Merger on the march

Originally published August 24, 2005

THE NATION’S TWO largest alternative newspaper publishers have been in intense negotiations over a merger that would create an 18-paper chain controlled to a significant extent by venture capitalists, new documents obtained by the Bay Guardian show.

The documents, which appear to be valid, include a May 27, 2005, draft of a merger agreement between Village Voice Media and New Times. They were provided by a source close to the VVM side of the negotiations.

The draft calls for the creation of a new company controlled by a nine-member board. Five of the members would come from Phoenix-based New Times and its primary venture-capital firm, the Boston-based Alta Communications.

New Times, which owns 11 newspapers including the SF Weekly, would have 62 percent of the equity in the new venture, and VVM, which owns the Village Voice and six other papers, would have 38 percent.

The documents mention a Nov. 30, 2005, date for closing the deal, but suggest that the date may have to be pushed back, in part because of federal regulatory issues.

Rumors of a possible VVM-New Times merger have been swirling for months (see “Chain Gang,” 5/25/05). Neither of the principals has denied the reports, although employees of some VVM papers have attempted to dismiss them.

But the new documents are the first concrete confirmation that talks are indeed going on, and that the two parties are close enough to agreement that they’ve circulated draft bylaws of a new limited liability corporation that would own all of the VVM and New Times papers.

As of late May there were clearly still some issues to be resolved: The documents include a memo from VVM CEO David Schneiderman complaining that New Times wants to “renegotiate the terms of our deal” and arguing that some New Times papers, including the SF Weekly and the East Bay Express, are losing a lot of money.

“In the 2004 Calendar year, SF Weekly, East Bay Express and the Cleveland Scene racked up losses of $4 million,” the memo states. SF Weekly, it says, “is locked in a brutal struggle in SF with no sign of success and the same is true in Cleveland.”

The memo concludes: “In short, they have some real losers and we don’t…. given these facts, I don’t believe a renegotiation is warranted.”

But overall, the shape of the deal appears to be fairly clear. A new Delaware-based LLC would be created, with a nine-member board. Mike Lacey and Jim Larkin, the executive editor and CEO of New Times, would each have a seat on the nine-member board, as would an Alta representative. Lacey, Larkin, and the Alta rep would then choose two more members – one of whom would be New Times chief financial officer Jed Brunst – giving New Times and its banker a 5-4 majority.

Schneiderman (who is slated, the documents show, to receive a $500,000 bonus for his work on the merger) would have a seat on the board, and the final three seats would go to Goldman, Sachs & Co., Trimaran Capital Partners, and Weiss Peck & Greer, all of whom are VVM investors.

So in the end, at least four of the board members – and possibly five – will be venture capitalists

The documents state that all but two of the board members (also called “managers”) can be removed from the board for “cause” – but “the Lacey Manager or the Larkin Manager may not be removed as Managers with or without Cause, it being understood that the sole basis on which either such Manager may be removed as a Manager shall be such Manager’s conviction of a felony.”

The documents suggest that the new company has been set up with the idea of an eventual sale: They state that, for the first three years, the company can only be sold with the consent of six of the nine board members. But over the next two years, five board members could approve a sale, and after five years, three directors could make that decision.

“In the event the Board of Managers approves a Sale of the Company … all Members shall be required and hereby agree to cooperate with and participate in such sale,” they state.

The documents also address the prospect that the SF Weekly, the East Bay Express, and the Cleveland Scene could be sold off or closed if they continue to hemorrhage cash. “[I]f at any time up to and including the Third Anniversary date, the cumulative losses for any of the [East Bay, Cleveland or San Francisco units] (brackets in original document) exceed the cumulative projected losses for such unit … the Company, with the consent of five managers, shall be permitted to dispose of such non-performing unit by merger, consolidation, sale of assets or otherwise,” they state.

The new company would be required to honor the union contracts at the Village Voice – the only paper in either chain that’s fully unionized (the L.A. Weekly has some union workers). But other employees may not fare so well. The new company “may, in its reasonable discretion, transition all employees … to new compensation, benefit plans, programs or arrangements.”

One source in New York said that “as I understand it, Larkin will be the CEO and Schneiderman will run the Internet operations. I believe the rest of the VVM corporate staff (essentially finance people) will be let go.”

A separate document, dated June 1, 2005, is titled “NT/VV Proposed Business Consolidation Agreement Issues List Reutf8g to NT Draft of Contribution and LLC Agreement.” It lists some concerns – apparently from VVM executives – about the deal.

It cites a “drop date of Nov. 30, 2005,” but notes that “[t]his is too short, obtaining HSR approval may take a long time.” That’s a reference to the Hart-Scott-Rodino Act, which requires federal approval of any merger that may have an impact on business competition.

That might not be routine: New Times and VVM have run afoul of federal antitrust laws in the past. The two chains were charged a year and a half ago with conspiring to end alt-weekly competition in Los Angeles and Cleveland (see “New Times Nailed,” 1/29/03). Under a consent decree, the companies are required for five years to give the Justice Department notice before pursuing any merger.

We’ve spoken to several sources close to the negotiations who say it’s likely that process is already under way. But the Justice Department has consistently maintained that any such notice would be confidential.

The two parties are also keeping a tight hold on the information. Staffers at VVM and New Times papers seem unaware of the details of the talks, and top management has refused to answer their questions about the situation. The agreement includes a clause stating, “No press releases or public disclosure, either written or oral, of the transactions contemplated by this agreement, shall be made by a party to the agreement without written consent of VV Media LLC and NT holdings.”

The merger would signal the biggest step so far in the consolidation of ownership in the alternative press. The merged company (which thus far is identified only by the dummy name “Newco”) would represent 14.2 percent of the membership of the Association of Alternative Newsweeklies and would give one chain operation control of some of the biggest media markets in the country, including New York, Los Angeles, Miami, Denver, Seattle, Phoenix, and Houston (see “SOS: No secret New Times-Village Voice Media deal, sfbg.com).

Schneiderman, Lacey, and Larkin all declined to return messages seeking comment.

The Bay Guardian is suing New Times, charging predatory pricing by the SF Weekly.