Auction will set value of papers

How much is Philadelphia Newspapers L.L.C. worth?

With the April 27 auction of the parent company of The Inquirer, the Philadelphia Daily News, and Philly.com approaching, the question looms large.

Not only will the answer go a long way to determining who will next own the papers and Web site, it also will set a value on a big-city news company, which holds interest for anyone who has followed the dramatic decline in the industry's fortunes over the last half-dozen years.

In the throes of the Great Recession and beset by competition from the Internet, many of the industry's largest companies saw their stock prices fall 80 percent or more over that period.

Purchased for $515 million four years ago but in bankruptcy since February 2009, Philadelphia Newspapers has been bickering with its senior lenders for more than a year over its worth today.

Last year, the senior lenders turned down a company offer of $67 million in cash and property to settle about $318 million in debt.

If $67 million is not enough, what is?

Based on the only offer now on the table ($80.5 million from a local group of investors) and how the lenders themselves have valued the company in the past ($85 million), it appears someone will need at least $85 million to buy the company.

That's a figure well into the upper range of the most generous estimates of the company's value, which, using various industry measures, would seem to fall between $70 million and $88 million.

And that would seem to ensure there will be few, if any, bidders beyond the two already announced: a local group of investors and the company's lenders.

"The private-equity companies that look at newspapers want to buy something dirt cheap," said John Morton, a longtime industry analyst. "I would be surprised if anybody would come in and top those numbers."

The key, of course, is how the market values the company.

"There are few, if any, recent precedents of successful metro newspaper sales that might help establish a fair market value," said Jim Friedlich, a partner at ZelnickMedia, a New York-based media-investment firm. "In today's climate, the value of newspapers is very much in the eyes of the beholder."

The most recent sale was the auction last fall of the Chicago Sun-Times group. The company, which owns the Sun-Times as well as 58 suburban Chicago papers, was purchased for $5 million in cash and the assumption of $20 million in debt. That put its value at $25 million.

Tribune Co., owner of the Chicago Tribune and the Los Angeles Times, recently released its own reorganization plan, which placed its value at $4.1 billion, down from its $8.2 billion purchase price three years ago.

Though not a sale, the recent bankruptcy of the Minneapolis Star Tribune offers an opportunity to put a price tag on a newspaper company similar to Philadelphia Newspapers in economic size. It also had some of the same senior lenders (those with the largest stake), including Angelo, Gordon & Co., CIT Group Inc., and Credit Suisse.

The Star Tribune came out of bankruptcy owned by its lenders and with its debt cut from $480 million to $100 million.

The new company was valued at between $118 million and $144 million by the Blackstone Group, a financial-advisory firm that also works for the senior lenders in the Philadelphia Newspapers bankruptcy. Since the Star Tribune bankruptcy was uncontested, Blackstone's estimate was not tested in court or at auction.

The valuation was based, in part, on a projection that the Star Tribune would produce $21 million in cash flow next year, almost double Philadelphia Newspapers' projection of $12.6 million.

Using the same measures, adjusted for the smaller cash flow, Philadelphia Newspapers' value would be between $70.8 million and $86.4 million.

Representatives for the lenders have declined to discuss what they think the company is worth.

Even without their help, there are other ways to make an educated guess on the company's value, starting with its minimum worth.

At bottom, a company is worth what its component parts would bring if sold off individually.

Philadelphia Newspapers, in a court filing last month, said such a sale could raise between $46.7 million and $60 million, after expenses. That included selling its Broad Street headquarters, its Conshohocken printing plant, and its presses and other equipment.

Both sides agree, however, that the whole company is worth more than its parts.

A minimum value for the intact company can be gleaned from court records and the current opening auction bid.

The floor for the auction is set by what is known as the "stalking horse bidder." In this case, the stalking horse is a new entity, Philly Papers L.L.C., which is made up of two previous investors in Philadelphia Newspapers - Bruce Toll, vice chairman of Toll Bros. Inc., and the Carpenters Union pension fund - and a newcomer, philanthropist David Haas.

The bid is $35 million in cash and a $17 million letter of credit for the company, minus its headquarters building, which would go to the lenders. The cash, the letter of credit, and the value of the building ($28.5 million, as projected by the company) add up to $80.5 million.

