Yesterday’s news that Journal Register Company was filing another Chapter 11 bankruptcy could signal the end of any options for Digital First, or any other industry player, to engage in what Ken Doctor described here as a “roll-up” or consolidation strategy.

Last year, looking at the Alden Global Capital acquisitions of MediaNews Group and Journal Register, I speculated that Alden, working through industry veteran John Paton, could be aiming for a consolidation strategy that would combine many more newspapers under common control. A bit later on, MNG’s outgoing CEO, Dean Singleton, confirmed this strategy in an interview with me.

Perhaps, I wrote, consolidation would have the positive connotations spelled out by Doctor, which were pretty much echoed by Singleton: economics of scale in advertising, production, news gathering, distribution. (Or maybe it was the other way around and Doctor was echoing Singleton, who has always looked for opportunities to be found by assembling regional clusters of newspapers.)

But in the year since then, under the yoked management, no significant consolidation took place. Yes, new savings were squeezed out of existing newspaper groups. Both MNG and JRC had newspapers in New England, allowing for some managerial consolidation there. Here and there, printing facilities were closed and the work outsourced or moved to other company-owned plants.

And certainly, Paton pushed with all his might to move hidebound ad departments and newsrooms toward “digital first” thinking. But this is hard to do when many of the papers still have front-end systems that were installed to solve Y2K problems and are to this day incapable of inserting hyperlinks into online text. Not to mention that many have websites that look even older than Y2K. On the other hand, new site and app designs are said to be in the works at the company’s digital skunkworks in Denver (The Denver Post’s snazzy, groundbreaking new iPad app, recently unveiled, could be a promise of good things to come).

But it’s now clear that the “stacking of digital dimes” to replace digital dollars hasn’t happened fast enough. And if there actually was an Alden-led strategy at Digital First to truly capitalize on the combination’s clout through new mergers and acquisitions, it failed.

Roll up or mop up?

Which brings us to the other, more cynical view of what’s meant by consolidation, as I expressed it last year in a comment to Doctor’s post. Doctor’s post presents the roll-up optimistically: a grand exploitation of clustering and super-clustering strategies, resulting in an industry that by 2016 is greatly reshaped but ready for the digital age. That kind of roll-up, which would have required JRC and MNG to take on new debt, is essentially the strategy once pursued by Mitt Romney at Bain Capital, where it was called “leveraging up.”

Alden has shed around half of its newspaper holdings in the past year.

But to execute the roll-up, you need access to new capital in the form of debt, which the Digital First empire was evidently not able to find — even in the case of MNG’s attempt last year to acquire Freedom Communications, where Alden had a stake in both sides of the deal and should have been able to make it happen.

Not only were banks and other lenders apparently unwilling to put money into the Freedom deal — they were also unwilling to finance a true merger of MNG and JRC. Hence the oddball structure in which both companies outsourced their general management to Digital First with Paton at the helm. While this allowed Paton to create a consolidated management operation, it must have been intended as a temporary expedient, just until the markets loosened up enough to permit an actual merger and to permit the roll-up strategy to begin.

In any event, in that comment on Doctor’s post, I suggested the alternative: It’s a not a roll-up but a mop-up, a way to cheaply buy the remaining assets, sell the hard assets that can be sold, squeeze the last profits out of those that can’t, and call it a day. (Pretty much what Mitt Romney and Bain Capital would do about one-third of the time when they couldn’t make the deal roll up.)

With a second bankruptcy in the works, I believe that’s what it’s now come to at JRC, MNG, and Digital First. While Warren Buffett may see value in acquiring newspaper assets, Alden seems more interested in squeezing the mop, rather than investing in any more.

Alden Global Capital is souring on newspapers

Much of this may be driven by the fact that Alden Global Capital, itself, has been gradually exiting the newspaper field for the past year.  The reclusive Randy Smith, who heads up Alden, talked up the potential of Gannett and newspaper stocks in general at a rare appearance last October, calling Gannett “the most undervalued security that [he] knows of.” His paraphrased views about newspapers in that talk, from someone taking notes:

The first thing you need to accept is that print is declining. What’s good though is the digital migration. The decline in print revenues is being offset by the increase in digital. In addition, newspaper companies have a lot of assets that probably aren’t being fully utilized and could be sold off. Across the board, newspapers are cutting costs very rapidly and most have positive free cash flow due to the low capex [capital expenditures] requirement of the business.

Contrast this with Warren Buffett’s view, expressed this year as he acquired a clutch of newspapers including most of Media General’s holdings:

In towns and cities where there is a strong sense of community, there is no more important institution than the local paper. The many locales serviced by the newspapers we are acquiring fall firmly in this mold, and we are delighted they have found a permanent home with Berkshire Hathaway.

