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Chatham, Cooperman offer to buy American Media

by Lisa Allen  |  Published July 10, 2014 at 2:29 PM

One of American Media Inc.'s largest second-lien noteholders and hedge fund investor Leon Cooperman have entered into a non-binding letter of intent to take over the magazine and tabloid publisher, according to a source familiar with the situation.

The source said the buying group includes hedge fund Chatham Asset Management, which owns American Media second-lien debt; Cooperman, the CEO of Omega Advisors Inc.; and Cooperman's Omega Charitable Partnership.

The beleaguered publisher of titles such as the National Enquirer, Star, Shape, and Men's Fitness revealed Wednesday that it had entered into a non-binding LOI for a takeover that would provide much-needed liquidity. But it didn't name who was in the buying group.

While an American Media spokesman said that it's working with investment bankers from JPMorgan Chase & Co., the source noted that Moelis & Co. is also been hired to advise.

Under the deal, the Chatham-Cooperman group would get 100% of American Media's equity for $2 million in cash and the assumption of $513 million in debt, in addition to a pledge to make sure the company has at least $10 million in liquidity for the next 12 months.

A July 9 Form 8-K filing with the Securities and Exchange Commission didn't divulge the names of the investors behind the bid, but it made it clear that certain first- and second-lien noteholders support the proposal.

The plan promised that holders of 10% second-lien pay-in-kind notes would provide two waivers -- one on $12.7 million in buyback payments and another for a change-of-control provision before definitive documentation is signed. A majority of first-lien noteholders are also providing a waiver on the change-of-control provision.

American Media and its potential bidder said they intend to seek change-of-control waivers from the remaining first-lien noteholders, from the holders of 13.5% second-lien notes, and from the syndicate that provides the revolving credit facility.

An October swap that converted 90% of second-lien notes into 10% PIK notes due June 15, 2018 -- which switch into 13.5% cash-pay notes in the event of a default -- left Chatham Asset Management as one of American Media's largest second-lien noteholders.

American Media's board of directors includes several representatives from hedge fund investors in the company. The board has three representatives from distress-focused hedge fund Avenue Capital Group, namely Randal Klein, David Licht, and Michael Elkins, and one, Gavin Baiera, from Angelo, Gordon & Co.

Cooperman wasn't available for comment. Officials at Chatham and Angelo Gordon didn't return calls. An Avenue spokesman declined to comment.

Avenue Capital and Angelo, Gordon backstopped the second-lien notes issued as part of American Media's Nov. 17, 2010, prepackaged Chapter 11 filing in the U.S. Bankruptcy Court for the Southern District of New York in Manhattan. American Media exited on Dec. 22, 2010, after just 35 days in Chapter 11.

Besides the 10% PIK notes, the company's other debt was issued as part of that bankruptcy.

The proposed takeover includes several cost-saving and liquidity-boosting measures for American Media.

The deal would also provide American Media with a $5 million unsecured delayed draw loan facility and at least $7.5 million of additional liquidity by Dec. 15.

The agreement provides for a go-shop period that will allow American Media to explore other offers. That period will end 30 days after the official terms of this offer are disclosed, although it may be extended if the company receives a written offer that would refinance all of American Media's notes.

American Media CEO David Pecker is expected to remain at the helm, according to the filing.

Additionally, American Media announced that the lenders under its $40 million revolving credit facility, a syndicate led by JPMorgan Chase Bank NA, have provided a waiver through July 15 on a default that occurred when the company delayed filing its annual report for 2013. The company hopes to extend that waiver.

The revolver comes due on Dec. 22, 2015, and is priced at Libor plus 600 basis points.

Moody's Investors Service Inc. downgraded American Media to Caa1 with a negative outlook from B3 on July 8, citing deteriorating liquidity, high leverage, and a tight margin on the leverage covenant for the revolver.

The ratings agency anticipates that the company's debt-to-Ebitda ratio will rise to 9 to 10 times.

The source familiar with the situation said American Media is in the best position it has been in for the last five years, and that the outlook is improving.

The company, however, has hit a rough patch after one of its two main wholesalers filed for bankruptcy, disrupting its distribution process and cutting into its revenues.

The wholesaler, Source Interlink Distribution LLC, filed for Chapter 11 on June 23 in the U.S. Bankruptcy Court for the District of Delaware in Wilmington after previously reorganizing in the 2009 bankruptcy of its former parent, Source Interlink Cos.

Source Interlink Distribution, the second-largest magazine wholesaler in the country, filed after its biggest customer, Time Inc., terminated its contract with the company.

The wholesaler, which was responsible for transporting magazines from warehouses to stores, accounted for 18% of American Media's revenues during the quarter ended Dec. 31.

American Media's national distributor is trying to replace the lost business from Source Interlink, but the company estimated on July 1 that the transition period could result in a $10 million to $20 million hit to its revenues. This is an increase from the American Media's June 3 estimate of a $5 million to $10 million revenue cut.

American Media also warned on June 3 that it has exposure to $5 million to $7 million in bad debt related to Source Interlink.

The company's financial troubles are nothing new.

Its 2010 bankruptcy filing came after an out-of-court debt exchange offer fell through. American Media had been in restructuring talks for two years and blamed cuts in discretionary spending for decreased single-copy circulation and ultimately a liquidity crunch that had made it difficult to pay its debts.

The prepack hinged on two note offerings for first- and second-lien debt and used the proceeds to pay its prepetition term loan lenders.

As of the quarter ended Dec. 31,American Media had $565.84 million in consolidated assets and $692.81 million in consolidated liabilities.

During the quarter ended Dec. 31, revenues were down to $74.65 million, compared to $85.32 million during the same quarter last year. The net loss attributable to American Media during the fourth quarter was $50.38 million, compared to a net loss of $57.9 million during the fourth quarter of 2012.

- Jamie Mason contributed to this report.

Tags: American Media Inc. | Avenue Capital Group | Chapter 11 | Chatham Asset Management | David Pecker | JPMorgan Chase & Co. | Leon Cooperman | Men's Fitness | Moelis & Co. | National Enquirer | Omega Advisors Inc. | Omega Charitable Partnership | Shape | Source Interlink Distribution LLC | Star

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