Monday, May 26, 2014

On Eve of Inky Auction, Reporters Reading Tea Leaves

Lewis Katz and George E. Norcross III
By Ralph Cipriano

One night last week, Lewis Katz strolled through the newsroom of The Philadelphia Inquirer wearing a T-shirt and jeans, yellow-green neon sneakers and Dr. Dre Beats headphones.

OK, so he may dress casually for a media mogul. But, a witness said, he acted like a guy ready to buy the joint.

But wait, there's a persistent rumor sweeping the building that Katz may have split up with his longtime companion, Inquirer City Editor Nancy Phillips.

Uh-oh. Another reason to think that Katz may be headed on his way out the door.

With the auction of the city's paper of record a day away, reporters can't be blamed for sifting through every new fact and rumor as they try to handicap Tuesday's long-awaited showdown between principal feuding owners Lewis Katz and George E. Norcross III.

When the opening gavel falls at 9:30 a.m. at the law offices of Dechert LLP, somebody has to blink. After Norcross makes that opening bid of $77 million, as he promised in court, the question is, in the next ten minutes, what will Katz do? When he has to decide whether to trump that bid by at least $1 million, or go home?

It's a guessing game that's keeping Inquirer and Daily News reporters up at night. While the media is barred from witnessing the auction, taxpayers have a stake in the local drama. Of that $77 million auction price, $2 million will go to cover a little-publicized sweetheart loan from the city back in 2012 that financed the newspapers' move to new offices on Market Street.

The Inky and Daily News cozying up to city officials, while helping themselves to taxpayers' money at bargain rates. Just the kind of story about powerful interests at work in the city that citizens have a right to know about. It's a reminder of the kind of power that's at stake in the battle for control of the local media. Because tomorrow, for the fifth time in the last nine years, our town's only two daily newspapers will once again be on the auction block.

Wait, maybe those rumors about Katz and Phillips splitting up aren't true. On Twitter, Phillips continues to act like Lew Katz's cheerleader, passing along other people's rave reviews about Katz's recent commencement speech to Temple grads, such as, "Lewis Katz = rock star."

Phillips also tweeted this in her own words about Katz's decision to pledge $25 million to the Temple University School of Medicine: "A generous, inspiring and enduring gift. Coming soon: the Lewis Katz School of Medicine at Temple University."

We interrupt this story for breaking news.

On Friday, Lewis Katz led a tour of the newspapers' printing presses out in Conshohocken. He left his blue Bentley convertible parked conspicuously in front of the door. "You know, screaming 'F--- You' to all the poor miserable schlubs walking in from the parking lot," one employee wrote in an email.

Katz had previously expressed an interest in selling off those printing presses. Were those guys with Katz on the tour investors or potential buyers after the sale? We don't know because Katz wouldn't talk to the only journalist on the scene who tried to question him, the Inquirer's David Sell.

Does this mean Katz is serious about buying the place? Or is it just more Katz Kabuki theater, as one observer cracked.

In the Inky newsroom, where Katz partisans reign, they're cheering for Lewis no matter how strange it  gets. Nancy Phillips is the city editor. Bill Marimow is the editor that Phillips personally recruited; the editor that Katz went to court for, to save his job.

In the Inky newsroom, they're willing to turn a blind eye to Katz's foibles because of their blind fear of Norcross. Regardless of what really transpires.

The Newspaper Guild and reporters from around the city won't be allowed to watch tomorrow's auction because of the expressed legal desires of just two guys: Lewis Katz, and H.F. "Gerry" Lenfest, the two minority owners of the newspapers.

Norcross, supposedly representing the forces of darkness, sought an "open and transparent process," according to the letter his lawyer sent the judge in Delaware who ordered the auction.

Katz, supposedly the champion of journalistic integrity in Philadelphia, not only wanted to ban reporters and the Newspaper Guild from witnessing the auction; he also didn't want the amount of the winning bid divulged.

[Katz's actions have inspired a new wave of newsroom speculation. Did Katz want nobody to know what the bids would be because he doesn't even plan to submit one? Or does it mean Katz doesn't want people to know how much he overpaid for the newspapers? Take your pick.]

