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July 19, 2017

Chicago Sun-Times' Fate Could Be Decided Soon

In Chicago, as post-Independence Day week unfolds, the countdown to the bedrock event in the Chicago Sun-Times’ future begins.

While most cities’ last-standing largest dailies have a hard time telling you how they plan to be big and strong a decade from now, the second daily in America’s Third City must look at that question in months. Losing more than $300,000 a month, the Sun-Times must find new ownership willing to both keep it operating and to find a new future.

And it must do quickly. Sun-Times owner Wrapports LLC rattled the cages a bit Friday, letting it be known that it would shut down the paper absent a deal. That’s not new news; it was the Wrapports board decision at the beginning of 2017 not to further cover Sun-Times losses that led to this crunch point. Consider the Wrapports threat an effort to sweeten a very thin offer; the company may be offered as little as a token dollar for the takeover of the ailing Sun-Times.

In any event, expect a wrap on the Sun-Times’ transition soon. The Department of Justice’s Antitrust Division had set a deadline of Monday for an agreed deal. All the parties in this mini-newspaper drama — Wrapports; longtime rival Chicago Tribune and its publisher, Tronc Inc. (TRNC) ; the DOJ’s Antitrust Division and the emergent local business/labor Eisendrath group newly impassioned about saving the Sun-Times — remain publicly mum on the details of the transaction.

“Everybody is committed,” former Chicago alderman Edwin Eisendrath would only say to Chicago media writer Robert Feder. “I expect us to be able to move forward and close the deal.”

Today, then, could see an agreement and possibly a move to put money into escrow, with details finalized later this week.

Throughout this months-old sales process, certainty or at least reducing uncertainty has been the name of this game.

How best to assure a more certain Sun-Times future will drive the decision-making? There’s the old saw about death and taxes, and until last fall, the futility of the Chicago Cubs, but it’s more certain survival that remains the key goal of the prominent nonbusiness player in this game, the DOJ.

The DOJ, after computing a liquidation value for the struggling Sun-Times and looking at its red run rate, has come up with one compelling number: $11.2 million. That’s the minimum capital requirement it has set for the group headed by Eisendrath.

Sources said Eisendrath’s Chicago Federation of Labor-backed group of local investors looks like it has raised commitments for about that sum, but likely for not much more yet, though it has intended to raise a $15 million pool. Sources said the offer to Wrapports is a single dollar, more or less, a number I suggested recently is a fair valuation for the money-losing enterprise.

The buying theory: The money-losing publication is without financial value on the open market, valuable only to Tronc in the short term given its printing contract and ability to whack costs. Further, the buyers would say that the Wrapports sellers — who espoused civic beliefs in buying the paper six years ago — should be glad to turn it over to new owners who will plunk new money into resuscitating the once-proud alternative to the Chicago Tribune. It’s a pitch to civic pride — with the hammer of the DOJ hanging above.

Waiting in the wings, long desirous of a single ownership for both the Sun-Times and the Chicago Tribune: Michael Ferro. The Tronc chairman — who had been the prime mover in Wrapports’ own purchase of the Sun-Times in 2011 and who has business associates still remaining on the Wrapports board — made clear early last year that he wanted to see the two Chicago dailies brought together. As the business strategist that he is waits for the game to come to him, now Ferro must wait a little longer. He must see the Eisendrath group bid fail to achieve his goal.

His impediment, though, isn’t Eisendrath; it’s the DOJ. Its Antitrust Division, which surprised and stymied Ferro’s bid to win the bankrupt Orange County Register last year, looks at this gating question: Which new owner is likely to keep the Sun-Times a going, independent concern for the longest possible period of time? That’s why it came up with that $11.8 million number, a sum that it believes would cover the paper’s losses over the next two to three years — assuming current trends in the business.

If Eisendrath can meet that commitment, and make a deal with the Wrapports ownership, that’s the next reprieve for the 69-year-old paper that’s been tossed from owner to owner over the years, including Rupert Murdoch back in 1984-86.

If the new group can plausibly extend the Sun-Times’ life to about 2020, what’s Tronc’s counteroffer? I believe Tronc is willing to pay $10 million or more for the company, but it has steadfastly publicly refused to make two commitments, a refusal that also puts it in clear second place in the DOJ’s assessment. First, Tronc won’t say how long it would keep the Sun-Times alive. Second, it won’t say how well funded the Sun-Times newsroom, which it has pledged would remain independent, would be. In a word, that’s uncertainty.

Only if the Eisendrath group bid failed, and Tronc’s offer were the only one left, would DOJ provide Tronc an antitrust exemption and allow it to combine all business-side operations and roll the dice in terms of Sun-Times longevity and resources.

If Michael Ferro wants to merge the companies, why won’t he make further commitments? That core question, not discussed publicly, seems fairly clear. For Tronc, which showed a $3 million net loss in the first quarter, buying the Sun-Times means some assurance of continuing positive cash flow into 2019.

The Chicago Tribune produces, prints and distributes the Sun-Times, and that single $25 million contract, at a profit margin of 50% or more, serves as the Tribune’s No. 1 source of profit. Lose that deal — the Eisendrath group would look at nearer-term alternatives to the contract that runs about another 18 months — and Tronc itself takes another hit, as newspaper print revenue continue a deep dive.

In the short term, if it won the Sun-Times, Tronc would achieve savings by eliminating the Sun-Times business-side operations — from ad sales and finance to HR and beyond — but those savings wouldn’t do much for Tronc by 2019. Which returns us to that question of the certainty of long-term Sun-Times longevity.

The fear behind the DOJ’s position: Tronc takes on the Sun-Times, manages shorter-term positive cash flow out of the deal and then winds down, even closing, the enterprise as it becomes once again economical.

On the other hand, the Eisendrath group plan offers some capital, and good civic spirit, but highly uncertain prospects.

Edwin Eisendrath has talked privately about renewing the civic support around the Sun-Times, working the pulpits from Chicago’s strong black churches to the Rotary clubs. Support is one thing, and the rallying cry around a journalistic institution sounds great.

Yet at an almost $4 million annual loss rate and with a remaining editorial staff of 60, the Sun-Times must plot a new path forward. In print circulation, its decline is breathtaking: It’s down to a print circulation of 114,000 on Sunday and 105,000 daily, from 261,00 and 343,000 just 10 years ago. Its readership loss exceeds even other dailies.

One culprit: like many tabloids, it prospered as a newsstand buy, and newsstand buys, of magazines and newspapers, have become a little toe of the digital age. Five million unique visitors frequent its digital products monthly, but like many smaller enterprises, the Sun-Times doesn’t monetize them well.

Going forward, if the Eisendrath group closes this deal soon, it faces a mountain of decisions. Can it appeal to the various constituencies that, over time, have embraced an alternative to the increasingly right-leaning Chicago Tribune? How much will it court, and tie its new identity to, Democrats, labor union members, African-Americans or sports fans, all of whom have seen themselves, in part, in the reflection of the Sun-Times? Is it a print-centric model that will work, contrarian to what others are doing, and if it’s digital, how does it represent a new or expanded digital identity in products yet to be created?

That’s a short list of questions before this earnest group of Chicagoans.

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