You need to read between the lines a bit, but clearly Smith’s views were driving a financial play, not a value-driven investment view like Buffett’s (though the jury is certainly still out on whether the Sage of Omaha knows what he’s doing in this case). And the trouble that Smith and other hedge fund operators found themselves in, at the time of that talk and ever since, is that despite multiple rounds of government bailouts, stimulus plans, quantitative easing by the Fed, and historically low interest rates, access to debt capital for risky ventures is still extremely tight.

The way Smith put it back in October (again, paraphrased by the notetaker): “Today, there is a kind of shutting down of some parts of access to capital for certain troubled companies.” That puts a crimp in the style of “distressed opportunities” hedge fund operations like Alden, which has seen its total holdings fall precipitously, from $3.5 billion in early 2011 to $2.1 billion as of June 30 as investors cash out and look elsewhere. As a result, they’ve not only been unable to execute leveraged debt strategies at the companies they control — they’ve been forced to sell significant chunks of their media holdings.

At Alden, the media sales desk has been particularly active. Over the 12 months ending June 30, according to SEC filings, Alden sold 5.6 million of its 9.2 million shares of Gannett, 50,000 of its 1.3 million shares of McClatchy, 267,000 of its 456,000 shares of A.H. Belo (Dallas Morning News), all of its 213,000 shares of Journal Communications (Milwaukee Journal Sentinel), and all of its 107,000 shares of Media General. No wonder Randy Smith was talking up those shares last fall.

Those are just the changes in publicly reportable holdings. On the privately-held side, Alden and fellow hedge fund Angelo, Gordon & Co. sold their stake in the Philadelphia Media Network at a loss of $84 million. And Freedom Communications, in which Alden held a significant stake, was finally sold last month to Aaron Kushner, a former greeting-card company executive. In addition, Alden still has stakes in long-bankrupt Tribune, the Canadian newspaper group Postmedia, and a few non-newspaper broadcast media firms.

Last year in July, I estimated the Alden’s total media investments to be about $750 million. Today, after the various sales and counting JRC’s value as zero, those holdings are probably down to about $300 million, and it seems clear that Alden would just as soon get out completely — at least from newspapers.

Is this the exit strategy?

So what happens next? Two big questions: Will MediaNews Group follow Journal Register into bankruptcy court? And, despite the existence of a “stalking horse bid” by an Alden affiliate, who will actually end up in control?

First, regarding MediaNews — it too went through a previous strategic bankruptcy, emerging in March 2010 (seven months after JRC did) with $165 million in debt, down from $930 million pre-bankruptcy. Since then, it’s probably paid off about a quarter of that, leaving perhaps $125 million. But like JRC, MNG is also saddled with legacy costs like an underfunded defined benefit pension plan. As of January 2011 (the most recent reporting date), that plan was only 67.6 percent funded, with a funding gap of more than $22 milion. (Full disclosure: As a former MediaNews employee, I’m a beneficiary of that plan.)

MNG has used permissible funding-method elections to delay payments and spread the cost over the next 15 years, but will have to begin making payments in 2013 to cover the underfunding. Given that both companies are managed by Digital First and controlled by Alden, and both have similar “legacy obligations incurred in the past,” Alden’s preference might be to shove MNG back into bankruptcy court, as well. However, MNG is about four or five times the size of JRC, which means its debt load is relatively much smaller and more easily carried — at least for now. So MNG probably won’t be following suit in the near term. But that could change in a year or two if print advertising revenues continue to slide (and I think they will).

Secondly, what about that “stalking horse bid?” The way I read it, there’s no particular guarantee that that bid will be successful, allowing Paton to stay in control. A stalking horse bid is entered simply as a way to set a minimum value on the company. Others could come in with higher bids, although of course, potentially the Alden-related “stalker,” 21st CMH Acquisition Co., could increase its bid. Of course, given Alden’s recent history of ongoing newspaper divestitures, rather than acquisitions, it might well be inclined to sell out rather than bid up. (By the way, an unsuccessful stalking horse generally receives pre-negotiated “breakup fees” as a consolation prize.)

In this case, the stalking horse is identified as an “affiliate” of Alden Global Capital — presumably, it is a company separate from Alden itself but controlled by its CEO Randy Smith and/or other executives. If that’s the case, whether he wins the bid or not, Smith would be removing JRC from the Alden portfolio he shares with other investors. If he loses the bid, he earns breakup fees for his trouble. If he wins, he ends up owning JRC free and clear, and would likely start looking to pick up MediaNews Group in the same way — which would finally clear the way for a merger and, conceivably, re-open the path to consolidation.

But getting to that scenario means piling up a lot of ifs, and I would’t bet on it happening. My guess is that the stalking horse bid is simply there to help gain creditor buy-in to the structured bankruptcy deal, and that at the end of the day, Smith would be happy to let someone outbid him. Who knows, maybe that would be Warren Buffett.