Star Tribune will exit Chapter 11

A federal bankruptcy judge in New York on Thursday approved the Star Tribune's reorganization plan, clearing the way for the Minneapolis newspaper to exit bankruptcy on or about Sept. 28.

The nation's 14th-largest daily newspaper will emerge with new owners, lower costs and reduced debt. But, like publishers around the country, it faces a weak advertising market and is struggling to find a way to make money from readers and advertisers who have migrated to the Web, cable television and other outlets.

The confirmation comes about eight months after the 142-year-old Star Tribune filed for Chapter 11 bankruptcy protection amid one of the most disastrous post-war declines in advertising. The newspaper couldn't make the expensive debt payments it was saddled with after New York-based Avista Capital Partners borrowed heavily to buy the newspaper in 2007 from the McClatchy Co. for $530 million.

Financial projections prepared by the company show that it won't turn a profit until 2013, but those figures include between $14 million and $16 million annually in non-cash charges. Without those, the company maintains that it will generate enough cash to fund operations and make its debt payments.

Judge Robert Drain confirmed the newspaper's plan despite the fact that the steering committee of the secured creditors still hasn't announced a new combined CEO/publisher for the company, drawing objections from the committee of unsecured creditors that asked the judge to force the CEO to be identified before confirming the plan.

A candidate for publisher has been identified and is expected to be announced in a few days, the judge was told. Marshall Huebner, the newspaper's bankruptcy attorney at Davis Polk & Wardwell, said in an interview that the steering committee of the lenders who will own 95 percent of the company when it emerges, is still negotiating with a top choice who is employed elsewhere.

'Enormous de-leveraging'

In approving the plan, Judge Drain cited "the enormous de-leveraging of this debt."

"I was pleased by the fact that management clearly shared in the sacrifices that everyone made," Drain said.

The center of the Star Tribune's overhaul plan is a debt-for-equity swap in which the newspaper's top secured creditors -- mostly investment banks and distressed or "vulture" debt investors -- agreed to exchange about $480 million in debt for ownership shares in the new newspaper company plus just $100 million in new debt.

Angelo Gordon & Co., a private equity group in New York with an interest in distressed newspapers, has been leading the group of lender-owners. Other members include Wayzata Investment Partners, a private equity firm in Wayzata that spun out of Cargill Inc.; investment bank Credit Suisse; CIT Bank, and an affiliate of GE Capital.

Chris Harte, the Star Tribune's current publisher, issued a note to employees Thursday morning saying he was "elated" and plans to celebrate "our new beginning as a new company, with new ownership and a new lease on our future." But, he said, "In many ways, the next few months and years will test our mettle far more than bankruptcy did."

Timothy Graulich with Davis Polk & Wardwell told the judge that Harte "has been working without compensation [during the bankruptcy] to make the Star Tribune competitive again."

In an interview outside the courtroom, Graulich said: "It's up to the new board to take the Star Tribune in a new direction, but the company is far healthier from a financial perspective than it has been in years."

David Chanen, co-chair of the Star Tribune's Newspaper Guild unit that represents newsroom employees, said he was "miffed" about the management sacrifice comment, but said the guild was pleased the judge signed off on the plan.

"It's been very hard on our membership," Chanen said. "Hopefully we can focus on journalism now and not money."

It's not clear whether the new management will seek more job cuts.

Revenue at the Star Tribune has plunged by $165 million since 2006. The company said it has slashed about $91 million in costs during that same period, including an estimated $20 million in contractual concessions from its 10 unions while in bankruptcy. Since 2006 the Star Tribune has used a combination of buyouts, layoffs and eliminated positions to shrink its workforce by nearly 40 percent, or the equivalent of 779 full-time employees.

Nancy Barnes, the paper's editor, said the newsroom staff should feel proud of what they have accomplished over the past several years.

"Yes, we have challenges, but I am absolutely confident that the Star Tribune has what it takes to succeed going forward," she said. "While we have been in bankruptcy, we have grown traffic to our website. We have expanded and improved our mobile site. We've built several niche websites with more to come, and we still sell a half a million papers on Sunday."

The newspaper still faces formidable challenges to its business model, including the loss of highly profitable real estate and auto classified advertising. Even with its debt reduced, the Star Tribune must still make sizable interest payments. In the next few years, which is as far out as the published financial projections go, the newspaper's annual debt payments will be between $9.3 million and $10.3 million a year.

Initially, the new owners will be paying themselves, because they own the debt. But immediately after the newspaper emerges from bankruptcy both the company's debt and equity will start trading separately and changing hands, Huebner noted. Over the next year, the interest payments will likely go to other parties.

The reorganization plan is based on financial projections prepared by the newspaper's financial adviser, Blackstone Advisory Services. It estimates the Star Tribune will be worth between $118 million and $144 million, including the five blocks of real estate the newspaper owns in downtown Minneapolis and the printing plant on 19 acres near the Mississippi River.

The newspaper will exit with $27.5 million in cash on hand, and cash flow will grow significantly over the next few years if advertising revenue grows at the rate Blackstone projects: 7 percent in 2011 and 5 percent in 2012.

Mike Simonton, an analyst at Fitch Ratings, called the ad revenue projections "optimistic." Local advertising may bounce back as the economy recovers, he said, but competition from advertising outlets online will continue to pressure print classified advertising long term.

"Even under their assumptions, there's not much room to cover the interest expense associated with this lighter debt balance," Simonton said.

John Puchalla, a senior analyst at Moody's Investor Service, agreed. The $100 million in debt is fairly high relative to the projected earnings, he said. Specifically, it's about five times the company's so-called EBITDA -- earnings before interest, taxes, depreciation and amortization. The projections put EBITDA, or cash flow, at nearly $21 million in 2010 and annual interest payments of $9.3 million.

The core issue all newspapers need to address, Puchalla has said in reports, is that they spend nearly three quarters of their operating cash on printing and distributing newspapers and only about 14 percent on their main value-added product -- editorial content.

Puchalla said that charging for online content is one option, but not the only one.

"It's not clear to me that the advertising model online is the only way to go, or that charging for content is the only way to go," he said.