Freedom Communications Inc., publisher of the Orange County Register, filed for Chapter 11 bankruptcy protection Tuesday after the slide in the newspaper industry and the recession made it impossible for the company to repay $770 million in debt.
The Irvine company said the Register and its other newspapers and magazines would continue publishing while it reorganizes its finances in Bankruptcy Court in Delaware. Freedom said most of its lenders would support a pre-negotiated restructuring plan that would ease the company's debt load.
"Reaching this agreement with our lenders provides us with an orderly process to realign our balance sheet with the realities of today's media environment," said Burl Osborne, Freedom's chief executive.
The company has sufficient cash to fund its daily operations, he said.
As the recession and online competition chewed into newspaper profits the last two years, Freedom has struggled to manage its debt load. The debt is a legacy of the 2004 transaction in which private equity firms Blackstone Group and Providence Equity Partners paid almost $470 million for a 40% stake in the company.
One roadblock to avoiding bankruptcy apparently was an inability to craft an agreement that was acceptable to all 26 of the company's lenders. Lenders representing more than 50% of Freedom's debt have already agreed to the restructuring plan.
Under the plan, Freedom's lenders would forgive $445 million of the company's debt. That would leave Freedom with $325 million in debt.
The family that controlled Freedom, combined with Blackstone, would have no more than 2% of the company when it emerges from bankruptcy reorganization. They also could have warrants to obtain an additional 10% of the shares, depending on Freedom's performance.
The lenders, a consortium of 26 banks led by JPMorgan Chase & Co., would take control and appoint a new board of directors and chief executive.
While the arrangement with lenders hurts shareholders, it secures a future for Freedom and its 8,200 employees by "adjusting the balance sheet to a level of debt that projected and current earnings can support," Osborne said.
He said Freedom's financial troubles were a result of the deep recession, which has been particularly hard on newspapers and other media, and of the deal with Blackstone, which occurred during a period of easy credit and saddled the company with too much debt.
The 2004 deal with Blackstone and Providence followed a long-running rift among the descendants of Freedom founder R.C. Hoiles, the libertarian son of an Ohio farmer who bought the Santa Ana Register in 1935. Some family members wanted to keep the company, while others wanted to sell it and cash out their holdings.
A compromise was reached that gave the private equity investors a minority stake in the company for buying out those who wanted to sell and allowed the remaining members of the Hoiles family to retain majority control. The deal failed to reconcile many of the family members who stood on opposite sides of the dispute, and the bankruptcy filing is making matters worse.
"There are a ton of wounds in that family," said a person who knows several of the family members well. If the bankruptcy pushes the family out of the business, "it's going to be an incredibly difficult thing for them to deal with the loss of the Register," the person said. "And it's not a financial thing. It's, 'Oh my God, what would Grandpa say about this?' "
In addition to the flagship Register -- No. 30 in the nation in circulation -- Freedom owns 32 daily papers; more than 70 weekly newspapers, magazines and other specialty publications; and eight TV stations.
The bankruptcy filing lists assets of $757 million and liabilities of $1.1 billion, including the $770 million in debt.
Freedom is the 10th newspaper publisher in the U.S. to file a bankruptcy petition in the last year, said Peter Kaufman, who heads the distressed mergers and acquisitions and restructuring practice of the Gordian Group in New York.
The list includes Tribune Co., owner of the Los Angeles Times, which filed in December. Other long-established papers, such as the Rocky Mountain News, have ceased publishing altogether.
Newspapers' schemes to win readers and advertisers back from the Internet or to make money off the papers' own sites have proved spotty at best.
The Register, which in the 1980s and 1990s fended off a determined effort by The Times to become the dominant news source in Orange County, saw its circulation fall by a third in the new millennium, dropping to about 231,000 this year from more than 363,500 in 2000.
In recent years, the Register launched OC Post and SqueezeOC, tabloids with short stories and big pictures designed to capture young, busy readers. Both failed.