Riverside P.E. sale may fall through

By Ken Bensinger

Nov. 6, 2013 12 AM PT

A deal to sell the Riverside Press-Enterprise to the owner of the Orange County Register may be in jeopardy less than a month after it was announced.

On Oct. 10, Aaron Kushner, owner of the Register, said he would buy the Inland Empire’s largest newspaper for $27.25 million, adding it to his fast-growing stable of Southern California dailies.

But a filing by A.H. Belo Corp., the Press-Enterprise’s current owner, casts doubts on the deal.

Originally slated to close Oct. 15, the sale has been extended to Nov. 15, according to the Monday filing to the Securities and Exchange Commission. Amended provisions now require Kushner to prove that his company, Freedom Communications, is financially solvent and has enough cash to operate the Riverside paper after a transfer.

Most notable is an obligation that Kushner put up $1 million in cash as a “down payment” on the deal. Such a nonrefundable payment, akin to a layaway sale at a discount store, is highly unusual in the world of mergers and acquisitions, experts say.

“They want to know whether or not he has the wherewithal,” said Ken Doctor, a media industry analyst who has closely followed Kushner’s entry into the newspaper business. “That’s been a key question all along as the rest of the industry has marveled at how much money he’s spent.”

Freedom Communications spokesman Eric Morgan declined to comment. “As a privately owned company we do not publicly discuss financial terms of an acquisition,” he said in an email.

In a statement accompanying the filing, Jim Moroney, chairman and chief executive of A.H. Belo, said the company looked “forward to closing on the previously announced sale of the newspaper operations of The Press-Enterprise” in mid-November. A.H. Belo also owns the Dallas Morning News and the Providence Journal, among other papers.

A spokesman for the company did not respond to a query seeking additional comment.

Last year, Kushner acquired the Register and two other California papers for $50 million plus the assumption of various liabilities, including at least $110 million in unfunded pension obligations. Since then, he’s been on a spending spree, hiring hundreds of journalists, expanding sections, printing fatter papers and even launching a new daily in Long Beach.

His agreement to pay more than $25 million for the Press-Enterprise fueled his reputation as a white knight with a vision for struggling print publications. The paper in recent years has suffered major staff cuts and declines in circulation. Daily circulation was 137,581 in March, according to the Audit Bureau of Circulation.

In a meeting last month with Press-Enterprise employees, Kushner pledged to continue to expand. “There is only one path for the survival of newspapers and that is to grow,” he said.

But the reworked terms of the Press-Enterprise deal signal that Kushner’s financing may have fallen through. That, in turn, has fed speculation about the financial viability of Freedom Communications’ aggressive growth strategy.

One clause of the new sales agreement, for example, said that Kushner must prove his company is “solvent” and won’t have “an unreasonably small amount of capital for the business in which it is engaged.”

In addition, the filing said, Freedom must “pay its debts as they become absolute and mature.”

Kushner, a former greeting card company executive, purchased Freedom with a loan from Crystal Financial, a private lender. Executives at Crystal have declined to comment on the terms or status of that loan, although Kushner has said he has paid down a substantial portion of the principal.

In addition, the new deal terms prohibit Kushner from paying a portion of the sales price with $17.45 million he has kept in an escrow account as part of his 2012 purchase of Freedom.

That amount -- called a holdback and used to protect buyers from unexpected losses -- is at the center of a lawsuit filed late last month by investment firm Angelo Gordon Management on behalf of the prior owners of Freedom.

Kushner has refused to pay the holdback and maintains that former company executives fraudulently misstated and concealed financial information during negotiations, leading him to overpay.

Kushner and his companies are also subject to at least two other lawsuits with multimillion-dollar claims related to his purchase of Freedom.

If the latest deal falls through, A.H. Belo would keep the $1-million down payment from Kushner, which the filing said has already been paid. But it would still be bad news for the publicly held Dallas concern, which has been attempting to shrink its portfolio of newspapers.

The company appears to be preparing for that contingency. The filing said Kushner had agreed that A.H. Belo may “immediately pursue alternative transactions” for the paper if the sales agreement is terminated.

Media consultant Alan Mutter said that new provision could point up a different reading of the deal’s status.

“It strikes me that Belo may have a better offer from somebody else and they’re trying to throw a lot of obstacles into the deal to convince Kushner to back out,” he said. “Maybe Belo wants out.”

Either way, an aborted sale would be discouraging to the 375 employees of the Press-Enterprise. In July, A.H. Belo sold the building where the newspaper is located for $30 million. Other potential buyers might be inclined to further reduce staffing and expenses.

Speaking to a group of staffers last month, Kushner warned of a tough road ahead.

“The transition will not be easy,” he said. “It never is.”

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