaper stocks have come back so far from their parlous state a year ago that the sector now ranks among the market's best performers. ... Zacks Investment Research Chief Equity Strategist Dirk Van Dijk says newspapers now rank seventh-best among 206 industries tracked by the Chicago-based firm. Two stocks — Gannett Co. Inc and The New York Times Co. — are now given No. 1 ratings in its stock evaluation system."
However, it's all relative: "Newspaper stocks across the board are trading at or near 52-week highs, and some have rebounded spectacularly since hitting all-time low prices in the winter of 2009. Gannett's share price, for instance, is up 103 percent from a year ago. Stock in The McClatchy Co. sunk below $1 a share last year, and only narrowly avoided being delisted by the New York Stock Exchange. A year later, McClatchy shares have soared 322 percent. Still, newspaper stocks remain near historic lows. McClatchy shares in January of 2005, for instance, traded for around $60. On Wednesday, McClatchy shares closed at $5.06. ...
"While they (newspapers) may never return to their glory days, that doesn't mean that they are all going to go extinct in the near future, either. Most have greatly reduced their costs over the last year, so just a small pick up in revenue should lead to large gains on the bottom line."
Sam Chapman is publisher of the Pacific Sun, the Weekly's sister paper in Marin County. Weekly Editor Jay Thorwaldson can be e-mailed at email@example.com.