A "Vanity Asset" Heads To The Auction Block

By Ralph Cipriano
for Bigtrial.net

The Philadelphia Inquirer is a "vanity asset" that should be disposed of at a private "English-style" auction.

That auction should feature "open, ascending serial bidding" restricted to the two current feuding ownership factions, who presumably between servings of tea and crumpets, would have the option to buy each other out.

With an English-style auction restricted to the current owners, continuity and confidentially would be preserved, and the struggling newspaper would have a chance to succeed economically, according to the ownership faction led by South Jersey Democratic boss George Norcross.

The rival ownership faction of  Lewis Katz and H.F. "Gerry" Lenfest disagrees. They seek court appointment of a receiver, who would oversee a public auction with sealed bids. After all the envelopes are opened, the city's paper of record would be sold to highest qualified bidder. The primary goal of the Katz-Lenfest faction would be to obtain the highest sales price. Katz and Lenfest say the limited English-style auction proposed by Norcross would "artificially restrict" that sales price.

The two alternative auction proposals were outlined in court papers filed today in the Delaware Court of Chancery, where Vice Chancellor Donald F. Parsons Jr. will oversee the sale of Interstate General Media [IGM], owner of the Inquirer, the Philadelphia Daily News, and the philly.com website. Predictably, the feuding ownership factions can't agree on anything.


Norcross, and two other IGM co-owners, William P. Hankowsky and Joseph Buckelew, foresee dire consequences with a public auction.

"A public auction would force IGM to spend very large amounts of money on setting up a data room, providing access to the key officers and employees and hiring investment bankers and lawyers," said P. Clarkson Collins Jr., the Wilmington lawyer representing the Norcross faction in the Delaware courts. "And all of those costs would be compounded by the inevitable flood of curiosity seeking bidders who appear whenever a vanity asset is on the market."

"Unfortunately, like many newspapers, IGM, owner of the Philadelphia Inquirer, the Daily News and philly.com, has suffered financial losses in recent years," Collins writes. "As just one indicator, on April 2, 2012, IGM purchased the company owning the Inquirer [Philadelphia Media Network, Inc. or PMN] for approximately $61 million. This was 44 percent of the $139 million paid for it just 18 months earlier in September of 2010, and less than 12 percent of its $515 million purchase price in 2006."

"With decreasing numbers of subscribers and difficulties adjusting to the digital age, newspapers face many challenges in the near future in order to survive," Collins writes.

At a public auction, "given the record loss in value over the last several years, a third party considering investing will want to obtain as much information about the company and its executives as possible," Collins writes. An optimistic estimate would be 90 days.

"It would be another four months before new executives could be reeducated and hired," Collins warns. "IGM and its employees cannot afford a continuing state of paralysis for two months, much less seven or more months. And the deterioration of the entity that will take place during a public auction process will almost inevitably result in a lowered value for the current owners, not a higher one."

The Katz and Lenfest faction disagree, saying that a public auction could be done in a timely fashion.

They ask the Delaware Court to appoint a receiver, who would announce the public auction of IGM. For a period of 30 days, the court-appointed "receiver will 'shop' IGM to potentially interested purchasers, who will have access to a data room compiled under the supervision of the receiver, to allow for due diligence," wrote Collins J. Seitz Jr., the Wilmington lawyer who represents the Katz and Lenfest ownership faction in Delaware's Chancery Court

At the end of 30 days, the receiver will "invite all interested parties who meet the requirements of a qualified bidder to submit a single, sealed bid." The primary concern is "which liquidation method will maximize value for all" of the company's current owners.

"A public auction in which multiple parties submit sealed bids for all of IGM's assets ... will provide for the value-maximizing sale that Delaware law requires," Seitz writes. In contrast, Seitz writes, "English-style' bidding [would be] limited to the two current ownership factions," which would "artificially restrict" the sales price.

Seitz proposes a court hearing of no more than two days, at which the Katz and Lenfest faction "will demonstrate through expert testimony that the public auction ... has a greater likelihood of yielding a higher sale price for IGM than a private sale limited to only two participants."

Sealed auction bids "are often employed to maximize value," Seitz argues. "A single-sealed bid is a preferred approach when bidders will include groups who hold material equity positions in the auctioned entity."

Because the current owners can't agree on anything, the new owners will have their work cut out for them. They will have to hire "the four most senior management positions" -- a new publisher, new editors of the Inquirer and philly.com, and an executive in charge of production and distribution, Collins writes.

The Norcross faction warns that another possible monkey wrench in a public auction might be confidentiality.

IGM's LLC agreement "prioritizes confidentiality, including a robust confidentiality provision binding" the current owners, Collins writes. "A public auction requires no confidentiality of finances and other confidential affairs of IGM and PMN."

A private auction, Collins argues, would also stabilize ownership until 2016, at a company that has "seen multiple changes of ownership in recent years."

"The current management deadlock goes beyond selecting a new publisher and new editors for The Philadelphia Inquirer and philly.com," Collins writes. "It extends to being unable to retain key employees and to attract able executives. It delays the implementation of the negotiated profit sharing agreement" with the newspaper's unions. "Talented people do not want to endure a protracted management impasse and the uncertainty it engenders."

"The same is true of key revenue sources like advertisers," Collins writes. "Uncertain about advertising polices going forward, advertisers are reluctant to enter into renewal agreements and can easily decide to move to other outlets. The fact is that the company needs to act quickly to stem the loss of advertising revenue. Delay will make that extremely difficult."

IGM "is not currently in bankruptcy with creditors knocking on its door but the current management deadlock puts it in immediate peril," Collins concludes.

"Although IGM's ownership might be faulted for the inability to resolve their differences, they at
least had the foresight to require that a dissolution prioritize speed, confidentiality and continuity of ownership over 'maximizing value' in the short term for the selling parties," Collins writes.

He urges the Chancery Court "to recognize the intent of the [current] owners, as well as the need for a quick resolution, and order an immediate private auction among the existing owners."

The Katz and Lenfest faction, however, sees no value in any continuity of ownership "among the original members of IGM."

"This contention is meritless," Seitz writes. "Ultimately these provisions of the LLC Agreement presuppose a board not subject to deadlock and have no bearing on a judicial dissolution ordered by this Court." A private auction would "artificially restrict the price that IGM's members will receive as a result of the sale of assets," Seitz argues.

The Newspaper Guild's motion to intervene in the current dispute "demonstrates that there is interest outside of the current ownership in bidding on IGM," Seitz concludes. "Additional  bidders will promote an even greater sale price."

While the battle over the upcoming auction plays out in the Delaware courts, IGM's feuding ownership factions are still going at it in the Pennsylvania courts.

In Pennsylvania Superior Court today, Philadelphia attorney Richard A. Sprague, acting on behalf of Katz and Lenfest, filed an appeal of Philadelphia Common Pleas Court Judge Patricia McInerney's Feb. 18 opinion where she declined to take jurisdiction over the breakup of IGM.

Judge McInerney opted to defer to the Delaware courts, as IGM was incorporated in Delaware, and according to its limited liability agreement agreement, the company should be dissolved under terms of the Delaware Limited Liability Act.

In her order, Judge McInerney declined an emergency petition from Sprague for dissolution and a request for an appointment of a trustee.

"IGM was created in Delaware and therefore should be dissolved ... by a judicial decree entered by a Delaware court," Judge McInerney wrote. "In this particular case, the parties sought judicial relief per the Delaware Limited Liability Act. As such, this court did not have jurisdiction."