Black Press's stalking horse: The auction that will seal the fate of hundreds of newspapers

The future of dozens of community newspapers in the Fraser Valley, Washington State and Hawaii may be determined during an auction later this month.

Three weeks after Black Press filed for creditor protection and announced its sale to a US company and two investment houses, an auction process has begun to sell off the company—potentially to a different entity.* (This story originally said Black Press might be sold a second time. In fact, the first announced “move to new ownership” has not yet been completed or approved by a court.)

New documents published as part of the process also shed light on how the corporate owner of the Fraser Valley’s newspapers tried—and failed—to solve its financial plight before filing for creditor protection last month.

As I have previously acknowledged in this story, I have array of personal connections to, and history with, the subject of this story. That results in obvious conflicts of interest. Keep that in mind. I write this story because it is of vital importance to the future of journalism in many communities across British Columbia, and no one else is covering the matter.

Black Press got its start in Williams Lake and is British Columbia’s largest community newspaper publishing, owning dozen of titles. The strategy of the company’s founder, David Black, was to buy newspapers close to one another, allowing for papers to share resources, which reduced operation costs and increased profits.

As The Current detailed last month, the company has three different subsidiaries based in three different jurisdictions: Hawaii, Washington State, and Western Canada. The company’s Canadian titles include all of the Fraser Valley’s community newspapers: the Hope Standard, Agassiz-Harrison Observer, Chilliwack Progress, Abbotsford News, Mission Record, Aldergrove Star, and Langley Advance Times.

Black Press entered creditor protection last month after hitting the point where it could no longer both pay its debt and keep functioning as a company. Most of the debt stems from the catastrophic decision to buy an Ohio daily newspaper in 2006 for $165 million. After a decade of losses, the company sold the paper for less than a tenth of that price, while retaining more than $40 million of pension obligations. Over the last decade, profits at Black Press’s other papers have declined to the point where they can’t pay off the legacy of the Ohio deal.

Read our in-depth story about how an Ohio newspaper doomed a BC-born newspaper empire

As of November, the company owed $57 million—and was paying interest averaging 10.8%—on its secured, formalized loans. That was before the legacy pension liabilities.

Having realized last summer that its debt load was too heavy to manage, Black Press hired a US company to try to offload some of its properties, according to a report by the monitor of the ongoing creditor protection process.

That company, Dirks, Van Essen & April (DVA), is considered “the leading merger and acquisition firm in the US newspaper industry,” the documents say. Over the last three decades, the company has been involved in the majority of newspaper transactions.

At first, Black Press told DVA to try to find a buyer for its Hawaii newspapers, including its one big US daily—the Honolulu Star-Advertiser.

“It was hoped that the sale of BP Hawaii’s business would generate sufficient cash to allow for a significant payment toward the Companies’ existing creditors,” the documents say.

But although the Hawaii operations were profitable, the potential purchase price was lower than Black Press had hoped. Four days after DVA started shopping the Hawaii papers, the firm was instructed to turn its attention to finding a buyer for the company’s Washington State community papers. And four days after that—having received no better news—Black Press finally told DVA to see what its Canadian papers might fetch.

During the process, 52 potential buyers were contacted. Five made offers “for various combinations'' of Black Press’s three entities. None were good enough to forestall creditor protection.

The finances

Financial statements for Black Press’s two main divisions have now been released. They show that the Hawaii papers—including the Honolulu Star Advertiser—made a gross profit of about $24 million each of the last two years. But after amortization of equipment, restructuring costs and indirect expenses are factored in, the papers have operated around the break-even point.

Meanwhile, the company’s community papers in Washington State and British Columbia posted $15 million in earnings last year and around $3 million this year. Much of the drop comes from a dramatic reduction in the amount of federal support and Canadian employee subsidies received by the company Canada in 2023 compared to 2022. (Many, though not all, of the subsidies were legacies of the COVID pandemic.)

