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April 29, 2017

Trash-Talking in the O.C., With Two Newspapers Hanging in the Balance

Nothing is easy when it comes to newspapering in southern California. Two bids for the Orange County Register, and associated properties, are now in to a bankruptcy court, and my sources indicate they are on the “puny” side.

That may not be surprising, considering the current dismal state of newspaper economics and the local context: each of the L.A.-area dailies has been part of at least one bankruptcy, and the Register itself, through parent Freedom Communications, is just emerging from a second with this process.

The drama of that emergence is set to begin soon (“Santa Ana showdown: Tribune’s bid for Southern California”), and the conclusion worthy of national attention. The bankruptcy court should decide the victor by month’s end, with the auction as early as March 21.

By April Fool’s Day, we could have a closing, on the sale of both the Register and its step-sister, the neighboring Riverside Press Enterprise (acquired by high-flying then-CEO Aaron Kushner in something of a shotgun marriage).


First published at Politico Media

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In the run-up to that auction, the theatrics haven’t disappointed.

Tribune Publishing – a prime bidder for the papers – has generated most of them. CEO Jack Griffin had needed funding to buy the papers, and, a month ago, turned to Chicago investor Michael Ferro to supply it. Ferro invested $44.4 million in the Tribune Publishing, to that end. Though the announcement was triumphal for Griffin, he soon saw the table turned. Ferro ousted Griffin two and a half weeks later, and then sacked much of Tribune’s top management ( “Michael Ferro Cleans the House That Jack Built”).

As bidders have positioned themselves for the bankruptcy auction, we’ve seen an unusual level of trash-talking about the assets and the deal. Would-be buyers have been denigrating the value of the two main assets at stake, the two papers and the perhaps-valuable real estate surrounding the Register. Usually, would-be buyers talk up value, sling around the S-word (synergy), and paint a picture of the upside. In this case, in recent weeks, the parties, publicly and privately, have thrown lots of cold water on the would-be deal.

Consequently, we’ve heard more about potential downsides. Those include: “environmental contamination,” a “toxic” pension fund, an uncooperative city government, antitrust concerns and, the most familiar one, deal risk.

As bidders weigh reality and fantasy here, they have begun to put in offers.

How low might those opening bids be? Tribune Publishing may have the higher initial bid, somewhere in the low to middle $30 million range, while Digital First Media, owner of the local Los Angeles News Group, may have come in $5-10 million below that, I’m told. Both are only opening bids; the court has yet to pick a “stalking horse” bidder to set a minimum for the auction, and it may not set one.

Tribune remains, through the drama, the papers’ logical buyer, given the stomach-churning economics of the industry. The buy would not be motivated by revenue. It is the cost savings, expected to be in the $8 to $12 million-plus annual range, that drives the deal, adding to TPUB earnings. The Register sits plum between Tribune’s L.A. Times and its San Diego Union-Tribune, bought last spring. Lots of cost consolidation would be pursued.

For Digital First Media, owned by private-equity player Alden Global Capital, a buy of the Register is both a bargaining chip, and a bit of a defensive play. Alden almost sold itself last spring and intends to dispose of its holdings when the price is right. Owning both the Register and the Press-Enterprise, and combining those operations with its own Los Angeles News Group (L.A. Daily News, Long Beach Press-Telegram, Pasadena Star-News and six other properties) offers two benefits. Short-term, an expanded LANG believes it can achieve cost synergies in the same neighborhood, or more, as Tribune’s $10-12M. Mid-term, as Alden sells, a bigger L.A. group should have more value than its current smaller group. Finally, the Register now prints at least three of the LANG titles. If rival Tribune owned that press as well, the cost of doing business for LANG might well increase, given the paucity of local press capacity.

The third bidder, an in-house one led by current Freedom Communications management and its CEO Rich Mirman, says it would take on the pension obligations. If this group buys, it could operate the papers’ independently, but is more likely to sell to either Tribune or LANG – at a premium.

