The Tea Party’s Over

For decades the joy of working at the Sun-Times has been blunted by the employees’ knowledge that they would never meet the Queen. When I worked nights there in the 70s I favored shirts and slacks that did not match. “What’s the point?” I told myself. “It’s not like the Queen’s going to show up.” Hadn’t the night editor said as much? “Marshall Field’s a great man,” I seem to recall him saying, “who would never in a million years sell the paper to the likes of Rupert Murdoch. But don’t expect him to stroll in one evening with Lizzie Deuce on his arm. That only happens at high-class Tory broadsheets like London’s Telegraph.”

Who would have guessed back then that in 2004 the Sun-Times and the Telegraph would be kin? But as Conrad Black recently strove to make a judge in Delaware understand, the two papers have maintained a prince and pauper relationship. The Telegraph, a legal brief filed on Lord Black’s behalf saw fit to remind the judge seven times, is the “crown jewel” of Hollinger International. It’s the “trophy asset,” the “core asset.” It’s what makes Hollinger a “world-class newspaper business.” As one Hollinger executive quoted in the brief put it, “You can have dinner with the Queen when you own that newspaper.”

As for the Sun-Times and the Chicago Group it anchors, they’re “much lesser institutions within newspaperdom,” a “back bench newspaper operation,” and “an essentially second-tier American newspaper business.” The Sun-Times was “on a path to the graveyard” when Black bought it in 1994, and even today it’s “the second-place newspaper in a two-newspaper town and is racked by circulation issues.” It’s “under fire.” It’s “scandal-plagued.”

It was in Black’s interest to portray the Telegraph as the only Hollinger International property not beneath his dignity. Under the laws of Delaware, which is where Hollinger International is incorporated, a corporation cannot sell off “substantially all” its assets without the approval of shareholders–which in this case would mean the approval of Black. So Black argued that without his crown jewel, Hollinger International would be just a burlap bag’s worth of provincial rags.

Black was petitioning chancery judge Leo Strine to halt the sale of the Telegraph Group–which is the daily and Sunday Telegraph and a couple of magazines–to the twin brothers Frederick and David Barclay for $1.2 billion. On July 29 Strine responded. It took him half a page to say no to Black and another 92 pages to explain why. I bet Strine wishes he could have written a book. If most billion-dollar corporate disputes that come before Strine are just about the money, this one, at least on Black’s part, reflected a Gilded Age sense of entitlement.

When Black took his newspaper empire public a few years ago, he concocted a pyramid of holding companies that let him go on running it as his fiefdom. As Strine noted, Black controlled Hollinger International even though his “personal economic stake . . . comprised less than 16% of the company’s equity. As a result, Black arguably stood to gain more on a yearly basis from his managerial perquisites at International . . . than he did from increasing the value of International’s profits and share price.”

Profits and share price preoccupy the faceless corporation man, but to Black the perquisites were the point. Black went so far as to renounce his Canadian citizenship when it stood in the way of his becoming the man he was born to be–Lord Black of Crossharbour and he who has dined with the Queen. As CEO of Hollinger International he assembled a board of glittering names–Henry Kissinger, Richard Perle, Governor James Thompson, and the like–to hobnob with. But “despite their distinguished careers,” as Strine observed, these directors “were not, to put it in an understated way, universally perceived as effective monitors of Black.” Minority stockholders finally began complaining too loudly to ignore, and the board had no choice but to take a long look at the books.

And now Hollinger is suing Black, his sidekick David Radler, and other defendants for more than $1.2 billion, and court documents show correspondence in which Black complained that shareholders thought of International as a “gravy train,” in which he admitted that even though the company plane might not really be affordable, “I’m not prepared to reenact the French Revolutionary renunciation of the rights of nobility,” and in which he warned, after the board turned on him, that “we are fighting truly evil people . . . who are a menace to capitalism as any sane and civilised person would define it.”

Today Black still controls the holding company, Hollinger Inc., that controls some 70 percent of the voting shares of Hollinger International. But he and Radler have no say over anything International does, having been stripped of command by its board, the courts, and the Securities and Exchange Commission while the mess they made is sorted out. And when Strine gave the OK last week, the Telegraph, Black’s ticket to Buckingham Palace, was immediately sold out from under him.

