Minneapolis newspapers in bankruptcy

A big-city newspaper company struggling under the burden of overwhelming debt files for bankruptcy.

Yes, it happened here on Sunday with Philadelphia Newspapers L.L.C., owner of The Inquirer, the Philadelphia Daily News and Philly.com. But a strikingly parallel situation is a month old in Minneapolis, Minn., where the owner of the Star Tribune also has sought court protection.

The cases seem remarkably similar. Scratch the surface, however, and there are some not-so-subtle contrasts that, while not predicting outcomes, certainly suggest a different path ahead for those involved.

Chief among those differences is the Star Tribune's use of its bankruptcy filing to try to nullify its contract with its 116-member pressmen's union and thereby extract major concessions from their workforce. Those concessions would bring savings of $3.5 million a year.

Philadelphia Newspapers has taken a different tack in its initial filings, which, in part, ask the court to assure the company that even in bankruptcy, it can continue to cover wages and benefits as it has. Instead, the company is seeking concessions primarily from its lenders.

"In Minneapolis, they are trying to reopen a union contract," said Lawrence McMichael, one of the lawyers representing Philadelphia Newspapers in its bankruptcy action. "We have no interest in doing that here. That is not part of our strategy.

"We want to do the opposite. We are trying to enlist the support of the community and our workforce."

Regardless of the outcome, both cases stem from a similar root: the hugely leveraged purchase of a big-city newspaper company by investors with little background in the industry.

In the case of Philadelphia Newspapers, a group of local investors paid $562 million for the company in 2006. The group still owes lenders $390 million.

In Minneapolis, the Star Tribune was purchased in 2007 for $530 million by Avista Capital Partners, a private equity group. It still owes lenders $493 million. Both newspapers were bought from the McClatchy Co.

Both companies have seen their profits pared as the newspaper industry and the broader economy have been battered.

In response, Philadelphia Newspapers has had several rounds of layoffs and has negotiated concessions from its unions. In June 2008, it was reported that it had failed to make interest payments on $85 million of loans.

The Star Tribune has had its share of cuts, and has missed debt payments and union concessions as well.

It failed in one key set of negotiations, however, to persuade its pressmen, members of the International Brotherhood of Teamsters, to accept concessions to an existing contract that would have saved the company $3.5 million.

The pressmen's rejection of the concessions meant that two other Teamsters units, which were willing to accept the changes, had to reject them as well.

In continued negotiations with the unions, the Star Tribune, as late as December, warned that it would seek bankruptcy if the unions were unable to provide $20 million in cost savings.

The Star Tribune filed for bankruptcy in concert with its lenders, a signal that the lenders are in the driver's seat when it comes to determining how the company will resolve its debt problems.

Among the lenders is Angelo, Gordon & Co., an investment firm that specializes in distressed companies. The firm also holds about 20 percent of Philadelphia Newspapers' debt.

The lenders also have hired the Blackstone Group, a financial asset management firm, as an adviser. Blackstone is also an adviser in the Philadelphia case.

In contrast to the Star Tribune, Philadelphia Newspapers filed for bankruptcy on its own. The company seeks a restructuring of its debt that recognizes that the climate in which it is operating is vastly different than the one that existed when it purchased the papers.

MinnPost.com, a Web-based newspaper staffed by former Star Tribune managers and journalists, said the approach represented "one stark difference" between the two cases.

Philadelphia Newspapers' owners also have come up with $25 million in financing to cover unexpected costs during the bankruptcy proceedings.

Such financing, known as debtor-in-possession or DIP Commitment, can be provided by lenders, but often with more onerous rates and conditions.

The court must approve the DIP financing.