Tuesday, December 13, 2011

Red Ink by the Barrel

Lee Enterprises has filed a pre-pack Chapter 11, basically to force some dissenting creditors to go along with restructuring the company's massive debt load.  For months now this hasn't been a matter of "whether" but "when".  Lee, frankly, is a mess, and while it is pretending to be singing "Kum-Ba-Ya" with its largest creditors now, this looks like nothing more than a game of kick the can.

Full disclosure: I used to be in newspapers, and Lee publishes a lot of them.  Locally, it publishes the Provo Herald.  Back in my old, home territories, it publishes the Quad City Times and the Muscatine Journal (in Iowa) and the Lincoln Journal-Star (in Nebraska).  I worked for the Des Moines Register, and the Times was our chief rival in Eastern Iowa.  On the other hand, when I was in high school, the Star ran a feature article on me, complete with a picture of my not-so-smiling face, on the front page.  I guess that makes me neutral.

In all seriousness, you have to wonder who is driving the bus at Lee.  You can trace this train wreck to 2005, when the company acquired Pulitzer, Inc. (owner of the St. Louis Post-Dispatch) for a cool $1.5 billion.  Newspapers folding left and right and the industry in a general state of free-fall, and Lee decides to drop a bill and a half on acquisition.  Of course it was 2005, credit was cheap and loose, and the economy could only go up, just ask The Blessed St. Greenspan.  You can imagine the dollar signs in Goldman Sachs's eyes when it heard Lee was looking for financing.  You can imagine the pitchers glossing over the 1.5 billion things wrong with the deal, including the complete lack of supporting cash flow and acquisition value and the requirement for unanimous creditor approval for refinancing (which is what forced the Chapter 11).  Anybody who greenlighted this checked both brain and spine at the boardroom door.

Now GoldSacks and its cronies are getting a 13% piece of the action, and you can bet they won't put up with any management shenanigans.  And I expect the shenanigan attempts to commence soon.  Lee's plan defers the due dates on all those bonds, but the bonds are still there, ticking away, and its revenue stream is so poor it must have been handing out Swisher Sweets to celebrate the deal.  Lee certainly couldn't cover Montecristo A's.  On top of that, a big chunk of the debt isn't really deferred.  It's currently at 10.55% (Can Mary Junck say "Junk"?), and in a year the escalator clause kicks in.  There is no way Lee can cover that.  I figure that in perhaps two years, the creditors will pull the plug, part Lee out, and hold fire sales for the papers that are still standing.  And there will go a big chunk of what's left of this country's news media straight down the drain.

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