PHILADELPHIA—The bid was good enough for the seller, and that's what really matters, for now.
Still, the long-term future of Philadelphia Newspapers Inc. is tied to the financial terms that made possible the company's planned $515 million purchase by Philadelphia Media Holdings, LLC.
In a filing with the Securities and Exchange Commission, seller McClatchy Co. revealed that the bid includes a pledge by Royal Bank of Scotland to lend up to $450 million to Philadelphia Media, though the buyers say they won't need that much.
Other key details, including the interest rates and terms of the loans, are being withheld by McClatchy, Philadelphia Media and Royal Bank.
"What we've filed is what we need to file," McClatchy chief financial officer Patrick Talamantes said last week. Philadelphia Media is privately held, and doesn't have to disclose a lot of information, Talamantes noted.
None of the parties have said how much equity the buyers expect to raise by the time the deal is scheduled to close at the end of June. The more the buyers invest as equity, the less they'll have to borrow.
So far, the buyers have publicly identified close to $100 million in individual equity investments by members of the ownership group; people familiar with the group say the total has approached $140 million. Philadelphia Media Holdings Inc. general partner Brian P. Tierney says his group has been trying to raise additional equity to reduce the debt and improve prospects for making future investments in products and sales.
"It's a very complicated deal. There's a lot of moving parts," said Stephen Steinour, who played a key role in the deal as president of Royal Bank's U.S. arm, Citizens Financial Group, after the deal was announced last month.
Philadelphia Newspapers includes The Philadelphia Inquirer, Philadelphia Daily News, philly.com, the Northeast Times, and other print and online publications and advertising vehicles currently owned by Knight Ridder Inc. McClatchy announced a deal to purchase Knight Ridder in March and the deal is expected to be completed this summer. McClatchy is selling 12 Knight Ridder publications.
People familiar with the agreements say the financial package includes roughly $250 million in long-term debt, typically priced at slightly above the prime lending rate, which is currently 8 percent. The rest of the debt will have a higher interest rate, and is initially slated to come due in two to three years.
Like households, companies are supposed to keep their yearly debt payments well below their yearly income. Philadelphia Newspapers projected it should earn around $62 million this year, not counting interest, taxes, depreciation and amortization (EBITDA). Another key measure, cash flow, totals around $70 million; cash flow has risen at Philadelphia Newspapers in some recent years, as expenses dropped faster than revenue, according to people who have studied the numbers.
Commercial lenders typically frown on clients borrowing much more than six times their EBITDA earnings, though they are sometimes more liberal if cash flow is increasing.
By that rough standard, a company with Philadelphia Newspapers' cash flow could comfortably borrow up to $375 million. And that's roughly what Philadelphia Media will need if it goes into the closing scheduled for later this month with $140 million in committed equity, and is able to keep other borrowing down.
Bankers also typically prefer a borrower whose EBITDA earnings will be at least 50 percent larger than its debt payments for a given period.
Philadelphia Media's long-term debt—if priced favorably, at around 8.5 percent, and spread evenly over 10 years—would require yearly repayments of around $35 million, well below that limit.
But another $100 million in shorter-term debt—even if priced favorably, at around 10 percent, and spread evenly over three years—would require an additional $35 million-plus in yearly payments. If Philadelphia Media had to pay both parts of the loan at the same time, debt service would be over $70 million—eating up the company's entire cash flow and leaving no margin for safety, let alone improvements.
However, such loans are typically structured so the long-term payments don't hit hard until after the shorter-term debt is paid. Often, principal payments are delayed until late in the term, giving borrowers an incentive to refinance the long-term debt.
The investors are not "expecting to get anything back" in the first few years, Tierney said last week.
Royal Bank will not be represented on the company's board. But banks can require borrowers to meet target levels of profits and key financial ratios. If the companies fall short, lenders can declare them in default. They can demand rapid repayment, or more favorable terms, or place liens that would make it tough to sell company assets. In extreme cases, the banks can take control.
Key to the transition over the next few months and years, according to Tierney, are new union agreements, and new advertising revenue. He joked that last week's congratulatory ads by the Greater Philadelphia Chamber of Commerce—which is chaired by Citizen's Steinour—"should have waited till we take over in July" so they could boost Philadelphia Media's revenue.
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