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Banks' Next Headache is Big Media

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What happens when two struggling industries collide?

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Here's just what banks don't need after the housing crunch: a stake in struggling media companies.

But it may work out that way, thanks to bankruptcies. When media companies can no longer pay their debts, as is often the case these days, it's their lenders -- often big Wall Street banks -- that end up holding the bag.

This raises a basic question: If restructuring efforts fail, will Uncle Sam step in to save newspaper companies much like lifelines tossed to General Motors, Chrysler, and American International Group (AIG)?

The idea of government-owned media companies is abhorrent because it would gut the watchdog role long claimed by newspapers and TV stations, but it's not difficult to imagine Congress taking action to "save" jobs.

Banks certainly don't want to be in the media business -- especially newspapers, as their circulation and advertising continue to decline. But through Chapter 11 bankruptcy, JPMorgan Chase (JPM) has taken over the Journal Register Co., the publisher of about 20 newspapers in six states, including New York, Pennsylvania, and Michigan.

It's a tough predicament to be in: Who would want to buy second-tier small and mid-size newspapers when major media properties such as The Boston Globe, owned by The New York Times (NYT), the San Francisco Chronicle, owned by Hearst, and Business Week, owned by McGraw-Hill (MPH), draw tepid interest from prospective buyers?

Freedom Communications may be next up for JPMorgan. Freedom, publisher of The Orange County Register and about 30 other papers, filed Chapter 11 bankruptcy September 1, and secured lenders, led by JPMorgan Chase, stepped in.

If the reorganization plan works as intended, Freedom's current owners -- descendants of founder R.C. Hoiles as well as private equity firms Blackstone Group and Providence Equity -- will have their equity stakes reduced to about 2% when the company emerges from bankruptcy. If Freedom meets certain financial targets, Blackstone and Providence can each exercise warrants to gain an additional 10% stake over the next five years.

But there's no reason to believe the newspaper business will improve in five years, suggesting Freedom Communications could be a continued drag on creditors. Blackstone and Providence might cut their losses by just sitting tight.

Federal limits on cross-ownership of TV stations and a newspaper in the same market may complicate JPMorgan's efforts to sort out the bankruptcy of the Tribune Co., which publishes about 10 newspapers, including the Chicago Tribune and Los Angeles Times, and owns 23 TV stations.

The Wall Street Journal (NWS) reports that Citadel Broadcasting has offered lenders, including JPMorgan Chase and General Electric (GE), a deal that would swap debt for equity. Citadel is the nation's third-largest broadcaster with about 220 stations in about 50 markets, and FCC rules limiting cross-ownership could complicate shuffling assets.

Federal limits on cross-ownership in a single market are intended to promote competition, but the law is an anachronism in the digital age because the Internet has exploded the idea of a single company dominating a media market.

But don't look for Congress to repeal ownership limits anytime soon, even if it would help banks regain their footing.

It may be time to ask: Why are any legacy media companies indispensable? Whatever happened to creative destruction?
No positions in stocks mentioned.
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