Digital, First

When on Sept. 5 the Journal Register Co. joined the line of newspaper companies filing for Chapter 11, it announced that an affiliate of its hedge-fund owner was going to act as the stalking-horse bidder to buy the company in what could be a strategic move to drive up the purchase price.

The company has about $165.5 million in debt, most of which is left over from the last time it filed for bankruptcy protection.

The Journal Register exited from its first bankruptcy in 2009 with $225 million in debt, plus defined pension obligations and lease costs that it says in court papers are now unsustainable. It blames a decline in advertising revenue, plus the lease and pension problems, as the reason for Chapter 11 redux.

Alden Global Capital, which didn't respond to requests for comment for this story, has owned the Journal Register since June 2011, when it paid $10 per share, for a purchase price that is not ultimately disclosed in court documents.

After its last bankruptcy case, the company switched its focus to digital content with management company Digital First's chief executive John Paton, who was profiled by New York Times media journalist David Carr last November as someone who plans to eliminate many print products. Digital First operates the Journal Register, among other news companies. The Journal Register's switch to digital caused the decline in print advertising - its main source of revenue, the company says in court papers.

Despite the digital strategy, print revenue still made up 56.7 percent of the Journal Register's total revenues for 2011.

The decline in revenue is consistent with the drop faced by the rest of the newspaper industry; it's just worse for the Journal Register. Print advertising from 2009 to 2011 declined about 17 percent, while the Journal Register's print advertising has plummeted 19 percent, according to the Newspaper Association of America and court papers.

Several other newspaper companies have sought bankruptcy protection in the past few years. Philadelphia Newspaper LLC, which owns the Philadelphia Inquirer, filed on Feb. 22, 2009. Its newsprint supplier, Paragon Paper Inc., filed for bankruptcy protection on April 17. Tribune Co., which owns the Los Angeles Times and Chicago Tribune, sought Chapter 11 protection in 2008.

The Journal Register isn't the only one focused on digital. When media company The Street bought financial news company The Deal LLC for $5.8 million in September, it killed the company's magazine, its sole print product.

In fiscal year 2011, 34.4 percent of the company's advertising revenue came from local and regional display advertising and 28.4 percent from classified advertising, according to court papers. Digital advertising made up just 15.3 percent of the total advertising revenue the Journal Register brought in that year.

That 15.3 percent represents a big leap from where the company's digital-advertising revenue was in 2009, but that growth rate is slowing. It grew 235 percent in 2009, 107.7 percent in 2010, 61 percent in 2011, and in the first six months of 2012, grew 32.5 percent.

When it filed, the Journal Register announced that Alden's affiliate, 21st CMH Acquisition Co., would place the initial bid for the bankruptcy auction.

As of press time, the company hadn't filed its bidding procedures, which would have indicated the amount of the bid and the amount required for a competitor's overbid.

Alden, through Alden Global Distressed Opportunities Master Fund LP and Alden Global Value Recovery Master Fund LP, is owed $152.3 million from loans it made to the debtor, according to court documents. Those loans aren't at the top to be paid back though.

The Journal Register defaulted on its debt to senior-secured lender Wells Fargo, which is owed $13.23 million from a revolving loan and letters of credit, court documents show. Wells is providing the company's $25 million debtor-in-possession loan, securing its place at the top with a super-priority administrative expense claim, meaning it will be among the first to get paid.

Having an affiliate serve as the stalking-horse bidder could be Alden's strategy to get other bidders to come in and pay more, experts say.

"It would use an affiliated company to submit a stalking-horse bid basically to provide a floor for the ultimate price that's paid for those assets," says Susan Hauser, the resident scholar at the American Bankruptcy Institute.

If a bankruptcy auction is done right, the stalking-horse bid is really just a starting place, says Douglas Baird, a bankruptcy expert at the University of Chicago Law School, who spoke generally - not specifically - about the Journal Register's case.

The aspiration is really to have that bid in place in order to entice other people to come in, Baird says.

For example, during the Texas Rangers' bankruptcy case, Nolan Ryan, the team president, acted as the stalking-horse bidder for $575 million. Ryan won the auction, but only after beating out the competing bidders with a $608 million bid.

If a stalking-horse bid weren't established, but the assets were still up for sale, bids could be lower than what the company was hoping for.

If the stalking-horse bidder wins, it will just result in the restructure of the company through an affiliate of the existing owner.

In some ways the best case scenario would be to attract a third-party bidder, Hauser says.

"If the third party bidder appeared and that could make more money for everyone, that would certainly be an attractive solution," Hauser says.

According to court documents, Alden's affiliate will credit bid, which means it is allowed to bid the amount of its debt without producing any cash, Hauser says.

The winning bidder, though possibly the same ultimate entity as the current owner, will determine the fate of the Journal Register's employees, according to a company statement.

"For it to be on board, Wells Fargo is receiving something from this procedure. Maybe its liens will continue in place," Hauser says - meaning that whatever entity buys the company would still have to pay Wells, or it could claim the assets. Wells supports the sale process, according to court documents.

The bankruptcy process could be used to restructure or in some cases, hand off, some of the pension obligations, Hauser says. Bankruptcy also allows the debtor to reject leases.

The pension plan itself could be terminated, and the Pension Benefit Guaranty Corp. (PBGC), as plan administrator for the beneficiaries, would pursue their claims. If it got to that point, the PBGC would negotiate how the pension situation would unfold, and the obligations the Journal Register would have to pay would be reduced typically, according to Hauser. Companies have options to restructure pension plans through bankruptcy.

Based on the company's admission that pension obligations had risen by 52 percent, it's likely the pension plan is now underfunded, Hauser says.

The amount the PBGC can pull out of a debtor in a bankruptcy case is often less than it is owed because it isn't a secured creditor, and as an unsecured creditor, it only gets paid with any extra dollars. Secured creditors on the other hand, get paid the value of the assets that secure their claim.

For example, in the bankruptcy case of Northern Berkshire Healthcare Inc., a bankrupt hospital in North Adams, Mass., the PBGC walked away with a $1.5 million note for $27 million in pension obligations. Lower Bucks Community Hospital, which filed for bankruptcy in Pennsylvania, had a pension plan that was underfunded by about $36 million. It proposed paying $3 million in benefits through its plan.

"The fact that someone isn't being paid what they're owed - that's called bankruptcy. That's what we're doing," says Baird.