Trouble Deepens For Blackstone-Providence Media Co.

An already troubled media investment by The Blackstone Group and Providence Equity Partners is exhibiting yet more signs of distress.

Freedom Communications

, a newspaper and broadcast company, earlier this month said it may have fallen out of compliance with financial covenants relating to its debt financing in the fiscal quarter ended Sept. 30. The company has undertaken a number of cost-cutting initiatives to help right the ship.

Irvine, Calif.-based Freedom Communications owns more than 30 daily newspapers, in addition to other magazines and specialty publications that push its print portfolio to more than 100 publications. The company’s broadcast segment includes five CBS affiliates, two ABC network affiliates and one CW affiliate. The company recorded total revenues of $798 million for the 12 months ended June 30, 2008, according to Moody’s Investors Service.

Blackstone Group and Providence Equity bought an approximately 40 percent minority stake in family-controlled Freedom Communications in 2004 for about $2 billion. The deal featured about $1.1 billion in debt financing, according to Reuters Loan Pricing Corp.

Weakness in newspaper and broadcast advertising and growing competition for advertising revenue from online media account for much of Freedom Communications’s woes. Declines in newspaper circulation, the recent economic slowdown, and vulnerability to markets affected by the real estate collapse haven’t helped either. In response to the economic uncertainty, the company said it would draw down on the balance of its revolving line of credit.

Upon hearing of the possible covenant breach and the total drawdown on its $300 million revolver, Moody’s downgraded Freedom Communications’s probability of default rating to Caa2 from Caa1, its corporate family rating to Caa1 from B3, and the senior secured credit facility to Caa1 from B3. Total debt affected by the downgrades is approximately $900 million, according to the ratings agency. The downgrade partially reflects Moody’s expectation that advertising spending will continue to decrease as economic conditions continue to decay throughout 2009.

To help bounce back, Freedom Communications is trying to control costs by focusing more on creating local content and selling local advertising—functions it considers to be “core competencies”—while consolidating or outsourcing other activities. The publisher also plans to reduce spending through more conservative use of newsprint and ink. Priority one for the company is to deleverage its balance sheet to “better reflect current revenue streams,” Freedom Communications President and CEO Scott Flanders said in a statement.

Following news of the possible covenant breach, Freedom Communications also said it would cut 142 jobs related to its Mesa, Ariz.-based newspaper, The East Valley Tribune, representing 40 percent of the paper’s total staff. The layoffs will be effective in the first week of 2009, at which time the East Valley Tribune will also change from a daily print publication format to four-day-a-week format. The newspaper, according to publisher Julie Moreno, has suffered declining revenue in the past year and has not been able to cut costs fast enough to offset that decline despite three rounds of layoffs.

For Blackstone Group and Providence Equity, the latest setback is likely to be doubly disappointing as the two firms had attempted an unsuccessful exit of the company late last year by selling their combined minority stakes back to the company. Freedom Communications had gone so far as to line up financing with GE Capital to facilitate the buyback. However, some banks became skittish with the deal given the hardships the newspaper industry was already facing, and the high borrowing costs worried the management of Freedom Communications.