Philadelphia Newspapers: a $562M LBO, Chapter 11, and a landmark credit-bid fight

In June 2006 a group of Philadelphia investors assembled by Brian Tierney, a political consultant turned publisher, bought The Philadelphia Inquirer and Philadelphia Daily News out of Knight Ridder in a deal reported at $562 million, funded largely with about $390 million of debt, including $85 million of junior loans.

The base kept shrinking: the Inquirer's weekday circulation of 300,674 was down 11% year over year by the filing. In June 2008 the company missed an interest payment on its junior debt after senior lenders blocked it, incurring $13.4 million in penalties. When restructuring talks collapsed on February 20, 2009, Philadelphia Newspapers LLC filed Chapter 11 two days later in Case 09-11204.

Tierney blamed 'the rare trifecta of a dramatic decline in revenue, the worst economic crisis since the Great Depression and a debt structure out of line with current economic realities' — while insisting 'our operations are sound and profitable.' The debtors' plan then barred the roughly $300 million of secured lenders from credit-bidding their debt, offering instead $37 million of cash plus $29.5 million of real estate.

On March 22, 2010 the Third Circuit let the no-credit-bid sale stand, forcing lenders to bid cash. They still won: after a first auction result was voided, the lenders beat Raymond Perelman at a September 2010 auction with a $139 million bid.

A $562 million deal rested on $390 million of debt; shareholders were wiped out and the papers sold for $139 million — a quarter of the 2006 price.

The purchase loaded $390 million of debt onto two structurally declining newspapers; the Inquirer's circulation was already falling 11% a year at the filing.

Management framed the problem as 'our debt, not our operations,' but no restructuring could restore the classified advertising the internet had taken.

The team spent its leverage on litigation: the no-credit-bid strategy became Third Circuit precedent, yet winning it only made lenders pay cash — it did not save the equity.

The debtors' own plan valued the papers far below the debt: $37 million of cash plus $29.5 million of real estate against about $300 million of secured claims.

An LBO of a declining business moves all risk into the capital structure. The papers won the most famous credit-bid fight in bankruptcy history — and still lost the company.

Tierney stepped down as CEO in May 2010, replaced by restructuring adviser Joseph Bondi. The lenders' consortium took the papers as Philadelphia Media Network, closing the $139 million purchase on October 8, 2010 after settling with the papers' fourteen unions — a 20-month case overseen by Judge Stephen Raslavich. The Third Circuit's no-credit-bid ruling became famous teaching material, but the Supreme Court later rejected the strategy in the RadLAX case in 2012, and the Inquirer and Daily News survive under later owners.