Fortunately on behalf of freedom of the press, the judge overruled Katz on his desire to close off the auction results. The amount of the winning bid will supposedly be divulged within an hour after it's made at tomorrow's auction.

Yet when the Inky reported on the legal maneuverings leading up to the auction, they basically covered for Katz, trying to hide the fact that he was the guy who wanted to ban reporters.

It also didn't seem to upset anybody in the Inky newsroom when on May 14, the newspaper ran an embarrassing front-page homage to Katz, under the headline, "Temple to name medical school after Katz." It's a story that had been ticketed for the front page of the local section until somebody intervened, and said, hey, let's put Lewis on page one.

As one Katz supporter in the Inky newsroom admitted about the bosses, "Their allegiances are being played out in the newspaper, which is lame. But I fear the alternative."

That would be George E. Norcross III, the Democratic boss of South Jersey and Gov. Chris Christie's pal.

Norcross, in the view of Katz partisans, should be the target of the newspaper, not the owner. If Norcross wins, Katz partisans expect a staff of award-winning reporters to be re-assigned to write about suburban zoning boards, or type up local school lunch menus. If Norcross wins the auction, Katz's Inky partisans will be diving out of windows.

Meanwhile, people wonder why the opening bid at the auction is set at $77 million when just two years ago, the current feuding owners paid only $55 million to buy the papers from a group of hedge funds.

The reason is when the new owners took over, they discovered some debts on the books that they didn't know about, such as some $5 million in workmen's compensation bills.

A total of $15 million in debt includes a low-interest loan of $2 million to the previous owners of the newspapers from the Philadelphia Industrial Development Corp. [PIDC].

After previous owners sold off the old Inquirer building on North Broad Street for $22 million in 2012, the Inky and Daily News moved to the old Strawbridge building at 801 Market Street.

"Taking city, state or federal funds can compromise future news judgement," Randall Smith, a University of Missouri School of Journalism professor warned the Philadelphia Business Journal on Nov. 25, 2011, when they wrote about the deal. "When a financially-strapped news organization decides to cross the line, it's important to be transparent," the journalism professor said.

While the Business Journal thought the loan was news, however, neither the Inquirer or Daily News ever wrote about it.

The PIDC gave the former owners of the newspapers the loan "to help renovate and fit out the space when they moved to 801 Market St., said John Grady, president of the PIDC in an email.

At the time, Mayor Nutter "had a real concern that this company could leave the city," a mayoral spokesman told the Philadelphia Business Journal back in 2011.

The $2 million loan, executed on Nov. 2, 2012, was at 1 percent interest with no payments over the first one-to-five years, followed by "20 years of level monthly principal and interest payments,"  Grady wrote.

In addition to the $2 million loan, the PIDC also "provided a guarantee to the landlord at 801 Market for $900,000," Grady wrote. That guarantee covered the security deposit on a 12-year-lease for the newspapers, Grady said. "That guarantee burns off over time."

The remainder of that $15 million in debt includes a line of credit the new owners took out with Susquehanna Bank to obtain some working capital. That money was used to pay out $6 million in severance payments to employees. In addition, the new owners invested some $4 million to upgrade the suburban printing plant.

That $77 million price tag includes the $15 million in debt. But it doesn't cover the amount that each ownership faction already has invested in the papers,  a total of $61.6 million so far.

In other words, if the Norcross ownership faction wins with its initial bid of $77 million, they have to pay the Katz ownership faction $26 million because they already own 57 percent of the company, plus $15 million for the debt, for a total of $41 million. That's according to an exhibit attached to the court order dissolving Interstate General Media Holdings LLC, the parent company that owns the two newspapers and

If the Katz faction bids $77 million, they have to pay the Norcross faction $35 million, because they only own 42 percent of the company, plus the $15 million in debt, for a total of $50 million.

Tomorrow's auction is closed to the press and public. Norcross's lawyers, however, have set aside a room at the Dechert law offices at 2929 Arch Street for reporters because "there may be an opportunity to speak directly with the successful bidder," according to a memo sent out by Daniel Fee, a spokesman for Norcross.

As of Friday, the Katz camp had made no similar arrangements.

As to what this may mean, however, we can only speculate.