Philadelphia’s Newspapers Face a Big Court Date
By RICHARD PÉREZ-PEÑA
Published: September 13, 2009
After all the dramatic turns Philadelphia’s newspapers have taken — rapid-fire ownership changes, layoffs, an advertising collapse and bankruptcy — the contest to control them and determine their future could turn on a crucial court hearing on Tuesday.
Matt Rourke/Associated Press
Headquarters of The Philadelphia Inquirer and The Daily News. Bank and investment-firm creditors could own them.
Some of the local investors who bought The Philadelphia Inquirer and The Daily News in 2006, led by Brian P. Tierney, have fought to defy the odds and remain in charge after the bankruptcy, rather than turning ownership over to banks and investment firms that hold their debts. Mr. Tierney’s team wants the bankruptcy court in Philadelphia to block those creditors from using a legal tactic that would give them an insurmountable advantage in a bankruptcy auction.
The case could come down to that legal question, and also a financial one: which side is more willing to throw good money after bad?
Bankruptcy has wiped out the $150 million investment made by Mr. Tierney, the former advertising executive who became chief executive of the papers, and his partners. The creditors will recover, at best, a small fraction of what Mr. Tierney’s group borrowed. And even with debt payments suspended, the papers are barely making money — they reported a cash cushion of $13 million on Aug. 2, just $2.2 million more than when they filed for bankruptcy in February.
Yet both sides are willing to offer millions more to win control of this troubled business, and each hopes to sway wavering creditors and Judge Stephen Raslavich, who is hearing the case.
Ordinarily, the firms that hold a company’s major debts take control in a bankruptcy. Bankruptcy law provides what may be their ultimate weapon, a “credit bid,” allowing creditors to bid for the company based on how much they are owed, without putting up any cash. In this case, that means senior lenders could bid more than $300 million, several times what Mr. Tierney’s side has offered. (Much of the debt has been sold, often at deep discounts, so it is held not by the banks that made the original loans, but by investment firms like Angelo, Gordon & Company, and the CIT Group.)
In battling that tide, Mr. Tierney has the support of most of the paper’s unions and some important investors, and he has mounted a public relations campaign in favor of local ownership over out-of-town bankers.
If the court prevents a credit bid, the offer Mr. Tierney’s team makes for the company stands a chance of winning, or a third bidder could emerge. Even if the court allows a credit bid, Mr. Tierney hopes to block it by persuading most of the creditors that they would be better off taking his offer.
“This isn’t at all about trying to save some percentage of the investment,” Mr. Tierney said of the 2006 buyers. “If this was about money, I’d go back into advertising. We’re fighting for something more important.”
He acknowledged a duty to creditors, but added, “you’re also supposed to be mindful of other constituencies — the employees, the readers, the advertisers.”
Calls to Fred S. Hodara, the lead lawyer for the senior creditors, and some of the leading bankers in that group were not returned.
The case mirrors what has happened to much of the newspaper business, where a string of high-priced, high-debt deals made during the boom have gone sour in the worst advertising slump in generations. The Philadelphia papers’ ad revenue has fallen more than 40 percent since 2006, and that is one of the industry’s best performances.
The Tribune Company, whose newspapers include The Los Angeles Times and Chicago Tribune; The Star Tribune of Minneapolis; and the companies that own The Chicago Sun-Times, The New Haven Register and The Orange County Register have also gone into bankruptcy.
In 2006, the McClatchy Company bought Knight Ridder, including The Inquirer and The Daily News, and then sold the Philadelphia papers. Mr. Tierney, who invested $10 million, led a group of local buyers including Bruce E. Toll, the home-building magnate; Michael J. Hagan, chief executive of NutriSystem; and the pension fund of the Carpenters Union.
The new owners seemed unlikely heroes. The papers had covered their business interests critically, and Mr. Tierney had clashed with them repeatedly.
But Mr. Tierney won over many employees. He became a constant cheerleader for the papers, kept his promise not to close the smaller Daily News, limited newsroom cuts after an initial round of layoffs, hired a respected editor for The Inquirer, William K. Marimow, and, journalists say, refrained from meddling in news coverage.
“The last three years have shown that the local investors’ primary motivation is strongly tilted toward public service,” Mr. Marimow said. “Earning a decent return is clearly a motivation, but not the predominant motivation.”
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