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April 30, 2017

Southern California Roll-up Gains Impetus, as Orange County Register Declares Bankruptcy

Today, the Orange County Register’s parent Freedom Communications Inc. said it would file for bankruptcy protection Monday, at the Ronald Reagan Federal Building and U.S. Courthouse in Santa Ana.

The long-expected move (which I’ve recently noted) further sets the stage for the continuing roll-up of big regional newspapers in the 20 million population center of southern California. Would be-bidders for the Register and its now-sister Riverside Press-Enterprise (bought by Freedom from Belo in October, 2013) may see the company’s financials within three to six weeks. A post-bankruptcy sale of the company’s assets should be completed within four months.

Who will end up owning the Register – located strategically between Tribune Publishing’s Los Angeles Times and the San Diego Union-Tribune, which Tribune Publishing bought in May?

Already, there’s one bidder-to-be, and another, Tribune Publishing, waiting in the wings, while others may surface.

 

First published at Politico Media

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Within the bankruptcy filing, Freedom’s current management has already stated its intention to buy the company’s assets. That’s the “stalking horse” position, the “friendly buyer.”

Rich Mirman, the Register’s current CEO and publisher, and Eric Spitz, Freedom’s board chair have teamed with Orange County real estate developer Mike Harrah. They’ll formally name the number they’ll pay for Freedom’s newspaper assets – and its real estate – after a creditors’ committee defines the bidding process.

It is the real estate that drives Harrah’s interest. The developer bought the Register’s headquarters building and several other parcels of land for $27 million one year ago. Further, he’s expressed interest in Freedom’s remaining real estate, 14 acres adjacent to the holdings he bought. Those holdings are valued at about $35 million.

One clear endgame, put into play by this bankruptcy filing: a sale of the company’s assets, then the separation of its real estate assets, presumably kept by Harrah, and, then, a further sale of the newspapers themselves.

Newspaper brokers will tell you that real estate often drives half or more of the value of “newspaper” transaction. This coming sale will be testament the proposition of the continuing value of real property – doubly so in real estate-crazed Orange County, which both defined the speculative real estate bubble, deeply suffered for it and is now re-embarked on that voyage – as compared to lowly, old newsprint-centric concerns.

 

Tumult in the O.C

We can detail a long, torturous road that brought the Register to this point, its second bankruptcy in six years. In short, though, after that bankruptcy – which followed a fascinating 75-year history of libertarian ownership by the Hoiles family – entrepreneur Aaron Kushner led a new group, taking over the paper.

For a short period, Kushner played the role of the Music Man of American daily publishing. In short order, he greatly expanded the company’s newsroom, added community sections, launched a daily edition in adjacent Long Beach and bought the Riverside paper. Along the way, cash became scarce, bills piled up and the number of wronged creditors grew. One year ago, Mirman replaced the discredited Kushner (who is no longer involved with management). Job one: Dealing with the pressure from those creditors and debtors grew.

Mirman wins points from some of those creditors for his even-keel approach, even as worked to stabilize the Register’s operating budget. He’s gotten agreement from two big creditors, the federal pension regulator Pension Benefit Guaranty Corporation (owed $15 million), and Silverpoint (owed $22 million), the company’s main lender on the structure of this pre-packaged, bankruptcy filing. “Both companies are “on board” with this action, says Freedom board chair Spitz. Agreement among the approximately two dozen creditors on final distribution of the asset sales could well be contentious; there’s a lot more owed than the combined newspapers and real estate will fetch.

Significantly, though, this is a “363 filing,” part of the bankruptcy code. That means that Freedom can proceed by early next year with the sale of assets – and then the creditors can argue about dividing the spoils. We can recall that the Tribune Company endured five years (emerging at the end of 2012) in bankruptcy court, before its case was resolved.

Consequently, the separation of the asset sales and the proceeds distribution simplifies the question of who will own the Register and the Press-Enterprise?

Who ends up owning the Register, and the Press-Enterprise?

How much are the newspapers worth and who might likely look at buying them, either at auction or after Mirman’s stalking group wins that auction?

 

It’s tough to gauge the price.

According to documents I’ve obtained, and confirmed, the company may produce about $6 million in EBITDA (earnings before interest, taxes, depreciation and amortization) this year, with that number projected to ramp by a million or two million dollars each year through 2018.

