A look at the sale process for companies like PMN

To many observers, it seems strange that two investor groups interested in buying Philadelphia Media Network Inc. have been rebuffed in their attempts to submit bids.

Philanthropist Raymond Perelman and developer Bart Blatstein have each complained about being denied the chance to make an offer for The Inquirer, the Philadelphia Daily News, and Philly.com.

PMN's owners, a group of financial-investment firms led by privately held hedge funds Alden Global Capital and Angelo, Gordon & Co., won't say why. Neither will Evercore Partners Inc., the New York investment bank hired to manage the sale of the parent company of the media properties.

But interviews with some who make a living buying and selling companies have provided insight into what is a methodical process, and one that is not always transparent.

When a company is considering a sale, information packages are made available to those interested in buying. Groups that want to go forward submit expression-of-interest letters, which include price and any conditions on a bid.

An investor group organized by former Pennsylvania Gov. Ed Rendell is the only one that has confirmed publicly that it has submitted such a letter. At a recent public meeting, Rendell indicated that his group's offer may not be the highest but has fewer conditions, helping to confirm that there are other bidders.

It's not clear who the other bidders for PMN may be. People familiar with the jockeying going on in the current sale process tend to suggest one or more local investor groups may be participating, or possibly a private-equity firm.

The newspaper industry has some qualities that would be attractive to private-equity firms, according to Matthew Rhodes-Kropf, a professor at the Harvard Business School. First, the newspaper business has been shrinking. With a typical five-year time horizon, private-equity investment "can be very good where anything needs to change," such as consolidating distribution or printing presses.

Generally, investment banks want to cast a wide net for possible bidders and create as much of an auction as they can, to get the best price possible, said one investment professional who advises media companies on recapitalizations and acquisitions.

But as several brokers and analysts noted, print media has not been a hot sector for several years, especially the newspaper industry.

Estimates of PMN's possible purchase price have ranged from $40 million to $100 million. The media properties sold for $139 million at bankruptcy auction in 2010; a local group led by public-relations executive Brian Tierney bought the company for $515 million from the McClatchy Co. in 2006.

But recent daily-newspaper purchases brought higher-than-expected prices: Warren Buffett spent $200 million for the Omaha World-Herald, and real estate developer Doug Manchester bought the San Diego Union-Tribune for $110 million.

Andrew T. Greenberg, chief executive officer of West Conshohocken's GD Data Resources L.L.C., which tracks acquisitions by private-equity firms, said he's seen few transactions in the publishing industry involving private equity in the last four years.

"This is an industry ripe for sentimental buyers to overpay," Greenberg said.

One reason Evercore may not be welcoming the recent unsolicited bids for PMN is that the sale process may be so far along that the current bidders may have already completed their due diligence, said Larry Grimes, president of W.B. Grimes & Co., a Gathersburg, Md., newspaper brokerage that is not involved in the PMN sale.

Due diligence is the homework that any buyer does in a transaction, including evaluating the financial statements and reviewing contracts with labor unions and suppliers. Thanks to technology, that work is done in a digital data room that is closely monitored by the investment bank.

Some legwork still must be done, however. Few would buy a house without seeing the inside and outside, not to mention having a home inspector give it a good going over. The same is true of companies.

In 2010, the bidders vying for control of what was then Philadelphia Media Holdings were seen strolling through the cavernous Inquirer newsroom. Blatstein bought the company's iconic headquarters at 400 N. Broad St. last fall for $22.7 million; the last key piece of real estate PMN owns is its Schuylkill Printing Plant in Upper Merion.

Though there have been many rumors about the identities of other bidders for PMN, one likely source of interest is missing: other newspaper companies. Chains such as Gannett Communications Inc., Washington Post Co., and New York Times Co. have been more active sellers than buyers in the last five years, Grimes said.

Without strategic buyers such as newspaper chains, bidders tend to be drawn from the financial industry, such as private-equity firms and hedge funds, or so-called civic-minded or vanity buyers from the local community. Vanity buyers often say that it's more important that a newspaper continue to perform its role in the civic life of a region than it is for it to make money.

After formal letters of intent from PMN bidders are submitted, Evercore may pick one bidder to enter into a period of exclusivity. During that 30- to 90-day period, buyer and seller negotiate the major points of the deal, the buyer lines up financing, and the buyer may negotiate with any labor unions.

In January, the purchase of MaineToday Media, which owns several papers including the Portland Press Herald, fell through when the papers' biggest union rejected demands for substantial concessions. In the wake of the failed sale, MaineToday attracted a multimillion loan from a hedge-fund manager earlier this month to continue operating the papers.

So far, the Newspaper Guild and the Teamsters, unions representing hundreds of PMN employees, have not had formal discussions with any potential buyer.