I imagine Strine at his desk gleefully composing the lecture he would give the Lord of Crossharbour on the facts of corporate life. “Investors in public companies,” says his opinion, “do not invest their money because they derive social status from owning shares in a corporation whose controlling manager can have dinner with the Queen. Whatever the social importance of the Telegraph in Great Britain, the economic value of that importance to International as an entity is what matters . . . not how cool it would be to be the Telegraph’s publisher . . .

“It may be that there exists somewhere an International stockholder (other than Mrs. Black or perhaps some personal friends of the Blacks) who value the opportunities that Conrad Black had to dine with the Queen and other eminent members of British society because he was the Telegraph’s publisher.” But what matters under Delaware corporate law is “the rational economic expectations of reasonable investors, and not the aberrational sentiments of the peculiar (if not, more likely, the non-existent) persons who invest money to help fulfill the social ambitions of inside managers and to thereby enjoy (through the ownership of common stock) vicariously extraordinary lives themselves.”

Strine’s opinion teems with documentation that Black is a piece of work. Consider the irony that before Black asked Strine to stop the Hollinger International board from selling the Telegraph to the Barclay brothers, the board asked Strine to stop Black from selling everything to the Barclay brothers. When Black stepped down as CEO he pledged his “full support” to a “strategic process” that would examine all possible avenues to maximizing the value of International stock, including selling off its assets. But then he and the Barclays cooked up a deal that would have had them buy his controlling interest in Hollinger Inc. This would have given them control of the Telegraph and the other Hollinger properties while enriching Black immensely and the minority stockholders not at all.

Strine put a stop to it last February, writing a 133-page opinion that said Black had “breached his fiduciary and contractual duties persistently and seriously.” Going back over the same ground on July 29, Strine said Black had no sooner signed on to the strategic process than he began to “undermine” it: “During his dealings with the Barclays, Black kept the rest of the International board in the dark, and made false protestations of loyalty to the Strategic Process. In January 2004, International’s board whiffed the strong scent of Black’s betrayal and began to try to rein him back in.”

Consider Black’s other exhibitions of chutzpah. There’s his insistence that shareholders should weigh in on the Telegraph sale. As Hollinger International noted in its response and Strine in his opinion, when International in 2000 sold off more than half the company–almost all its Canadian papers–for more than $2 billion, there was no shareholder vote. Strine wrote, “And Inc.–then controlled by the same person who controls it now–never demanded one.”

And when Black painted the Sun-Times as a sullied paper that had cheated on its circulation and would now be bled by irate advertisers, his argument echoed the famous plea for mercy by the orphan who’d slain his parents. As Strine noted, if the books were cooked, they were cooked while Radler ran the Sun-Times and reported to Black. It was Radler’s successor, John Cruickshank, who turned the Sun-Times in.

Hollinger International responded to Black’s petition by squeezing his lemons into lemonade. That circulation finagling? A trifle: “Ironically, termination of the improper practices will actually save the Sun-Times money because it will be able to print fewer papers and it will end certain improper payments.” Strine commented, “The reality, of course, is that this embarrassment is, at the very least, a short-term negative that has some real costs.”

The Sun-Times’s hind-teat status in Chicago? “With three Pulitzer Prize winners, including nationally recognized film critic Roger Ebert, and a premier sports section, the Sun-Times captures 36% of the readers in the city of Chicago, as compared to just 29% for its competitor, the Chicago Tribune.” A newspaper analyst was found to say that the Sun-Times is “probably the most successful No. 2 newspaper in recent history.” Strine bought the argument. “Even though it is a tabloid, the Sun-Times is not an undistinguished paper,” he wrote. “Its sports coverage is considered to be excellent, its film critic Roger Ebert is nationally prominent, and its pages include the work of many well-regarded journalists. . . . It fills a niche.”

Whatever the Sun-Times pays Ebert, it is obviously not enough.

