Filed under: Forecasts, Deals, Industry, Newspapers

Within the past years, several public newspaper companies have been pushed to the cliff of insolvency. They have taken on too much debt and the downturn in advertising has put them in a position where they cannot cover interest payments.

Journal Register was knocked off The New York Stock Exchange and is in the process of liquidation. The value of its properties has dropped so low that its common shareholders will get nothing and creditors won’t recover the amount of their loans. Gatehouse Media (NYSE: GHS) has traded under $1 for weeks and also face delisting. Odds are that its properties will have to be auctioned off.

Banks might be employing a new tactic in the hope of getting their money out of the newspaper industry. Extend loans, let the companies cut expenses to the bone, and pray that advertising will get superior. If it does, they might get their money back. McClatchy (NYSE: MNI), the nation’s third largest chain, was the next company in the industry to head toward liquidation. Based on a new lifeline from its creditors, it may dodge that for a while. According to The Wall Street Journal (subscription required), “The publisher of the Sacramento Bee and Miami Herald said Friday its banks concurred to loosen restrictions on the company’s level of debt compared to cash flow, and its ratio of interest payments to cash flow.”

The banks are making a big mistake. McClatchy’s has many of its properties in California and Florida were the economies could be troubled for years. By letting McClatchy stay in business, the banks are risking that the value of the company’s papers will drop even more. If McClatchy is sold off in pieces now, creditors might get most of their money back.

The holders of McClatchy’s debt may have saved the company, for a few months at least. They have also put themselves in a position to lose most of their money.

Douglas A. McIntyre is an editor at 247wallst.com.

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Filed under: Deals

With Borders’ (NYSE: BGP) efforts at a sale of the entire company so far producing no results, the company is coming up on an important deadline. Under a deal struck with hedge fund manager William Ackman, if the company doesn’t sell itself by October 1, Ackman’s fund will receive options to buy 5.15 million shares of the company’s stock at $7 per share. Given that that represents a good chunk of the company’s 60.5 million shares outstanding, any deal at a substantial premium would become a lot more high-priced after October 1.

The Wall Street Journal reports (subscription required) that since “shares of Borders are trading close to the exercise price of the warrants, Mr. Ackman is apt to wait to redeem them until the shares are well above their current level. If Borders misses the deadline to finish a deal and issues the warrants, Mr. Ackman stands to benefit even more from a sale and may begin to exert pressure on Borders to secure a transaction quickly.”

I’m not so sure about that. I think the problem is that no one wants to purchase Borders — Barnes & Noble (NYSE: BKS) reportedly lost interest after taking a look at the books — and the higher cost to a potential buyer that’ll come with the options allow will make a sale much less likely, however badly Ackman wants it.

Ackman already has a 35.6% stake in Borders, and shareholders are lucky to have someone as smart as him on their side, pushing the board of directors to maximize value. But it may be too late.

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