September 4, 2009 / 6:55 PM / 10 years ago

Philly newspapers, creditors clash over "local" ads

WILMINGTON, Del., Sept 4 (Reuters) - The bankrupt publisher of the Philadelphia Inquirer has run afoul of creditors over its “Keep It Local” campaign, an unusual tactic that appeals to newspaper readers to support insiders’ bid for the company.

The judge in the case approved a motion on Thursday for a hearing next week on the campaign, which creditors said prevents a fair sale process.

Since it presented its reorganization plan last month, Philadelphia Newspapers LLC has been running display ads in the Inquirer and Daily News telling readers what they can do in the “fight” against the “disaster” of “out-of-town corporate ownership.”

Under such ownership, “the papers and the website would run the risk of bankruptcy again after the current proceedings, forcing steep cuts, news shrinkage and sell-offs in the near future.”

Those ads haven’t gone down well with creditors, who said in court documents that the campaign amounts to a breach of management’s fiduciary duty to seek the best price for the company’s assets.

“There can be no doubt that the ‘Keep It Local’ rhetoric is designed to advantage a single bidder and a bidder that is friendly to current management and is owned by many of the same investors who previously welcomed over $400 million of financing from creditors they now denigrate,” said a filing by the creditors committee.

The publisher, Philadelphia Newspapers LLC, proposed a plan to emerge from bankruptcy last month, in which local real estate executive Bruce Toll would help finance a $92 million plan that would wipe out about $300 million in debt.

Toll was part of the group that was formed by local advertising executive Brian Tierney to buy the papers in 2006 from McClatchy Co (MNI.N).

McClatchy owned the paper briefly after buying it from Knight-Ridder Inc, a Miami company that had owned the paper for more than 30 years.

“A question in all this is: Is the object to get the best possible price?” said David Skeel, a professor at the University of Pennsylvania Law School. He said such a campaign in a bankruptcy was highly unusual and compared it to the failed campaign by Britain’s Manchester United football club to prevent a takeover by an American investor.

Creditors said the “Local” campaign was aimed at preventing other bids.

“This entire campaign is designed to dissuade otherwise interested bidders, who will think twice before participating in the auction,” said the creditors’ motion.

Philadelphia Newspapers attorney could not be reached for comment.

The case is In re Philadelphia Newspapers LLC, U.S. Bankruptcy Court, Eastern District of Pennsylvania, No. 09-11204. (Editing by Kenneth Barry)

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