• by Erik Sass  @eriksass1, August 28, 2009

Two of the biggest newspaper buyouts of the last decade have both ended in bankruptcy and acrimony, as creditors and bondholders fight for control of Philadelphia Newspapers and the Tribune Co. In both cases, recent moves suggest the outcome of Chapter 11 bankruptcy proceedings will only be decided by fierce financial and legal combat in coming months.

Philadelphia Newspapers, which filed for Chapter 11 bankruptcy protection in February, has seen a bitter falling out with its creditors. The banks are determined to wrest control of the company from Brian Tierney and the other managers appointed by Philadelphia Media Holdings, the investor group that bought the Philadelphia Inquirer and Daily News for $560 million in 2006.

As part of this push, the banks have hired a former publisher of the newspapers, Bob Hall, for the proposed management roster of the company after their planned takeover. Hall, who has also served as an advisor to the banks, was publisher from 1990 to 2003.

Two weeks ago, a judge told both sides of the dispute that they were failing to present reasonable plans that would allow a compromise and continued operation of the newspapers. At one point, the company's management said it would turn elsewhere for a $15 million short-term loan, antagonizing senior creditors, who fear losing precedence.

For their part, the creditors proposed a takeover -- giving them complete control while leaving the company with $60 million in debt, which management flatly rejected. Both sides managed to reconcile -- temporarily -- but future conflict is virtually guaranteed. The Tribune Co. situation is even more convoluted, as bondholders are facing off against banks in a struggle for control of the company. While there's no telling who will win, one thing is clear: It won't be Sam Zell.

On Wednesday, bondholders presented arguments to a bankruptcy judge in Delaware indicating the original terms of the $8.6 billion deal engineered by Zell, and approved by the banks, were "fraudulent" and unsustainable.

Citing this negligence, the bondholders want the bankruptcy judge to prevent Zell from turning over most of the company to the banks, as proposed in his Chapter 11 recovery plan. To support this argument, they want access to documents from Zell's original negotiations with the company's previous management and bank lenders, which they believe will detail these failures.

In 2007, Zell himself told employees of The Baltimore Sun that Tribune's previous management overestimated cash flow in 2007 by up to 20%, skewing any forecast for 2008 based on year-to-year comparisons and thus overvaluing the company.