With none of the five offers large enough to actually pay back its secured creditors, Black Press returned to its lenders to ask if they would be willing to waive a portion of their debt in exchange for getting paid with whatever the company could get from the potential buyers. The creditors said no.

There was one final domino to fall: After the failed attempts to find a buyer, two of the company’s lenders, along with Carpenter Media Group, a southern US publisher, offered to buy the entirety of Black Press. While the Black family supported the deal, Metroland—the Toronto Star-affiliated publisher that owns one-fifth of the company—did not. (Metroland has been going through its own bankruptcy proceedings.)

That led Black Press to apply for creditor protection. It also led to the same two Canadian investment firms and Carpenter to agree to purchase the company.

In a press release after the sale, the new owners declared the sale and restructuring “will lead to a stronger, more sustainable Black Press that will continue to provide by far the best local Canadian and American news coverage in our markets and the best ways for advertisers to reach their customers.”

The Chairman of Carpenter Media Group said the company and its partners “are firm believers in local media and the future of Black Press” and “committed to maintaining the company’s vital journalistic presence in Canada and to a plan that creates the most financially beneficial environment for Black Press to continue to do what it does best—produce excellent journalism and advertising services for the communities it serves all across Canada and the U.S.”

But the companies don’t actually own the newspaper chain yet.

The three companies’ bid for the company is designed to be the precursor to a full auction of Black Press’s assets.

Their offer to purchase Black Press is what’s called a “stalking horse transaction” that is designed to set the stage for a “sale and investment solicitation process,” or an SISP. The purpose of an SISP is to get the highest return possible for the sale of a company’s businesses and assets. A stalking horse bid functions as a floor for purchasers and a deterrent for low-ball offers. If no better offer is received, the stalking horse bid goes through. The bid provides some guarantee for the creditors. Meanwhile, if the stalking horse bid is usurped by a higher offer, the stalking horse companies get a “breakup fee” to compensate them. In the case of the Black Press bid, Carpenter and company would share a $1.75 million fee if another bid trumps their offer.

The horse race

A court-appointed monitor of Black Press’s creditor protections declared the stalking horse bid to be the best way to maximize value for creditors. They have also declared that 22 days is enough time to solicit bids.

So next comes an auction.

The 52 companies previously identified as potential buyers will receive marketing material and a wealth of financial information on Black Press. Anyone else can bid over the 22-day process, with all offers having to be made by 5pm on Feb. 16.

(Black Press’s financing head said a three-week timeline was appropriate in part because “public and well-known nature of the companies in the locations in which they operate” would help flush out any potential bidders. But none of Black Press’s own papers, nor any other outlet, have reported on the bidding process prior to this story.)

Submitting a bid is not just as easy as throwing out a number. To qualify, a bidder will need to promise to pay off around $61.5 million in debt, another $5.4 million in costs incurred during creditor protection, $1.75 million to trump the stalking horse bid, and another half-million to wrap up the legal proceedings. The total amount needed is pegged at about $75 million. Some requirements can be waived, but the stalking horse bidders need to consent if a successful bid doesn’t promise to pay off all Black Press’s debt.

A bid must also lay out how the company intends to treat Black Press’s existing employees, customers, and pension and vendor obligations.

If no bids meet the requirements, Carpenter and the investment companies’ stalking horse bid will go before the court for approval. If more than one bid comes through, an auction process will start with each participant given the opportunity to trump the other’s offer (in $100,000 increments).

Carpenter and company

The stalking horse bid might very well stand—particularly if its valuation of the company reflects general market sentiment about the business prospects of Black Press or if the company’s liabilities scare off potential suitors.

According to legal documents, Carpenter would pay $7 million in exchange for a 25% equity share of the company, plus support from its investor partners. The entire term sheet suggests a purchase price for the company of a little more than $50 million, according to the company.

Of course, Black Press, with all its debt, is not actually worth that money—if it was, it wouldn’t be in creditor protection.

