As economy sinks, McClatchy’s plan for quick sale hits roadblock in bankruptcy court
McClatchy Co.’s attempt to quickly exit bankruptcy by finding a buyer hit a snag Wednesday when a federal judge ordered all parties to reach an agreement on the sales process even as the nation’s economic uncertainty deepened.
The local media company had asked bankruptcy Judge Michael E. Wiles to sign off on modifications to some terms of its bankruptcy financing. Also in the motion was the first official notice that the company has been speaking to potential buyers, prompting objections from a committee of less protected creditors as well as the trustee serving as an independent watchdog in the case.
Wiles must approve the sale of the bankrupt company, so pursuing buyers before obtaining the court’s input on the process puts any potential deal at risk, the judge said.
“I cannot say strongly enough how crazy that seems to me,” he said, ordering the parties to come back to him Monday with an agreement on process, or risk having him decide. “Maybe you don’t trust what I will do with a sale process?”
The less-protected, or “unsecured,” creditors fear that the company’s two biggest lenders, who have offered to assume control of the company and stand to benefit most from any sale, will squash their interests.
McClatchy is concerned that prospects of a quick restructuring might be slipping away. The company’s lawyers argued Wednesday that adding potential delays on the front end of a sale process could be harmful.
The sale discussions are occurring in parallel with mediation talks between the company and the least-protected creditors, aimed at reaching an agreement to restructure debt under the Chapter 11 process.
Wednesday’s often-contentious hearing offered the first glimpse into those private talks, and neither side even hinted at a breakthrough. Both said they’ve been slowed by the inability to have face-to-face discussions after the coronavirus pandemic shut down much of the country.
Company executives began speaking with potential buyers April 18, lawyers told the court in filings made April 16. Although the sales process doesn’t require his blessing, Wiles warned that failure to involve him from the start was risky.
“We are very confident that you will be satisfied with the process,” McClatchy’s chief lawyer in the proceedings, Van C. Durrer II of Skadden, Arps, Slate, Meagher & Flom LLP, told Wiles on Wednesday.
Wiles was not persuaded.
“It’s not the right thing to do,” he said.
In a statement Wednesday night, Durrer said work to fulfill the judge’s order was under way.
“We appreciate Judge Wiles’ encouragement for an agreed path forward, which we have already begun. If needed, we will file the appropriate motions and materials with the court confirming our business judgment,” the veteran lawyer said. “Our goal, as it was at the outset of this case, is to resolve this process and emerge stronger for all of the stakeholders who rely on McClatchy.”
The April 16 filing by McClatchy’s top two creditors — hedge funds Chatham Asset Management and Brigade Capital Management — invoked a bankruptcy code provision that would effectively allow them to assume control of the company.
The provision set up the hedge funds as a so-called stalking horse bidder, signaling that they’d take over the company absent an offer above their price, described as “well in excess” of $300 million.
In its response to the filing, the committee of less protected creditors called on the judge to intervene.
On Wednesday, Wiles cautioned that Chatham and Brigade “have dual interests,” meaning they have an interest in being made whole and in potentially acquiring the company.
Andrew N. Rosenberg, the outside counsel for Chatham, was blunt when describing the urgency of an accelerated sale. The world has changed, he noted, in the almost 2 ½ months since McClatchy proposed a restructuring that would allow it to emerge from bankruptcy owned by Chatham.
Available funding is drying up, Rosenberg said.
“It does have an expiry [expiration date],” he said, declining to discuss company finances in a public hearing. “This was tight to begin with, and it is much tighter now.”
Chatham doesn’t care who ultimately owns McClatchy, it only wants an expeditious sale, he said.
“We are happy to have someone outbid us,” Rosenberg said.
But Kristopher M. Hansen, the lawyer for the Committee of Unsecured Creditors, called the funding claims a “smokescreen” and painted a rosier outlook.
“Candidly, the shift to the digital platform has actually helped them,” said Hansen of Stroock & Stroock & Lavan LLP, referring to the move away from newsprint to online publication. He added, “the pandemic is starting to ease.”
After the April 16 filing, McClatchy chief executive Craig Forman said in a statement that about 20 interested bidders were reviewing the company’s finances. The company’s outside lawyers confirmed Wednesday that 20 parties were examining the company’s books.
McClatchy’s lawyers also warned in court that potential anti-trust issues could delay completion of a sale, a sign that large media outlets are likely among those considering a bid for the company.
Executives have declined to discuss the potential buyers, citing non-disclosure agreements. But McClatchy has previously acknowledged that it twice tried unsuccessfully to merge with another chain, widely reported to be Tribune, before declaring bankruptcy in February.
After consolidations, only two other major chains remain in the industry: MediaNews, whose holdings include The Denver Post, and Gannett, which recently merged with GateHouse and is the nation’s largest.
In a sign of the turmoil brought by the virus, Wednesday’s hearing was conducted over the internet and telephone rather than in U.S. Bankruptcy Court for the Southern District of New York because of stay-at-home orders issued by Gov. Andrew Cuomo.
In other developments Wednesday, Wiles allowed McClatchy to sell a parking lot it owns in downtown Raleigh, N.C., for $1.5 million.
The judge also let the unsecured creditors committee hire a specialist in complex financial instruments called Credit Default Swaps, to gauge if the hedge funds that restructured McClatchy’s debt more than a year before the bankruptcy filing engaged in a form of insider trading of private securities.
Left for a future hearing was a request by a group of about 220 former executives from McClatchy and Knight Ridder, which was acquired by McClatchy in 2006, to reinstate special supplemental pensions for former senior company officials. These were terminated in January ahead of the bankruptcy filing.
Shortly before Wednesday’s hearing began, the Commerce Department reported a first-quarter contraction of 4.8 percent for gross domestic product, the broadest measure of U.S. economic activity. That economic plunge was caused by the pandemic, which has complicated both McClatchy’s operations and the bankruptcy process.
Earlier this month, the company announced initial cost-cutting measures that included temporary furloughs for some advertising employees amid the downturn in advertising. No journalists were affected in that announcement.
Sacramento-based McClatchy operates newsrooms in 30 markets, including the Miami Herald, the Kansas City Star, the Sacramento Bee, the Charlotte Observer, the (Raleigh) News & Observer and the Fort Worth Star-Telegram. The company has been controlled by the McClatchy family since the time of the California Gold Rush.
Editor’s note: This story has been updated to correct the date of the filing announcing McClatchy’s sales process to April 16. (Updated: 4:45 pm Eastern, 4/29/2020)
This story was originally published April 29, 2020 at 11:09 AM with the headline "As economy sinks, McClatchy’s plan for quick sale hits roadblock in bankruptcy court."
