Enron sues over newsprint hedge deals Enron sues media firms Newsprint hedge deals contested
Newspapers have been beating up on Enron Corp. for the better part of this year. Now it's Enron's turn to fight back.
Enron, the now-notorious bankrupt energy trader, is suing two of the nation's largest newspaper companies, including San Jose's Knight Ridder, for backing out of newsprint deals.
Enron, based in Houston, is seeking $22.9 million from Tribune Co. and $8.7 million from Knight Ridder, and is also in talks with New York Times Co. and Media General. (Neither The Chronicle nor its parent, the Hearst Corp., entered into such deals with Enron, according to company representatives.)
Newsprint was only one of many ancillary businesses that fast-growing Enron entered in recent years. In most cases, it wasn't actually selling paper to publishers but instead offered a financial hedge.
If the price of newsprint rose above a certain level, specified in a contract, then Enron would pay the newspaper company. If the price dropped below that level, the newspaper company would pay Enron. "It was essentially a bet," said Knight Ridder spokesman Polk Laffoon. "It's like insurance. No newsprint ever changed hands here."
When Knight Ridder and other newspaper companies entered into deals with Enron in 1997, however, they were reeling from sudden spikes in the price of newsprint -- from $400 per metric ton to $600 per metric ton, according to David Cole, editor and publisher of NewsInc., a newspaper industry newsletter in Pacifica.
"When you have these wide swings, and the swings happen rapidly, it can screw up your financial position," Cole said. "If you play this game, you may be betting long, but at least you're in a position where the money is always consistent. You don't have to go fire 10 reporters to pay for newsprint. That's what happened in '96."
The deals set the price of newsprint around $600 per metric ton, Cole said. Since 1997, however, the price of newsprint dropped, as producers increased capacity and demand slackened. Newsprint now sells for about $425 per ton, Cole said. (To demonstrate the demand for newsprint, Cole said the San Francisco Newspaper Agency bought about 230,000 tons of newsprint in 1998, when it was printing both The Chronicle and the San Francisco Examiner.)
So even though the publishers were on the losing end of the deal, they stuck with it -- until Enron declared bankruptcy last December. "Part and parcel with the agreement is the notion that this financial company has a degree of financial resilience," Cole said.
If Enron was bankrupt, it would not be able to pay if newsprint prices went back up. This gave the newspaper companies a way to try to get out of the deals.
Experts differ on whether the companies could quit the deals.
"Enron may be in breach of the contracts, but that still does not give the other party the right to unilaterally terminate the contract," Stephen Leach, a bankruptcy attorney at Venable, Baetjer and Howard LLP, told Bloomberg News.
But Kevin Mason, an analyst at Equity Research Associates in Vancouver, Wash., told the Associated Press that Tribune and Knight Ridder are likely to argue that Enron would not have been able to live up to the terms of the deal.
That's Media General's contention.
"We simply told them (at Enron), 'you didn't live up to your end of the program,' " Marshall Morton, chief financial officer of Media General, the Richmond, Va., publisher of the Tampa Tribune and Richmond Times-Dispatch, told Bloomberg. "We couldn't stand by and send money to an outfit that clearly was illiquid and incapable of satisfying its side of the agreement."
Reading from a document provided by the company's lawyers, Laffoon, the Knight Ridder spokesman, said Enron does not deny that it defaulted.
"Knight Ridder relied on specific representations regarding Enron's financial condition at the time of entering into the contract, which later turned out to be fraudulent," Laffoon said. "Knight Ridder would never have entered into a financial hedge contract with Enron had it known Enron's true financial condition."
Knight Ridder, the nation's second-largest newspaper company, publishes the San Jose Mercury News, the Contra Costa Times, the Miami Herald, the Philadelphia Inquirer and 28 other daily papers.