The parent of the Orange County Register may end up turning over majority ownership to bondholders in exchange for eliminating some or all of its debt, according to sources familiar with negotiations over the company’s $700 million debt.
The move would come at the expense of Irvine-based Freedom Communications Inc.’s current owners,private equity firms Blackstone Group LP of New York and Rhode Island’s Providence Equity Partners LLC, as well as members of the Register’s founding Hoiles family.
The private equity firms bought into Freedom in 2004 in a deal that kept majority ownership with descendents of founder R.C. Hoiles.
Freedom has spent the past year working with lenders. Last fall, the company went into technical default on terms agreed to with lenders after shrinking profits put its debt at more than five times profits for a 12-month period.
In April, former Chief Executive Scott Flanders struck a deal with a group of lenders that extended until Dec. 31 the time Freedom has to meet the terms of its debt.
As part of the extension, the company prepaid some principal payments due this year as well as an amendment fee.
The debt stems from a $2 billion deal five years ago that saw Blackstone and Providence buy half of the company from Hoiles family members who wanted to cash out.
Freedom’s owners and directors now seem to be leaning toward handing over majority ownership to bondholders in order to forgive some or all of its debt, according to sources familiar with the company.
The banking groups that hold most of Freedom’s debt likely would reorganize management, said Burl Osborne, interim chief executive at Freedom in a recent interview with the Orange County Register.
Under this scenario, “The bank groups then take control of the company,” he said. “They’ll assign a new board of directors and hire their own CEO.”
Osborne was brought on in July to take over for Flanders, who left to run Chicago-based Playboy Enterprises Inc.
Osborne has stressed his position as interim chief executive is “a temporary assignment.”
“I came into this with the understanding that when the restructuring is completed and executed, then the existing board and ownership will decide who should be the next CEO,” Osborne said.
What is unclear about the transfer of ownership to the bondholders is what will happen to the family and private equity stakes.
According to sources, the stakes of the current shareholders still are to be negotiated.
Typically in stock swaps for debt forgiveness, existing shareholders end up losing most if not all of their stakes.
The Hoiles family has the most to lose.
The family has remained deeply involved in the company. Family members could retain minority ownership but lose their controlling interest. The private equity firms could end up writing off their stakes in Freedom.
“The family may retain some minority ownership of the company, though one can’t be certain of anything,” Osborne said.
If lenders end up owning the company, Freedom could end up being sold,something the family has fought against for years.
A sale in the near term is unlikely with few identifiable media industry or private equity buyers.
The lenders could end up restructuring the company and holding on to it for several years until the market improves.
Years ago, several media companies courted Freedom with interest in buying the Register and its other properties. They included Sacramento-based McClatchy Co. and Chicago-based Tribune Co.
But now, many of the major newspaper companies in the country are suffering from debt and revenue issues similar to Freedom.
Freedom, which has yearly revenue of more than $600 million, also owns and runs TV stations and magazines.
There has been talk about Freedom considering bankruptcy, among other options.
“It is possible, but unlikely,” former boss Flanders told the Business Journal in March.
Osborne has suggested the process with the banks could take several courses including a bankruptcy or out-of-court reorganization.
“It’s possible to have a consensual agreement that is executed out of court,” Osborne said. “If the bank group did not all agree, then it could go into Chapter 11 bankruptcy reorganization in a consensual filing, but that does not mean the company is bankrupt.”
The Register is seen as being able to pull through in either scenario, publisher Terry Horne said in an interview with the daily newspaper.
“The Register will be strongly positioned under the new ownership because we will have less financial burden to deal with,” he said.
It’s unlikely the bondholders would shut down the Register, which according to Horne, “is operating with double-digit operating margins” after extensive cuts to its operations.
