Today, in the Ronald Reagan Federal Building and U.S. Courthouse in Santa Ana, Calif., the Orange County Register - for the second time - begins to emerge from bankruptcy. There may not be much activity in the courtroom itself, as initial bids to buy the paper will come in by filings, not in open court.
Sources tell me that there may be as many as a half dozen would-be bidders positioning themselves. In addition, some may partner up as the auction process proceeds. Tribune Publishing (TPUB) has already said it wants to be the bidder that sets the opening price for the actual auction next month - the "stalking horse" position in the process.
For Tribune Publishing Company, the move has amounted to a bigger bet than we thought it might be even 10 days ago. Unable to obtain credit financing at acceptable rates to make its bid, Tribune needed new funding to be able to make a serious bid for the Register and its sister, Riverside Press-Enterprise. Last week, it got the money, but shocked investors and others with the two big moves it had to make to get it.
First, it brought in new investor Michael Ferro - who also took the powerful position of non-executive board chairman. In fact, Ferro, according to several confidential sources, has been acting far more like an operational executive than a non-executive chair (Michael Ferro immediately redefines Tribune Publishing's chairman role).
Ferro put $44.4 million into the company and gained a 16.6% lead stake in TPUB (Tribune Publishing builds a Southern California war chest). Second, it announced the immediate cessation of its pricey 70-cents-a-share annual dividend.
The market reaction has been sharp. At Thursday's market close, TPUB's share price was down from about $8 at the time of the announcement to a $5.95 close Thursday, after dropping to a low of $5.45 before recovering some. That's a 25% decline since the Ferro investment-dividend cut (and a 76% drop since TPUB was split over from the mother Tribune Company 18 months ago). Today, it has claimed a 17.65% gain, back to $7.
What's driven the week's swoon and great volatility? Financial analysts said that value-oriented investors, for whom dividends are key, would want to abandon the company, and that likely is what we've seen over the week. Further, investor confidence overall has got to be shaken by the unexpected 20% dilution of current shareholders, the result of the private-placement sale to Ferro.
In Orange County, as the auction begins Friday, the roll-up it portends of all the struggling newspaper properties in southern California has long made financial sense (Politico: Southern California roll-up gains impetus, as Orange County Register declares bankruptcy).
If the Register's remaining real estate value, derived from its 14.3 acres of property adjacent to the paper, has maintained earlier value, then it would be expected to be worth $45-$55 million. Given zoning disputes, though, it may have lost as much as half of that value, local sources now say.
Let's set the two papers' worth at maybe $15 million, given that the Press-Enterprise is the only newspaper profit producing profit. Consequently, depending on the value of real estate, we can now see a final price in the $40-65 million range. TPUB will try not to be outbid, and knows that if the properties go to others (the real estate should end up, eventually, in the hands of developer Michael Harrah, who owns adjacent property and is part of one bidding group), it may have to pay a steep premium to the winning bidder to complete its SoCal trifecta.
So within a month, we should know whether CEO Jack Griffin's and Michael Ferro's risky business move bears some fruit - a Register acquisition - as the downside of it has already become clear. The company has estimated $15-20 million in annual cost synergies by combining print, production and other operations among the L.A. Times, San Diego Union-Tribune and to-be-semi-merged Orange County Register and Riverside Press-Enterprise. Synergies are often overestimated, and some insiders put the likelier savings at closer to $10-12 million a year. That's real money, but still makes justifying last week's financial moves difficult.
Though Tribune Publishing will announce its own year-end financials on March 2, the company, though, has already previewed those as part of its announcements last week. They are generally in line with the company's "revised guidance" of last fall, but apparently hitting the revised numbers isn't doing enough to bolster investor confidence in the company's strategy.
March will prove to be a pivotal month for TPUB as it determines whether it gets the Register and PE or not, and at what price. Through the continuing turmoil, further down print ad revenue is forecast, and that against the backdrop of threats of overall economic downturn. This is the environment in which the company continues on the strategy to transform itself. In other words, what seemed like a pretty tough situation a month ago looks even tougher now.
An interesting coda: In the recent filings, one of the endless nuances of bankruptcy reveals itself: how a paper still losing money every month on an operating basis squirrels money away to serve the few rather than the many.
This is the Register's second bankruptcy, and consequently the fourth among the papers in play in this roll-up. The Register's long and tangled history - including the short regime of near-messianic owner Aaron Kushner - has produced seemingly endless financial disarray, dislocation and disheartening for staff and for readers. Now, the O.C. Register, which struggles turn any profit, is setting aside $1.5 million for a Key Executive Incentive Plan. Its top seven execs (excepting CEO Rich Mirman) would share part or all of that fund - if the sale of Freedom Communications (the parent bankrupt company) exceeds what should be the exceedingly low-ball number of $42 million.
Why the payout?
Only a court document could explain it:
II. NECESSITY FOR THE EMPLOYEE INCENTIVE AND SEVERANCE PROGRAM
Following extensive discussions with their professionals, the Debtors determined that a specifically tailored performance incentive plan for a limited number of important Key Executives and a severance plan for their Associate Employees and Key Executives was a necessary and appropriate means of motivating the Employees, all of whom have played, and continue to play, a critical role in the success of the Debtors' businesses and corresponding going-concern value.
So goes it in southern California: lots of financial engineering and a press that has declined in quality and quantity each successive year, for now almost a decade.