Inquirer's owner begins court odyssey

Beginning today in federal court, a bankruptcy judge will commence hearings that in the coming months will determine the future of the parent company of The Inquirer, the Philadelphia Daily News, and Philly.com.

Among the complex issues awaiting U.S. Bankruptcy Court Judge Jean K. FitzSimon are how much the company - Philadelphia Newspapers L.L.C. - is worth, how much debt it can support, and who will end up owning the business.

While the proceedings, which could easily last more than a year, are under way, the two newspapers will continue to publish, readers will receive their newspapers as usual, and the Web audience for Philly.com will receive its full array of news, videos and podcasts, leaders of the company said.

Since a group of local investors paid $515 million in cash - most of it borrowed - for the business in 2006, the value of the operation has plummeted because of the economic downturn and deteriorating prospects for big-city dailies.

It is possible that those investors, who put up about $150 million of the purchase price three years ago, will be wiped out because the company's $395 million in debt is so much greater than its value, which could be $180 million or less, according to experts. The group also assumed $47 million in pension liabilities.

Even among investors, there were varied reactions.

Brian P. Tierney, who persuaded local business people to join him in buying the papers three years ago, said it was too soon to say what would happen to the investors. "We won't really be certain about that until we complete the Chapter 11 process," Tierney, the company's chief executive officer, said yesterday.

William A. Graham IV, the biggest investor at more than $30 million, said he was optimistic that the current owners would retain a small stake, though they would have to put in more money to do so.

The company, in its filing, said lenders had rejected a proposal for an additional $20 million investment by current owners in return for a reduction in the debt.

Graham, who owns a large insurance brokerage, said he would invest in the papers again. "I'm proud I did it," he said.

By contrast, Bruce Toll, who is company chairman and among the largest investors, said he thought the investors would get nothing out of the bankruptcy process.

"I lost a lot of money," said Toll, a member of the Toll Bros. Inc. home-building family and a major auto dealer. "I'm upset to say the least.

"It wasn't anybody's fault. It was the economy. Look at the Sunday Inquirer. We used to have 52 pages of auto ads. Now we have 10. Real estate has taken a tremendous hit. So have employment ads. No one is hiring," Toll said.

Philadelphia Newspapers was among the companies that were shedding workers last year. The company laid off 88 employees in its newsrooms, in finance and in advertising.

Last summer, truck drivers for The Inquirer and the Daily News and other union members agreed to give up or postpone a $25 weekly raise to help the newspapers save money.

According to a court document filed yesterday by the company, Tierney's annual pay was boosted twice in 2008, from $600,000 to $618,000 in May and then to $850,000 in December. The company said in the filing that he got the raise because he had assumed the dual role of publisher and CEO in 2006, without being paid extra for more than two years.

"I approved that, and I have no qualms about that. I think he earns every penny," Graham said.

The company's contracts with unions, which represent 74 percent of its 4,619 full-time, part-time and seasonal employees, expire Aug. 31.

The judge in the case, FitzSimon, was appointed to the Bankruptcy Court in Philadelphia in June 2006. She had been executive vice president of Whitehall Jewelers Inc.

Federal bankruptcy law gives debtors some latitude in selecting a jurisdiction for filing. It requires only that the company seeking bankruptcy protection be established legally in a jurisdiction, or have significant operations there.

Philadelphia Newspapers filed for bankruptcy protection in Pennsylvania rather than in Delaware, where some of its affiliates are incorporated, and where many of the nation's largest bankruptcies are filed.

"The strategy may have been that debtors' counsel thought this was the place where the court would be most sensitive to Philadelphia-related issues," said Claudia Springer, a bankruptcy lawyer with Reed Smith L.L.P. who is not involved in the Philadelphia Newspapers case.

Today's hearing is the beginning of what is often a long process.

Debtors typically get 120 days to propose an initial plan for restructuring, but that period can be extended for up to 18 months, said Natalie Ramsey, chair of the bankruptcy and corporate restructuring practice at Montgomery McCracken Walker & Rhoades L.L.P.

After the initial phase of 120 days or more, creditors also can propose plans for reorganizing the company, or in the worst-case scenario, selling off its assets.

But it is the judge in the case who makes the decision.

The fundamental question in bankruptcy is whether the company is viable, said Howard Brod Brownstein, principal with NachmanHaysBrownstein Inc., a turnaround management firm in Narberth.

Philadelphia Newspapers argued in court documents that the business was viable, pointing to its operating profit: $36 million in 2008. That measure does not include interest payments and other expenses. Operating profit is projected at $25 million this year.

To be sustainable, the company probably can afford only $70 million in debt, said Eric Meltzer, a Wayne investment banker.