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Sizing Up the Big Sale

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By Rick Edmunds

Unless I'm missing something, Angelo, Gordon & Co. and fellow distressed asset specialists had an ace up their sleeve in Wednesday's (April 28) auction for Philadelphia Media Holdings. As they upped the bid to win the bankruptcy auction, they were -- in effect -- paying themselves.

That's not to say these Wall Street guys were not putting money at risk on a bet they can turn around the financial fortunes of the Philadelphia Inquirer and Daily News and cash out with a big gain in a few years. However, Wednesday's transaction may have been pretty close to a wash or even a money-maker for them.

Here is how I figure the deal in round numbers:

Brian Tierney's original group of local buyers (of which he was a member) lost their entire investment of $100 million or so.

Inquirer Building.jpgUnsecured creditors will get a little, but not much.

Tierney's new group, with its assorted public-spirited millionaires on board, is out nothing except some legal and administrative fees.

Most of the $105 million cash sale price goes back to the secured lenders/new owners as partial settlement for the $400 million or so the original Tierney group borrowed and then defaulted on.

Angelo, Gordon was not one of the original lenders, but the firm bought its position at a discount from the original lenders, who were ready to get out and take their losses rather than plod through bankruptcy court.

I don't know from whom Angelo, Gordon and other distressed asset specialists in the lenders group bought their stake or what they paid.

But their business strategy is part simple arbitrage, and my hunch is that they have already made out well. They bought in early 2009 when industry market valuations were in the dumpster and prospects for even short-term survival of metros like the Inquirer and Daily News were uncertain. A year later, though the future is not altogether rosy, newspapers up for sale are again being valued as going ventures.

Here is another piquant financial detail from Tierney's quick interview after the deal went down.

Tierney said that he was encouraged that the lenders' group was only assuming a debt of $30 to $40 million, roughly the value of the building and presses they pick up. He added that the papers earned a 2009 profit (operating profit before interest payments, presumably) of $15 million, enough to handle comfortably that level of obligation.

 This struck me as telling in two ways. When I spoke with Tierney in early July last year, he expressed spirited alarm that the Angelo, Gordon group was taking on way too much debt in leading the lenders acquiring the Star Tribune in Minneapolis -- $100 million plus -- and would do the same if it prevailed and got the Philadelphia papers.

 In Tierney's view that was an unsupportable debt load given the modest cash flow prospects of the next several years. It would put the papers at risk of failing financially again or needing to institute crippling cuts to meet short-term obligations.

 So, Tierney's take Wednesday was fully consistent with what he had said 10 months ago. That suggests to me, further kudos to Tierney, that his sense of stewardship for the home-town papers extended to losing on the best possible terms if he could not, in the end, win and continue running the papers himself.

 I am also encouraged that former Inquirer publisher Bob Hall has the lead operating role for the new owners. Hall led the paper after my time there, but he has a reputation for being good with the unions, as well as a hard-headed cost-cutter when necessary.

In a brief interview Wednesday, Hall said that he expected to be chief operating officer rather than CEO for the new owners. He would be seeking concessions, he added, but on terms negotiated with the unions rather than simply imposed.

None of this should be taken as an "all's well" with the results of the bankruptcy auction. It does matter who owns newspapers.

Even flinty bottom-line operators like Gannett or Dean Singleton's MediaNews have plenty of newspaper DNA in their organizations and an appreciation for the watchdog and public service role. Bankers don't have those genes, and their emergence as a new force in newspaper ownership bears a whole lot of watching.

 

Rick Edmonds is a former Inquirer editor and is currently a media business analyst at The Poynter Institute in St. Petersburg, Fla.

 

Photo: The Inquirer/Daily News Building

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