Tuesday, July 21, 2009

Ben Eason discusses what's next for the Reader

Posted By on 07.21.09 at 01:46 PM

The company that owns the Reader is in bankruptcy court in Tampa trying to hang on to us, and we watch from Chicago spellbound. Who will own us when it's all over?

With $30 million borrowed from Atalaya Capital Management of New York and $10 million from BIA Digital Partners of Virginia, Creative Loafing Inc. bought the Reader and the Washington City Paper from the Reader’s founding owners in July of 2007. “There has never been a more exciting or challenging time to be in the publishing business,” said Creative Loafing CEO Ben Eason at the time. But the purchase was risky in any economic climate, and CLI was headed into the storm that has battered the most solvent newspapers. Last September Eason filed for bankruptcy in order to reorganize.

Atalaya has argued in court that Creative Loafing’s chain of six alternative newspapers shrinks in value with each passing day because of mismanagement, and that to protect what it can of its investment it wants the collateral Eason put up — 100 percent of the CLI stock. On July 13 Atalaya and Creative Loafing agreed on a plan — an equity auction in late August. The stakes in this auction are the papers, and although anyone can bid for them the auction is expected to be a one-on-one. The opening, or “stalking horse,” bid is from Atalaya — $2 million. The opposition will be Creative Loafing, in an alliance with BIA. As the secondary or “mezzanine” lender in the 2007 deal, BIA doesn't stand to recover a single penny until after Atalaya is satisfied; part ownership might strike BIA as a way to salvage something.

Atalaya is in the catbird seat. The first $2 or $3 million raised in the auction will pay back small creditors and provide the company with working capital. But after that the money all goes to Atalaya until it gets back the money it's owed, now about $31 millon. In effect, it can bid that high simply by taking money out of one pocket that it will put back in another. Under the circumstances, how can Eason compete?

I asked him. “You hit on a dilemma we think we can work through,” he said. The key date, according to Eason, is not August 25, when the auction will be held, but July 27 29, when Judge Caryl Delano sets the rules of the auction.

“What the issue really is,” Eason said, “is who’s going to keep their money in. Who’ll be involved in this thing for the long haul. It appears the way Atalaya is coming at this they’ll put their money in and immediately take it out. That’s part of their financial engineering, it’s a typical Wall Street hedge fund being slick with the money. But we’re looking to make sure that whoever bids at the equity auction truly wants to hold the company.”

Do you mean to say the judge could disqualify Atalaya? I wondered.

“She’ll have to decide,” Eason told me. “She wants to open the auction up to basically anybody who is interested in being an owner and caretaker of the assets. And if Atalaya is sitting there with the ability to put money in and take it back out, and put money in and rewrite the terms of the loans, then nobody will show up and bid. Why go through the effort? It’s a foregone conclusion. I don’t think the judge wants to do that.”

Eason believes the judge should award the papers to the “highest and best” bid, which he's ready to argue would be Creative Loafing's. For Atalaya, he told me, “it’s just a deal. For me it’s my passion, my life, and everything. And on the business side, I have to say I think the company has really responded to making the digital transition. I think we’re a third of the way there, a half the way there, and I like the model we’ve created of sort of old media morphing over to new media and using in our sales models the strengths of both mediums. The real key here is not a financial play — it’s how everybody uses their publishing smarts and knowledge of online to fuse those models together. The game is not who’s got the most money but who’s got the most smarts to make the transition.”

But what if the judge doesn’t set rules that restrict Atalaya? I asked him.

“It’s over,” said Eason. “It’s the same thing as a foreclosure.”

UPDATE: Next week's hearing has been moved back to Wednesday, July 29.

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