Arthur Sulzberger's Deal To Save The Times

Remember back in January, when Mexican billionaire Carlos Slim saved the New York Times (NYT) by lending it $250 million?

Yes, well, we knew then that the deal was dizzyingly expensive–the corporate equivalent of borrowing money from a payday loan shop.  What we didn’t know was just how expensive it was–and how many puppet strings the clever Carlos attached.

A summary:

The New York Times borrowed $250 million from Carlos Slim for six years.  But of this $250 million, the company actually pocketed only $242 million. 

What happened to the rest? 

$3.5 million went to the usual “transaction costs” (a.k.a., investment banking fees).  $4.5 million, meanwhile, went to a mysterious “investor funding fee.”

What is an “investor funding fee”? NYTCo’s latest SEC filing doesn’t say, exactly.  But it sounds as though NYTCo had to pay Carlos Slim $4.5 million upfront for the privilege of borrowing his money. (At your neighbourhood payday loan shop, this would presumably be described as a “processing fee.”)

And now for the cost of the actual money:

In exchange for its $242 million, NYT is paying:

  • Annual interest of 14% on the full $250 million.  Over the six years, that will add up to $210 million.  The cost of this money, in other words, is almost as much as the money itself.
  • Warrants to buy 15.9 million shares of NYTCo stock at $6.36 a share.  This is equivalent to more than 10% of the company.  NYTCo worked for a century to build a global enterprise, only to suddenly give 10% to the neighbourhood payday loan shop.

And now for the strings:

Say what you will about the ethics of Carlos Slim’s various business dealings, he is not a stupid man.  For example, he was not about to lend the New York Times $250 million only to watch the company piss it away on, say, journalism.

Under the terms of the deal:

  • NYTCo is not allowed to incur any additional debt until March 2010–and then only if the company’s fixed charge coverage ratio exceeds 2.75 to 1.  This ratio is a measure of the company’s ability to repay the debt with cash it generates from operations.  It is Carlos’s way of assuring that NYTCo does not continue to mortgage its business and and bury its stakeholders just to maintain the size of its newsroom.
  • NYTCo may not mortgage any of its properties or stuff (with certain exceptions).  Why not?  Because mortgages are secured loans, which means that the lender can seize the collateral before unsecured lenders like Carlos get their hands on it. 
  • If NYTCo sells anything–its Boston Red Sox stake, for example–it must use any cash it gets in excess of $10 million to pay back Carlos or buy tangible things that Carlos can seize if NYTCo goes bankrupt (such as other companies or capital equipment).  If NYTCo does not use this “excess cash” these purposes within a year, it must offer to buy back Carlos’s bonds at full price.  In other words, if NYTCo sells its Red Sox stake for $150 million, $140 million will likely go straight to Carlos.

All of which makes that $4.5 million upfront fee a bit more understandable.  Working out all these restrictions and making sure the NYT sticks to them is annoying…not to mention the hassle and cost of  seizing and reselling stuff if the company ever goes bust.  So who wouldn’t want to be paid $5 million upfront?

For the New York Times, meanwhile, this money was just about as expensive as it gets.

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