Is smaller bigger at CL?
So, let’s say the flagship weekly of your newspaper company lost around 30 percent of its print advertising in three months, suffered similar results at its other papers, threw its scarce cash at bankruptcy lawyers and financial advisers, and was spanked with unceasingly bad publicity during that time. Oh, yeah: You’re also in the midst of the worst recession in at least 27 years.
How could you come up with an argument that the company actually gained value over that time?
That’s the challenge facing Creative Loafing Inc. CEO Ben Eason in U.S. Bankruptcy Court in Tampa this afternoon.
Eason fired me as CL/Atlanta’s editor in November for arguing that he should cut administrative costs a little before hatcheting editorial and sales yet again, so you can take what I write about this subject with a grain of salt. But, honestly, my interest in writing about this isn’t vengeance: My heart is breaking over what’s happening to CL, and I desperately want to see the media organization I helped build survive — and thrive.
Eason took company into Chapter 11 bankruptcy protection on Sept. 29, two days before his main lender might have held him in default over taken control of the company from him for defaulting on a $30 million loan. At the time, CL/Atlanta was running around 100 pages. By the week I was canned, it had dropped to 80 or 88 pages. Then, each week in December, it ran either 64 or 72 pages.
Things appear to have gotten worse since December. I peak into the CL box with mixed feelings each Tuesday night to find a disturbingly thin publication. In January — always a slow month — the Atlanta paper was regularly down to 64 pages. But in February, when ad lineage usually ramps up, the paper got down to 56 pages — a size I’m told it hasn’t been since the mid-1980s. I think it’s been above 64 pages only once this year. Who would’ve guessed that CL — an established brand with award-winning coverage — would so suddenly fall that it now produces a smaller paper each week than the upstart Sunday Paper?
I’d be lying if I didn’t admit a sense of vindication — that Ben, with whom I disagreed so often over the eight years I worked for him, reaped what he sowed. But my more potent emotion is fear: A fear that something we that we grunts in Atlanta had built into a significant media organization (in spite of Ben’s misguidance, rather than thanks to it) was being driven into the ground.
Today’s Bankruptcy Court hearing isn’t about such grand issues as justice or, say, about the ideal that a newspaper belongs, in some sense, to its community as much as to its shareholders. The hearing is a bit more technical than that. It doesn’t even cover what’s happening on the ground right now. It stems from a November motion by Atalaya Capital, Creative Loafing’s $30-million creditor, requesting that the court give Atalaya control of the company — in part because the longer Eason controls it, the more CLI’s value drops. A couple of months ago, the judge scheduled this week’s hearing to determine whether the Creative Loafing Inc.’s value had dropped from the Sept. 29 bankruptcy filing through Dec. 31.
If the value did drop during that time, Atalaya would be able to back up its argument that CLI needs to be taken out of Eason’s hands for its very survival. If the value was low to start with and had risen since, Eason could claim he was righting the ship and should be given a chance to manage the company out of bankruptcy.
Not surprisingly, Atalaya’s expert argued yesterday that the company’s overall value dropped from $19 million to $11.4 million. Given the shrinking page-count of CLI’s newspapers (while other cities’ papers haven’t shrunk as dramatically as Atlanta’s has, they’ve declined pretty steeply as well) and the documents showing lower and lower revenue numbers that Ben’s gang has filed to the Bankruptcy Court, it seems likely that CLI would fetch less (if it were for sale) after three months of Chapter 11 than before.
So, how will Eason argue this afternoon that the company’s somehow gaining value? I suspect the trick will lie in trying to convince the Court not that he’s getting more revenue, but that he’s getting more revenue of the right kind. Specifically, he’ll claim that more revenue is coming from online ads. From the standpoint of a company’s valuation, the argument goes, money that comes from online ads promises more revenue for the future (because it’s likely to grow), while money that comes from print ads doesn’t raise the value as much (because you can expect that number to shrink over time).
There’s some validity to the argument. Current employees confirm that online audience in Atlanta is continuing to grow — just as it was growing during the months before I left (except for that last point, I’m not going to share in this article any information that I learned as editor in Atlanta). Whether the increased audience brings in enough revenue to offset Creative Loafing’s shrinking position in the print market is another question. For one thing, online ads are notoriously cheap, so the amount of traffic you’d need to cancel out disappearing print ad revenue is enormous.
Of course, it would be pretty easy for a print publisher to make it look as if he was getting more revenue from online than he really was getting. All he’d have to do is weight the revenue coming from clients who were buying both print and online ads, more heavily toward online. Let’s say the client was spending $1,000 on print and $100 on online. Change the way that money is booked to $800 for print and $300 for online. Voila! Your company is suddenly more valuable. Even if the advertiser was spending less money with you — say $700 print and $300 online — the valuation expert you hired to testify for you might claim the company’s value had risen.
I’m not saying that’s what Eason’s doing, mind you. The point is that the more I’ve watched this drama unfold, the more I am amazed that decisions are made by the way things look on spreadsheets and by narrow legalistic arguments rather than on what is going on in the real world. Maybe, that’s the way bankruptcy cases have to role. And maybe the consequence won’t end up jeopardizing the jobs of 240 or so people who still work for Creative Loafing Inc.