Surely Black was right that the sale of the Telegraph would diminish the company? Maybe not. Hollinger International hinted in its brief that it had taken the Barclays to the cleaners, obtaining “an epic, above market price” for a paper on the brink. “As one of ten daily papers in a nation of 60 million people,” International reasoned, “it competes for a dwindling readership that is becoming increasingly obsessed with celebrity culture.” A journalism professor was found to say that “the long-term trends of the Telegraph are not good.” But Strine didn’t bite. “On balance,” he wrote, “there is no question that the Telegraph Group is a profitable and valuable one.”

The Telegraph happens to own a printing plant in partnership with the Daily Express. Hollinger International cited this plant as one more reason why the loss of the Telegraph should not be mourned. The plant is old and needs to be replaced. Furthermore, the plant’s other owner was proving impossible to put up with.

Hollinger International alluded to the demonstration put on by Daily Express owner Richard Desmond at an April meeting of the two papers’ executives. Desmond had coveted the Telegraph himself but couldn’t afford it, and his feelings ran deep. At the time of the meeting he was expecting the paper to be purchased by Axel Springer, a German newspaper group. Newspaper accounts say Desmond welcomed the Telegraph delegation with cries of Guten Morgen and Sehr gut.

He asked if they looked forward to working for Nazis. “That is thoroughly offensive,” replied Jeremy Deedes, chief executive of the Telegraph. “Could you please sit down so we can start the meeting?”

“Don’t you tell me to sit down, you miserable little piece of shit,” Desmond answered. According to the Guardian’s account, he continued, “After three years dealing with a bunch of crooks I’m starting to enjoy this. You sat down with that fucking fat crook and did nothing”–an apparent reference to Black. The Guardian reported that Desmond went on to call the Telegraph executives “fucking cunts” and “fucking wankers,” goose-stepped around his boardroom, and when the Telegraph delegation got up and walked out, instructed the other Express executives present to sing “Deutschland uber alles.”

But it wasn’t Axel Springer who wound up with the Telegraph. It was the Barclay twins, who were willing to pay whatever it took. Reclusive multimillionaires who operate from a tax haven in the English Channel, they have no minority stockholders to answer to. Presumably they will soon be dining with the Queen.

Return of the King?

And what of the Sun-Times and the Chicago Group?

Strine noted in his opinion that “the Chicago Group as a whole has run neck-and-neck with the Telegraph Group in terms of generating EBITDA [earnings before interest, taxes, depreciation, and amortization] for International. In 2003, it won the race.”

Chicago Group earnings last year were $78.1 million, a little more than half of that coming from the Sun-Times. This year they’re projected to be $95.1 million, with most of the increase produced by the 100-some community and suburban papers in the group. Strine noted that when International assets were put up for bid this year, firm offers for the Chicago Group ranged from $900 to $950 million–not far behind the billion dollars plus that International was offered for the Telegraph Group.

Ultimately, the Chicago Group was taken off the market. There are tax disadvantages to selling it now, and liquidating virtually the entire company would have made it much harder to keep Black at arm’s length. Strine observed that Black was hawking a strategy close to the one Hollinger has followed–except that Black’s would have had him ride out his term in Coventry and wind up back in control. Black proposed selling off the Telegraph and Hollinger International’s other assets, hanging on to the Chicago Group (the Post-Tribune in Gary excepted), and buying out the public shareholders. Strine wrote, “Black opined that the Chicago Group would generate annual EBITDA of $130 to $150 million within four years and be worth $1.5 billion.” That’s a nice chunk of change.

The idea that Black, perhaps with Radler, could take over again terrifies people at the Sun-Times. So they look for reasons to believe this can’t happen. One is that Black has cash-flow problems and might be forced to sell his supervoting stock in order to share in the Telegraph proceeds.

Another is more dramatic. In 1982 a Black-run company tried to take over Hanna Mining in Cleveland. Hanna filed a fraud and racketeering suit against Black, who escaped charges by filing a consent decree with the Securities and Exchange Commission. Now the SEC is investigating him again. The old consent decree increases his liability to criminal charges, as well as the odds that the SEC would never again let him run a public company.

Otherwise, the Sun-Times could be in for the sort of shock the Founding Fathers would have felt if they’d convened for the first Continental Congress and discovered George III pounding the gavel.

Art accompanying story in printed newspaper (not available in this archive): illustration/Mike Werner.