Sam Babe, a Toronto-based lawyer who has written about stalking horse bids online, told The Current that when a company moves to creditor protection, usually it is only the assets—and not liabilities—that are purchased by a new owner.

That’s not entirely the case with Black Press. Carpenter and the investors’ bid also requires that the company’s debt be restructured, and the transaction stipulates that after the purchase, the company’s debt obligations won’t exceed $72 million. But there’s a reason for that: Canso and Deans Knight are themselves likely creditors.

The stalking horse bid would extend the existing closing date for Black Press’s debt by five years, while setting a 10% annual interest rate for all loans in arrears. All money from any assets sold would be plowed into repaying debt, as would three-quarters of any “excess cashflow” until there is less than $20 million owing.

Crucially, the sale of Black Press to Carpenter would also rid the company of its obligations to its former Ohio workers—and the US government. When Black Press sold the Akron Beacon’s assets in 2018, it retained more than $40 million in pension obligations to the papers’ workers. Since 2019, the pension has been overseen by a US federal corporation tasked with taking over pension plans that have become “distressed.” But that corporation is now a Black Press creditor—albeit one that is deemed to be “unsecured.” Hargreaves’s 843-page affidavit says that the stalking horse bid won’t assume or satisfy the pension liabilities. “For the avoidance of doubt,” the affidavit makes the same declaration 24 pages later. In other words, Carpenter and company want no part of paying back Black Press’s pension debt.

That underscores how creditor protection ends up working: a company’s debt can be slashed, with “secured” formal lenders first in line to get their money back over less-formalized “unsecured” creditors, like employees, vendors, and pension obligations.

The lawsuit

There’s one new lingering (and potentially massive) liability hanging over the company.

According to the Hargreaves’ affidavit, a class action lawsuit has been filed in Hawaii alleging that the company collected subscribers’ personal information then disclosed it to Facebook without the subscribers’ consent. The plaintiffs are claiming at least $2,500 in damages for each of more than 50,000 subscribers with Facebook accounts. Black Press denies the claims.

If the company were ordered to pay $2,500 paid to 50,000 people, it would need $125 million. However, such debts are considered “unsecured” and, like the pension obligations, might not be acquired by Carpenter and company.

Executives and cutting costs

While most Black Press workers have been left in the dark about the creditor protection process, a handful of employees are set to get bonuses for their participation.

The creditor protection process involves “a Key Employee Retention Plan” that involves paying 18 executives and senior employees a combined $615,000 to discourage them from leaving the company. The employees are defined as “senior executives and key employees: who are considered necessary for the success of the company’s restructuring. They will get the bonuses once the company is sold.

One person who won’t be paid any longer is company founder David Black, whose retirement was announced on the same date as his company filed for creditor protection.

The Hargreaves affidavit reveals that the company had been paying Black salary, benefits, and expenses—including for his assistant—amounting to $1.3 million per year. Those payments had continued through last year, even as Black’s involvement in the company’s day-to-day operations had been mostly curtaild. Now the pay is ceasing altogether.

At the moment, most Black Press publications appear to be in a holding pattern, with some mixed signals about operations.

When it announced its sale, Black Press said it would continue providing customers with the best local coverage in its markets.

But the affidavit says the plan to remedy the company’s finances includes “winding down certain unprofitable business units” and “further employee headcount rationalization”—i.e. closing papers and laying off employees.

The Friday before the company announced it had filed for creditor protection, Black Press laid off its editors at the Surrey Now-Leader and Peace Arch News, two neighbouring papers. No replacement has been hired since. There isn’t a hiring freeze yet: the company’s Abbotsford News recently hired a new reporter as a replacement for a journalist who left the paper to edit the neighbouring Chilliwack Progress. A replacement for the Progress’ recently departed sports reporter, who left for a job at the university of the Fraser Valley, has not yet been hired.

This story has been corrected in several spots to clarify that the stalking horse bid has not yet been accepted and completed as a transaction.