So what are the issues the buyers are talking about—either because they are real concerns or because they are levers that can be pulled to justify a lower bid?

• The 14.3 acres of real estate. While once “worth” $40-45 million, buyers have now talked it down to as little as $14 million– if the local governments make its conversion from industrial (that $14M valuation) to residential too costly or cumbersome. Developer Mike Harrah, publicly associated with Rich Mirman’s own bidding group, and the likeliest would-be developer of the property, last week mentioned the risk of “environmental contamination,” as he expressed deal doubts. We could be seeing a lot of developer positioning and/or a real reckoning of value.

• “Toxic” pension funds. In November, the Wall Street Journal reported that Freedom Communications pension plan was underfunded by $155 million. More lately, we’ve heard allusions to something “toxic” in the assets held by the fund. Again, here, there’s more speculation than fact, but the pension bogeyman may scare away bidders or lower bid price. TPUB took on the Union-Tribune’s pension funds – the last agreed upon part of that spring, 2015 buy – but doesn’t want to take on Freedom’s. Given it’s a public company, its accounting for the pension funds wouldn’t do its balance sheet any good. Alden, a private company, could take then on without that issue, but doesn’t want to. Rich Mirman’s group says it would take on the pension responsibility, but presumably would pay less in cash accordingly.

When all is said and done, the bankruptcy court, which will decide which plan — cash-only or cash plus assumption of pension obligations — will most benefit creditors. (It may also make it harder to figure out a true public sales price.) At this point, it’s getting increasingly hard to see how Freedom’s many creditors will get their money out.

• Anti-Trust concerns. Tribune must assess how likely a deal could get hung up by anti-trust authorities. Clearly, newspaper monopoly isn’t what it used to be. Still, one newspaper-based company dominating a region of 20 million people would be unprecedented. Two anti-trust arguments could be tested, one along the ad dominance question and the other of one company owning the great majority of the newspaper printing press capacity in the region. The U.S. Attorney General’s Antitrust Division could open an investigation. Perhaps, more problematically, the state of California, under the anti-trust Cartwright Act, seen by some observers as being stronger than federal statute, could be applied. Either act might be ultimately winnable by Tribune, but at what cost to a company with little margin to spare in time or money?

• The value of the newspapers themselves. Given all the chaos in and around Freedom Communications, these papers by themselves aren’t worth much. I’ve estimated perhaps $15 million. As standalones, they have little value. In a bright-white sign of the times, it is only in their combination with others that there is value in the millions.

What is playing out here, as bidders talk smack? Is it game theory, with a few laughs thrown in? Or are the cold feet real, given the sober acknowledgment that it’s tough to find anyone who has recently bought a paper and found it to be a profitable investment?

The market has been positioning for the Register sale for many months. What’s new, in the last month, is the sudden change in leadership at Tribune Publishing. Former CEO Jack Griffin had made in-market acquisition of additional properties a top priority. So the question, all have recently wondered: Is the new leadership of Tribune Publishing as intent on buying the Register as was Griffin?

Apparently so. Michael Ferro began to pay assiduous attention to the L.A. Times, from mere days after his TPUB investment, and has spent notable time in the Southland since. While he has prided himself on being a Chicago guy, L.A. is apparently to his immediate liking. His Oscars attendance (which was followed by a similar, high-profile participation in the formal, Washington D.C. Gridiron Dinner Saturday night) caused a stir. Most tellingly, though, Chicagoan looks like he’s becoming a Los Angeleno, even if it’s part-time residency.

As the L.A. Times itself reported Monday, “[CEO Justin] Dearborn is moving his family to Los Angeles and Ferro has already bought a house in the city, which, technically, makes them local owners.” Further, there’s much new internal TPUB talk about building up the L.A.-based corporate staff. So for long-time observers of the Tribune’s Chicago-L.A. dance (first choreographed in 2000 when Tribune bought the Times Mirror Company for $8 billion), what came around is going around yet again.

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