What started as a marathon has turned into an obstacle course. In today's wee hours, just before dawn, Tribune Publishing (TPUB) was named as the "winner" in the Orange County Register bankruptcy auction. Tribune's winning bid of $56 million in cash - topping high-end estimates of the combined value of the Register, its sister Press-Enterprise and attendant real estate - seemed to signal an end to the big question of who would own the paper next.
But within half a day, the next shoe dropped, in a bankruptcy court that has been heavily contentious, where a new suit arrived - from the Department of Justice. By early afternoon, the DOJ's Antitrust unit sent a reminder, both to Tribune Publishing and all those involved in the bankruptcy process. It filed an antitrust lawsuit to stop Tribune from acquiring Freedom Communications. In only three days, that suit was followed by an urgent email from the Justice Department's Antitrust Division director, William Baer, assistant attorney general in charge of the antitrust division. That Monday email had raised serious questions about Tribune's domination of the southern California market, should it win the auction. It seemed like the buying terrain had changed overnight.
Baer's suit today used the M word - Monopoly:
"If Tribune acquires Freedom, along with its Press-Enterprise and Register newspapers, it would obtain a monopoly in newspapers in Riverside County," the suit says. "Thus, competition for readers of English-language local daily newspapers in Riverside County would be substantially reduced or eliminated and newspaper readers in Riverside County would be likely to pay higher prices and receive lower levels of quality and service... If this acquisition is allowed to proceed, newspaper competition will be eliminated and readers and advertisers in Orange and Riverside Counties will suffer."
Today's events only reinforce the quite fragile nature of Tribune Publishing's early morning win as all the parties head to a Monday date in federal bankruptcy court. On Monday, a judge is expected to certify an auction winner - Tribune Publishing or one of its competitors.
The Tribune "win" had come at the end of an extremely long day. At 10 a.m. on Wednesday, three bidders ("Trash-Talking in the O.C., with Two Newspapers Hanging in the Balance") had met in the offices of Freedom Communications attorney Alan Friedman. This wasn't a raise-your-paddle bankruptcy auction. Bidders and attorneys representing them and the company's creditors spent the day and evening arguing about the terms of the auction. Finally, Tribune emerged with the winning, highest bid.
Tribune Publishing had been positioning itself for this acquisition for more than a year as a cash-strapped Freedom Communications prepared itself to go into bankruptcy. If that represented a marathon of strategy, it's that just-erected obstacle of antitrust that most piques business interest.
Tribune's offer of $56 million seems to have surpassed the initial offer of rival Digital First Media, owner of the competing Los Angeles News Group, by more than $10 million. (Given the complexity of assets and liabilities, it's tough to get an apples-to-apples comparison of the would-be buying price, but the $10 million difference is in the neighborhood.) Yet, the decision on whether DFM's $45 million - or more, if it raises its offer - is a better bird in the hand than the Tribune's more complicated $56 million now goes to court.
As the bankruptcy judge reviews Freedom's choice of Tribune, as the victor it will have to ascertain how the creditors are best served by that bid. Until that DOJ letter and the suit arrived, the question had seemed more straightforward - based solely on the highest bid.
Could the court approve the Tribune buy and transfer of the property by the March 31 target date, given the DOJ suit? It could, but it also could force Tribune to put the new asset - the newspapers (if not the real estate, which account for the majority of the value here) - into a kind of escrow or trust until the DOJ action is resolved. Given that the DOJ action would likely take months to play out, and maybe more time if there are courtroom appeals, the driving impulse for the deal would be at the very least postponed, if not lost. As I've repeatedly noted, for both Tribune and DFM, this isn't an acquisition of optimism and growth - it's all about cost consolidation. And time is as important as money.
If Tribune can't - because of the DOJ challenge - achieve those consolidation synergies with certainty, it's unclear why it would proceed. In addition, Tribune will have to pay out an immediate deposit of $5.6 million on its winning bid. If it paid out $56 million by March 31, that would leave the company with less than $25 million in cash - a small amount for a company of its size. Over the weekend, before the Monday court date, Tribune must assess its own legal chances and its financial wherewithal, and be mindful of big shareholders wary of taking on more "deal risk."
Given all the recent concatenations of change ("Ferro Era Begins with Massive Exec Shuffle") at Tribune Publishing as investor Michael Ferro has seized control and radically reoriented management, this company reassessment should be careful. Newly minted CEO, Justin Dearborn, told investors on March 2 that the company wouldn't "overpay" for Freedom. Aside from the deal risk introduced by the DOJ action, the high price of the sale has got to raise questions. How accretive - boosting annual earnings - would the acquisition be, given its pricing and accompanying financial issues?
Overall, we see the tightening financial vice on all these newspaper operations. Tribune operates close to the line, and has been unable to obtain new financing at reasonable rates. Freedom Communications, in bankruptcy, operates month to month on a barely profitable basis. Digital First Media, controlled by P/E company Alden Global Financial, has deep pockets - but it's filling them more, rather than investing in products and staffing. That's the backdrop of these theatrics, and they remind us that whatever happens this week or next will likely be followed by still more changes in ownership and management.