At a market multiple of 3-4X, that might mean a value of $20-25 million. Given its strategic geographic value, though, and if there is competitive bidding, that number could well be higher.

(Freedom’s net cash flow runs from $500,000 to $1.5 million annually, a further indication, if anyone needed one, of the difficulty of newspaper management these days.)

The Mirman/Spitz/Harrah group could both win the papers at auction as the “stalking horse” and keep operating them.
“In the past year, we turned around to a positive cash flow,” Spitz told me Sunday. That’s been an important marker on the road to this filing; even a marginally profitable company would seem to fetch a higher price than a losing one.

The most logical, strategic buyer for both the Register and the Press-Enterprise would be the owner of the papers on both sides, and that’s Tribune Publishing.

Tribune Publishing, of course, has found itself in the harsh glare of public scrutiny of late (“Tribune Publishing prepares to play more defense”). Since TPUB CEO Jack Griffin fired his L.A. Times Publisher Austin Beutner in early September, the company has endured L.A. civic backlash, public questioning of its strategy by financial analysts, and a further drop of its share price. Further, it is in midst of newsroom staff buyouts that will likely total fifty or more at the Times, and into the hundreds across the nine-city metro chain. Lastly, L.A. businessman/philanthropist and erstwhile Beutner associate Eli Broad, who told Tribune he wanted to buy its California properties in the weeks before Beutner was fired, considers a next buying move.

On Nov. 5, Griffin will review and explain the company’s third-quarter financial results, and talk more about the company’s strategy. He should now expect questions about the company’s interest in — and its financial wherewithal ability to complete – a buy of the two papers. Given the likely expense synergies – most in printing, production and distribution – of linking the Times and U-T operations with the Register’s (and P-E’s), TPUB’s fit are clear. Those synergies could range between $10 to $25 million annually. Those would be atop the $12-20 million in annual synergies wrung out of the L.A./San Diego combination.

Tribune Publishing did not respond to request for comment today on its interest.

We can add three other names to a presumably short list of those eyeing the Freedom financials.

Gannett, newly acquisitive since its split from its formerly combined newspaper/broadcast company, could take a look. Fresh from its announcement that it is buying 15 papers from Journal Media – including the Milwaukee Journal-Sentinel, about which Tribune Publishing had talks as well – Gannett has signaled that it will make more buys.

Then, there’s a non-newspaper name from that not-distant past that is newly circulating: Apollo Global Management. Apollo almost bought out Digital First Media in May, before leaving the bride at the altar. Now, its name is popping again as the question of the Times/U-T availability has been raised. If interested in those two, the logic goes, Apollo may well take a look at the Freedom papers. (And, if all that rings any bell of likelihood, might Apollo then be interested in an all-in California bet? Digital First Media’s Los Angeles News Group constitutes the other daily player in southern California, and its Bay Area News Group (including the Mercury News) is dominant in California’s second largest region.)

Finally, there’s the potential Register interest of Eli Broad. The odds continue to be better than even that a group led by Broad will emerge as would-be buyer for either the California papers (now formally the California News Group) and/or Tribune as a while, within the next several months.

As Broad considers what kind of offer to make, the Freedom asset sale moves along in parallel. So how might this bankruptcy filing, and the freeing of pivotal, strategic assets, affect the Broad strategy? Would Broad bid for the Register and PE to assert his bigger plans for southern California newspaper ownership? While intriguing, that’s unlikely. Such a move would be speculative and risky; the major value of the Register to Broad is only in combination with the Times and U-T. The Mirman/Spitz/Harrah group could both win the papers at auction as the “stalking horse” and keep operating them.

It’s unclear whether a Broad bid for Times/U.T. might be made before or after the bids are due for the Register/PE. We can project several scenarios, but overall at this point, let’s just note the complexity of all that is in the newspaper air in one of America’s biggest metro areas.

It’s a game of three-dimensional chess, with a timer thrown in. While we’ve known for awhile that Freedom Communications would get to this point of a fresh bankruptcy filing, it is Tribune Publishing’s spring purchase of the Union-Tribune that changes the business dynamics of the big market.

That acquisition may drive the price up for the Register and speed up what now seems like an inevitable single-company consolidation of newspaper ownership across a geography stretching for 200 miles from north to south.

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