Though the senior lenders have questioned the math, including the value of the company headquarters, the stalking horse bid declares the company is worth at least $80.5 million.

That is not far from the minimum value suggested by a key financial adviser to the lenders in a deposition last summer.

Flip Huffard, senior managing director for the Blackstone Group, testified that the lenders envisioned the company coming out of bankruptcy with about $85 million in debt, which would establish that figure as a floor for the company's value at that time.

In similar testimony, Bradley Pattelli, managing director of Angelo, Gordon & Co., a key lender, offered what could be read as an upper limit to the company's value at the time. Asked how much debt the company could carry, Pattelli said that a "preliminary" assessment suggested it had to be "less than $100 million."

Pattelli did not respond to a request for comment for this article.

Brian P. Tierney, chief executive officer of Philadelphia Newspapers, has contended that even $85 million would be far too much debt for the company to carry.

Fred S. Hodara, lead attorney for the lenders, cautioned recently that those statements did not necessarily represent how the lenders valued the company today. He declined to say what their current assessment was.

Tierney, too, declined to offer an opinion as to the company's worth.

"The auction will tell us that answer when we see what is indeed the best and highest bid," he said Friday. "It's the fairest way imaginable to answer the question."

"The best and highest" is the standard by which the bids at auction will be measured. It means that factors other than just dollars are in play. For instance, a high bid of cash and debt might be deemed lesser than a lower bid of strictly cash.

The auction will be monitored by Arlin M. Adams, a former federal appeals court judge now with the law firm Schnader, Harrison, Segal & Lewis L.L.P., and J. Scott Victor, a former bankruptcy lawyer who is managing director of SSG Capital Advisors. The outcome then must be approved by Chief Bankruptcy Judge Stephen Raslavich at a confirmation hearing now set for May 25. Even then, a disputed ruling can be appealed.

Given the state of the newspaper industry, experts say it is not surprising that the company's value remains in flux.

What had been a stable sector, with companies that routinely delivered profit margins of 20 percent to 25 percent, has become unhinged largely by the loss of classified advertising to the Internet and the economic collapse that began in 2008.

The McClatchy newspaper chain, for instance, saw its stock price fall from $69.49 a share in May 2005 to a low of 44 cents in July 2009. It has rebounded slightly, closing Friday at $6.47 a share.

Gannett Co. Inc., another major chain, reported Friday that its net income jumped 51 percent for the first quarter of this year.

Though newspaper companies have recovered somewhat with the economy, there is no evidence they will return to their levels of five or six years ago. That is key to the question of value.

"There is no way to the answer right now," said Lauren Rich Fine, a former Merrill Lynch newspaper analyst who teaches at Kent State University. "Nobody knows what the future looks like in the industry. In the past, you could make projections with reasonable certainty. No more. There is no way to know what the beast looks like."

Philadelphia Newspapers' own recent projections offer ample evidence of the vagaries of financial forecasting.

In February 2009, when it filed for bankruptcy, the company predicted it would end the year with a positive cash flow of $25 million. In October, it readjusted that figure to $4.6 million. When the year ended, the actual number was $15 million.

The company is projecting about $12.6 million for next year, once it is out of bankruptcy and all the attendant costs are settled.

That figure is known as EBITDA - earnings before interest, taxes, depreciation, and amortization. It is a standard measure for establishing a company's worth.

When newspapers were most profitable, they were routinely valued at 10 to 12 times EBITDA.

"Right now, six to seven times EBITDA is the rule of thumb," said Edward Atorino, a longtime industry analyst with Benchmark Co. "Six times is for a company that might be struggling."

That would place Philadelphia Newspapers' value at $75.6 million to $88.2 million, which is consistent with the range reached by looking at Blackstone's evaluation of the Star Tribune.

With $80.5 million already offered, and the lenders talking a "robust bid" on property they previously valued at least at $85 million, who then might step up at the auction and offer more?

"This is sort of like Broadway - you are going to need a quote-unquote angel," said Atorino, using the metaphor of the rich patron who steps forward to produce a Broadway play.

"You need a Bloomberg, a Murdoch, a guy with a few bucks to spare, who wants to own a newspaper, who wants to be respectable, who wants to have a voice in the community. You need an angel."