Bankruptcy: Lee Enterprises follows an American Business Tradition

How would Joseph Pulitzer, founder of the St. Louis Post-Dispatch in 1879, respond to news that the newspaper’s current parent company, Lee Enterprises, Inc., on December 12, 2011, filed for Chapter 11 bankruptcy protection?

It is safe to assume that Pulitzer knew that with every shift of an industrial paradigm, bankruptcy filings can mount up as high as the piles of pennies young children donated in Pulitzer’s campaign to fund installation of the Statue of Liberty in 1885. His newspapers in St. Louis and New York covered paradigm shifts as railroads outmoded wagon trains, electricity replaced gas lamps, and old technology companies began to unravel.

Bankruptcy is an American business tradition, particularly in times of industrial change. While not necessarily the most welcome of business customs, the reorganization of a company’s debt has enabled many organizations to emerge from fiscal disaster better-equipped to survive another day and, often, prosper over the long haul. This is evident among U.S. industries ranging from airlines to automobiles, building materials and, yes, even newspaper companies.

Lee Enterprises of Davenport, Iowa, acquired Pulitzer, Inc., owner of the Post-Dispatch and other media properties, in 2005. The St. Louis daily became the flagship in a Lee publishing empire of more than 50 small- and middle-market U.S. newspapers. That $1.46 billion acquisition was enabled almost entirely by bank debt. The deal occurred after the “Dot.com bust” of the 1990s, but on the leading edge of a digital media typhoon that empowered today’s increasing influence of online newspapers, magazines, web TV and social networking that seemingly dominates business and consumer communications while offering dynamic, new advertising options.

Some observers today comment that Lee bought Pulitzer just as the tsunami of a new industrial paradigm was transitioning from print-based publishing, with its reliance on production employees, unions, vendors and distributors, to digital publishing and its lightning-fast, 24-7 worldwide communications advantages. Within a few years, observers say, Lee apparently got swept up in a kind of publishing riptide, as did other newspaper companies, in part the result of rising paper costs, higher fuel costs for delivery trucks, plus skyrocketing insurance benefit premiums for employees. Lee’s acquisition debt load was another millstone around its neck.

On December 12, the Post-Dispatch reported that Lee had filed for Chapter 11 protection as part of a debt refinancing plan it had successfully negotiated with creditors. In its filing, Lee listed $1.15 billion in assets and $994.5 million in liabilities, as of September 25, and noted it had secured agreements with most of its creditors and expected the company to emerge from bankruptcy in 60 days or fewer.

“Our ability to operate as a going concern is dependent on our ability to obtain approval by the U.S. Bankruptcy Court of the refinancing plan approved by creditors and to generate cash flows and maintain liquidity sufficient to service our debt,” the company said in a statement.

As the Post-Dispatch reported, this “pre-packaged” refinancing plan will increase Lee’s higher interest payment to an average of 9.2 percent interest rate on its debt versus 5.1 percent currently. Lee said it can meet that interest level while also paying down its principal. Its newspapers do generate an operating profit, the company says. Yet in recent years Lee has “suffered from declining circulation and advertising revenue brought on both by the sluggish economy and the migration of advertising revenue and readers to the Internet.”

Because of the paradigm shift in publishing industries – and the resulting riptide — Lee Enterprises’ Chapter 11 filing is another reminder that American newspapers need the same kind of bankruptcy solution that has shored up other troubled U.S. industries.  For example, Chapter 11 reorganizations have:

• Helped large companies such as Johns Manville (whose origins date to before Joseph Pulitzer’s day) recover from the effects of accumulated business mistakes of the past.
• Reduced massive debt among scores of large businesses and corporations by enabling a restructuring of corporate organizations and transforming creditors into shareholders by paying debt with stock.

• Given companies time to revamp union contracts and, sometimes, offer union employees ownership stakes in the companies, creating new business momentum.

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• Allowed companies with excessive debt to be sold in efficient auction processes that would not have been possible outside of bankruptcy.

Lee’s filing during the same month as American Airlines’ parent company AMR Corporation announced it would enter bankruptcy is a reminder that nearly every other historic U.S. air carrier, including United and Delta, has used bankruptcy to keep flying during troubled times by shedding costly labor contracts, reducing debt with new financial agreements and generating positive cash flow, or to merge with stronger players.  Likewise, the Obama administration’s success in stabilizing the auto industry would not have been possible without a Chapter 11 process.

Clearly, the U.S. newspaper industry is in the midst of a paradigm shift as Americans increasingly obtain their news from Internet portals and handy digital tools, not the least of which are cell phones. Today, print newspaper readership is decreasing, fewer people under age 50 are signing up as new subscribers, and advertiser shifts to digital media, including newspaper websites and blogs, is escalating fast.  Some newspaper companies have been successful in navigating this paradigm shift, such as in Philadelphia, where a new media company was formed after the parent company of two leading dailies entered bankruptcy, while many others have not. In recent years, once-powerful daily newspapers across the nation, such as the Cincinnati Post, Honolulu Advertiser, Oakland Tribune and Rocky Mountain News, have met their last deadline.

The good news: Chapter 11 bankruptcy reorganizations have helped the U.S. steel industry, the asbestos industry, airline industry, auto industry and others build bridges for companies that are forward-thinking and efficient. Chapter 11 will float Lee Enterprises out of the riptide of potential default and postpone its day of reckoning. One key for Lee will be whether its management, employees, unions and vendors can adapt to changing circumstances in our dizzying digital world, and with business models that can be profitable in the new industrial paradigm of high-powered online media platforms.

Chapter 11 does give ailing newspapers and other industries time to address needful changes. The outcomes – virtually impossible to predict right now — will depend on the quality of future management and healthy doses of good luck.

David A. Lander is Co-Chair of the Business Bankruptcy Practice Group at Gallop, which is one of the largest law firms headquartered in St. Louis, Missouri. Mr. Lander was recently reappointed by Chief Justice of the U.S. Supreme Court John G. Roberts, Jr. to serve a second, three-year term on the influential Advisory Committee on Bankruptcy Rules, a unit of the nation’s Judiciary system whose members develop policy and recommendations generally impacting all U.S. bankruptcy courts and their procedures. Mr. Lander can be reached by calling 314 615 6000 or via email at David.Lander@galloplaw.com.