But it is pretty evident that Eason is caught in the cycle of doing more to impress the Bankruptcy Court than he is in doing what needs to be done to build the company’s future. Can you blame him? It’s not surprising, for example, that he made sure that a long-awaited Atlanta homepage redesign and Charlotte food blog went up this week — just before the hearing. (For the record, I’m in awe of what my former staff, as well as Atlanta Online Producer Alejandro Leal, have been able to achieve in the midst of the company’s mess!)
Still the hard facts on the ground are that Creative Loafing has been shrinking for sometime, and at least physically right now, this once-promising media institution appears to be taking a nosedive. All you have to do is pick up the paper and weight it in your hands to figure that out. I worry, though, that what happens in the world of financiers and courtrooms reflects the reality of Creative Loafing about as well as mortgage-based securities reflected the reality of real estate.
The question is: Will the the Bankruptcy Court figure out what’s going on on the ground before it’s too late?
Bulkley not new to CL
Turns out that the financial services company that Creative Loafing Inc.’s lead creditor plans to turn to if it gains control of the troubled alt-weekly company has had some dealings with CL before: Bulkley Capital shepherded the 2007 sale of the Chicago Reader and the Washington City Paper to Creative Loafing Inc.
According to Bulkley’s website:
Bulkley Capital was called upon by two of the country’s leading alternative weekly newspapers, the Chicago Reader and the Washington City Paper, to represent them through final negotiations and due diligence in their sale to Creative Loafing, Inc., owner of alternative weeklies in Atlanta, Tampa, Sarasota and Charlotte.
Tom Yoder, one of the owner of the Reader and the City Paper, is featured in a testimonial on the Bulkley website lauding the company for its discrete handling of the deal: “Bulkley Capital was extremely useful in advising us, keeping the deal on track and sheperding it through to a sale. It was completely top-secret. And we ended up astonished that word never got out – astonished and delighted.”
The 2007 transaction didn’t turn out to be as good for Creative Loafing as it was for the 11 former owners of the Reader and the City Paper. CLI CEO Ben Eason borrowed $40 million to buy the two altweeklies and to retire a existing $16 million debt. On Sept. 29, 2008, when he was about to be held in default because he couldn’t make scheduled payments, Eason took the company into Chapter 11 bankruptcy protection. For the time being, that’s prevented Atalaya Capital, an investment fund, from taking control.
Today, in a hearing that could determine whether Eason must finally turn the company over to Atalaya, an Atalaya official announced that the investement fund had contracted with Bulkley Capital to help manage CLI. At the same time, as its own description of the Reader/City Paper deal makes clear, Bulkley has a track record of arranging sales:
The owners were seeking a buyer with a proven track record and a clear plan for taking the papers to the next level, while maintaining the strong culture and commitment to quality they had established for their readers and employees. Bulkley Capital worked alongside the shareholders to evaluate the buyer’s operations and plans for integration. Despite a challenging environment in the publishing industry, which has seen increased competition and a decline in readership and advertisers, Bulkley Capital succeeded in negotiating and consummating a complex transaction that achieved the economic and structural goals of the selling shareholders, including separate treatment of and added value for the real estate holdings.
The usual disclosure: I’m the former editor of Creative Loafing/Atlanta. Eason fired me in November after I suggested that he cut his corporate and administrative expenses before continuing to cut Sales and Editorial.
Atalaya: Keep CL alive
(See update to this this story here.)
The investment fund that is the main creditor of Creative Loafing Inc. would keep its six papers going and pump more resources into them than current management has been willing to spend, the fund’s media specialist testified today in U.S. Bankruptcy Court today. But only if CEO Ben Eason and the rest of the team that got Creative Loafing into its bankruptcy mess were forced out.
From CL/Tampa’s Wayne Garcia:
Atalaya partner Michael Bogdan testified that the firm has hired another investment banking firm with media experience, Bulkley Capital of Dallas, Texas (with an office in Atlanta, the home of CL’s largest newspaper) to advise it and provide “management assistance” in running the CL papers if it is successful in court today.
… Bogdan said his investment firm would be willing to spend more money to increase revenues at the newspaper chain, but only if it can displace the current management and ownership. He said Bulkley is familiar with alt-papers and advised the Chicago-DC paper owners in their 2007 sale to CL. Bogdan said Atalaya would seek to publish “a quality publication” in order to maximize its investment. He also said the lender is concered about the CL workers. “We’re concerned with the morale of the employees,” a fact Bogdan said he gleaned from “reading in blogs.” Federal Bankruptcy Judge Caryl E. Delano disallowed the blog-related testimony after an objection from CL’s attorney, David Jennis.
Bulkley sounds as if he’s set up to help manage and sell media companies rather than to shut them down. This undermines the public claims of CLI CEO Ben Eason that Atalaya would shutter the papers if it wrested control from him.
In case you didn’t know, Eason fired me in November for urging him to cut his administrative staff a wee bit before continuing to axe Sales and Editorial. So, consider my reporting on this with that in mind.
Still, facts are facts: Eason’s own Bankruptcy filings show that he’s cut both Sales and Edit, while he’s failed to cut the General & Administrative budget that includes his salary and those of the people closest to him. The result has been disastrous, particularly in Atlanta, where the print product is now regularly smaller than the upstart Sunday Paper. And now Eason’s claim that Atalaya would shut down the papers — rather than try to get its investment back by operating it or selling it — sounds even less credible.
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