Chicago Sun-Times Media Group Files for Bankruptcy

Sun-Times Media Group (STMG)–burning through cash at more than $5 million a month–filed for Chapter 11 bankruptcy protection Tuesday.

The parent of the Chicago Sun-Times and 59 Chicago-area newspapers said it would continue to operate its papers as usual, while it focuses on further improving its cost structure and stabilizing operations.

With its Chapter 11 filing in U.S. Bankruptcy Court in Delaware, STMG became the second Chicago-based newspaper chain to file for bankruptcy protection. Last Dec. 8, Chicago Tribune parent Tribune Co.–straining under nearly $13 billion in debt–filed for protection while it restructures.

While STMG said in a statement the company believed it had enough “financial resources” for day-to-day operations, it has retained Rothschild Inc. to “commence a process for a sale of assets.”

“Over the past several months, the company has taken several steps to reduce costs and strengthen our organization,” STMG Chairman and Interim CEO Jeremy L. Halbreich said in a statement. “However, the significant downturn in the print advertising environment that has affected newspapers across the country has continued to severely impact us.

“Unfortunately, this deteriorating economic climate, coupled with a significant, pending IRS tax liability dating back to previous management, has led us to today’s difficult action,” he continued. “Importantly, we firmly believe that filing for Chapter 11 protection and exploring the potential sale of assets or new investment in the company offers us the best opportunity to protect our respected media properties for the long term.”

STMG said it “intends to move through the Chapter 11 process as quickly as possible and expects the process to be completed in 2009.”

Halbreich became interim CEO in February as a result of a shareholder revolt that ousted several board members plus CEO Cyrus Freidheim, regarded as turnaround executive when he came to STMG in late 2006.

Freidheim chopped away at expenses by outsourcing, laying off employees and folding newspapers. The paper wrung out $50 million in expenses in the first half of 2008, and committed to reducing costs another $50 million in the first half of this year. STMG has essentially had all its papers up for sale for the past year with no apparent buyer interest.

For the third quarter of 2008, STMG reported it had burned through $16 million in cash.

STMG has never recovered from the damage inflicted by the disastrous reign of former chairman and controlling shareholder Conrad M. Black, who along with a handful of other top executives were ultimately accused of “looting” the publisher through sales of assets with phony “non-compete fees,” excessive expense accounts and management fees, and sweetheart contracts.

Among the fallout from the period were huge tax bills from Canada, which has been settled, and the U.S. Internal Revenue Service. STMG is in negotiating with the IRS a tax liability that could be as much as $600 million.

STMG was also recently ordered to pay $42 million in a legal dispute dating from Black’s sale of newspapers to CanWest Global Communications Corp. A circulation fraud uncovered after Black’s lieutenant, David Radler, was removed as Chicago Sun-Times publisher resulted in STMG paying out millions in compensation to advertisers.

Through the period, STMG stock lost essentially all its value. It was de-listed from the New York Stock Exchange about a year ago, and is now quoted on the OTC Pink Sheets. It closed Monday at 5 cents a share.

Former chief Black has just finished the first year of a six-and-a-half year prison terms on his federal convictions for fraud and obstruction of justice.

STMG’s legal advisor is Kirkland & Ellis. Rothschild is its financial advisor. Huron Consulting Group is acting as restructuring advisor.

In addition to the Sun-Times, STMG publishes the following Illinois dailies: the SouthtownStar in Tinley Park; the Beacon News in Aurora; Courier-News in Elgin; Herald News in Joliet; Lake County News-Sun in Waukegan; and the Naperville Sun. It also publishes the daily Post-Tribune in Merrillville, Ind., and weeklies published by Pioneer Press and Fox Valley Publications.