Prophetic words echo from last fall

A speech given last September by MediaNews CEO William Dean Singleton now seems prophetic.

Addressing the National Conference of Editorial Writers, Singleton said that “motives for newspaper ownership have shifted over the years, from those who wanted to cover news and write opinion to those who came to view newspapers as purely financial investments,” according to coverage in his own Salt Lake City Tribune.

“Now banks are becoming ‘accidental’ stockholders. To reduce debt, more newspapers are likely to seek bankruptcy court protection, while others try to convince banks to swap debt for ownership stakes in their companies.”

The speech was a sneak preview of a pre-packaged bankruptcy filing MediaNews announced, as quietly as possible, late Friday, Jan. 15. Singleton reportedly was already intently working on the bankruptcy package

He went further: “Whether by supervision of the courts or by negotiation to convert some debt to equity, America’s banks will own a large position in the newspaper sector going forward.

“Get used to it,” Singleton said.

While the proposed bankruptcy deal indicates that Singleton and his management team will be able to appoint four of the seven members of the new company board and retain control of the company, such deals are not simple. A Bank of America-led group of 116 banks and 49 bondholders will own 80 percent of the second largest newspaper company in the United States.

The problem for readers and the public is that financial institutions don’t want to be in the business of journalism. They want maximum return on their distressed investments, which may not bode well for healthy journalism.

In the same story, Singleton returns to a favorite theme — consolidation — in predicting how banks as newspaper owners will behave: “Singleton said lenders will seek to recoup their investments by pushing newspapers to consolidate. Through mergers, banks will eliminate expensive corporate overhead and allow papers to improve their financial performance without hurting readers or advertisers.”

Consolidation of Bay Area MediaNews properties has been the order of the day, as it has in some other parts of the industry. Whether readers and advertisers are unscathed in the process is the subject of much debate.

One thing is known: Banks are not permitted to own parts of companies except in cases such as the MediaNews bankruptcy when their stake is due to a swap for debt. In such cases federal law requires that they divest their ownership within five years.

“The first question these banks have is: ‘What is my exit strategy?'” Marc Abrams, a New York lawyer who represented newspaper publisher Journal-Register Co. while in bankruptcy protection, said as quoted in an Associated Press report. He said the bank’s decisions are not based on criteria related to what produces high-quality journalism and sustainable publications but on how they can extract as much equity as possible as quickly as possible from the investment.

The highly regarded Knight Ridder newspaper company, which included the San Jose Mercury News and Contra Costa Times, came to an end when Florida investment manager Bruce Sherman, who owned 19 percent of the company’s stock, decided his return on investment wasn’t as high as he wanted. He forced a sale of the company and its dissolution.

The irony here is that MediaNews acquired Bay Area Knight Ridder newspapers by incurring major debt that has now helped put MediaNews itself in a similar situation of being dependent on the financial calculations of non-newspaper investor/owners who are mostly interested in selling and recovering as much of their investment as possible.

And in the restructured MediaNews empire with its 54 daily newspapers and 100 non-daily papers in 12 states, the banks and bondholders will own 80 percent of the company, more than four times the percentage Sherman owned of Knight Ridder.

The financial picture in the broader daily newspaper publishing business is not rosy. Respected credit-rating company Fitch Ratings in a 2009-10 report noted that while “the worst of the advertising downturn has passed, Fitch believes that newspapers are likely to be left behind in an ad recovery. Fitch expects revenues to be down again off very easy comparable periods due to permanent shifts in advertiser sentiment and excess ad inventory that will plague the industry for years to come.”