Media firm's circuitous path through bankruptcy

Getting into bankruptcy is relatively easy, lawyer Lawrence G. McMichael likes to tell his clients; it is the getting out that is the trick.

Case in point is McMichael's most high-profile client at the moment, Philadelphia Media Holdings L.L.C., which has owned The Inquirer, the Philadelphia Daily News, and Philly.com since 2006.

As of tomorrow, Philadelphia Media Holdings will have spent a year navigating the thicket of bankruptcy. Its goal has been to eliminate more than $300 million in debt and to continue on, unencumbered by any suffocating, long-term financial obligations. It would do so by offering $67 million in cash and real estate to make the debt and the holders of that debt go away.

At the moment, however, that goal remains elusive.

For instance, an auction of the company, which is central to its reorganization plan, is on hold as the U.S. Court of Appeals for the Third Circuit weighs a key ruling in the case.

In the meantime, about 36 potential bidders have signed nondisclosure forms so they can review the company's books in advance of a sale, McMichael said. He fully expects at least nine bidders when the auction is finally held, maybe months from now.

To this point, though, PMH's path to solvency has been circuitous, marked by great contention and expense. Last year, the company spent $26.6 million in legal and professional fees associated with the bankruptcy. That includes having to pay the legal and professional costs of its lenders.

So while the company cleared about $15 million in profit last year, it wound up about $11 million in the hole once the bankruptcy fees were paid.

Beyond expenses, there have been accusations (by PMH) of illegal taping of a meeting by the company's largest creditors, as well as extended legal squabbles over short-term financing and over a company campaign to promote a "local" buyer for the firm.

On a national level, the case is proving to be a test of what had been seen as a tenet of bankruptcy - the right of lenders to use the debt they are owed to bid on a bankrupt company. It is that issue that is now before the Third Circuit.

Finally, there is the company itself, which, despite the burden, has pressed forward. As noted, save bankruptcy costs, PMH ended the year $15 million ahead of expenses. That was short of the $25 million the company initially projected for the year, but well ahead of the company's October projection of $4.9 million.

From the consumer's point of view, there probably is little evidence of distress in the day-to-day product.

"Despite everything The Inquirer is going through, the paper is still doing a lot of great journalism," said Ford Risley, head of Pennsylvania State University's Department of Journalism and a regular reader of the paper. "I've always been impressed by its enterprise reporting. That seems to be quite good still."

In the last year, the paper produced a number of memorable projects, including its expose of the shortcomings of the city's Board of Revision of Taxes and a stark look at the failures of Philadelphia's courts system.

The paper remains among the largest-selling in the country, though, like all newspapers, down considerably from what it once sold.

The combined daily circulation of The Inquirer and the Daily News was 361,480 as of September, the most recent audit available. Sunday Inquirer circulation was 499,140, down 10.3 percent from 556,426 a year earlier. Jim Gregory, vice president for circulation, said that if current projections hold up, the Sunday paper will outsell all competitors in the region's eight counties by the time of the next audit.

"I've had better anniversaries," said PMH president and chief executive officer Brian P. Tierney in an interview last week. "Still, I find the whole experience oddly exhilarating. Sure, there is an incredible disappointment that we are in bankruptcy, but the paper is better than it was a year ago. Performancewise, we made $15 million last year, even with the challenges we face. In many ways, the company is stronger than it was before this process."

The "process" began Feb. 22, 2009, when PMH formally filed for bankruptcy. After many twists and turns, the company presented its reorganization plan in August.

The plan calls for providing senior lenders about $67 million in cash and property to settle about $318 million in debt. The debt was taken on in 2006, when Tierney and his partners bought the company for about $515 million. That figure included $150 million put up by the partnership. The loan package was assembled by the Royal Bank of Scotland Group P.L.C. and its subsidiary, Citizens Bank. Over time, the debt has been sold to the point where now there are 38 secured lenders, including Citizens Bank, which serves as agent for the secured lenders.

To ensure that $67 million represents a fair settlement for the lenders, the company is to hold an auction, with its assets to be sold to the highest bidder.

The opening bid will come from a new entity comprising Bruce Toll, vice chairman of Toll Bros. Inc.; the carpenters' union pension fund; and the philanthropist David Haas. Toll and the pension fund were among Tierney's original partners.

The group has offered $35 million in cash and $17 million in a letter of credit for the company.

Originally scheduled for November, the company's auction triggered the most serious dispute between PMH and its senior lenders.

The company did not want to permit the senior lenders to credit-bid. The key senior lenders, which include Angelo, Gordon & Co., CIT Syndicate Loan Group, and Credit Suisse, insisted they had the right to do so in an effort to buy the company.

Chief Federal Bankruptcy Judge Stephen Raslavich sided with the lenders, but he was overruled by U.S. District Judge Eduardo C. Robreno. The lenders appealed to the Third Circuit, where a ruling is pending.

David Arthur Skeel, the S. Samuel Arsht Professor of Corporate Law at the University of Pennsylvania, said Robreno's "ruling was a very surprising result."

"If the Third Circuit agrees, it will force people to rethink the dynamics of these sales, which are the heart of bankruptcy right now," he said.

Beyond credit-bidding, Skeel said, the contentious nature of the case has made it stand out. At almost every step of the way, PMH and its lenders have been at loggerheads on issues big and small.

"From that perspective, the case has been very unusual," he said.

Andrew C. Kassner, who represents Citizens Bank, agreed that the case has been particularly combative. One reason, he suggested, was that it involved a major newspaper company. As a result, the various conflicts have been played out in the media.

"When there is this much publicity, there is greater opportunity for misunderstanding," he said. "People feel they are being backed into positions they don't want to take."

Tierney traces the roots of the conflict to an incident in November 2008, when a representative of the senior lenders was found taping a meeting between company officials and lenders. While the lenders have dismissed the incident as insignificant, Tierney pressed the court for an investigation.

Tierney contends that the lenders have been intractable ever since. He has agreed not to pursue an investigation until after March 31.

"Come April 1, I look forward to cranking this back up and getting to the bottom of this," he said last week.

Fred S. Hodara, the lead attorney for the senior lenders, bristled when told of Tierney's position.

"This is a classic example of someone making a mountain out of a molehill," he said. "This has been a charade and waste of time. He seems to really believe the incident is some sort of indication of a worldwide conspiracy. It is a Capt. Queeg-type moment."

Regardless of who is to blame for the delays, both sides have hunkered down to await the Third Circuit ruling.

Hodara said his clients believed they would ultimately prevail and would, in fact, seek to take control of the company at auction.

"The lenders continue to really believe in these newspapers," he said. "They absolutely intend to follow the course to the finish."

Tierney, too, is looking to the future, one in which he hopes to have a hand running the company, and if not, one in which the new owner is someone "who cares about the community."

"I'm going out to California to talk to potential bidders," he said. "I've been to Texas to talk to potential bidders. I'm trying really hard to show everyone that this was a process that results in the highest and best bid. Which means a company not laden with debt and stumbling out of bankruptcy."

As evidence of his own optimism of continuing on with the company, Tierney said he was preparing a strategic plan for the coming year.

"This is still the coolest business in the world," Tierney said. "And I have a duty here. You know, my mother used to tell me all the time growing up: The easiest thing to do in life is to do your duty.

"For me, that duty is to put my football helmet on, get on the field, and lead. That is what I am going to do."