Crash Of The Titan

Following months of criticism from angry investors, an embattled media baron accused of lining his pockets at the expense of shareholders is stepping down. Conrad Black agreed to relinquish his post as chief executive of Hollinger International (HLR), the publisher of the Chicago Sun-Times, effective Friday. Black will remain on board as nonexecutive chairman. Shares of Hollinger leapt 17% to a two-year high of $15.73.

"I think this is a major step in the right direction, but the matter is not yet resolved," says Eugene Fox, managing director of Cardinal Capital Management, an institutional equity manager based in Greenwich, Conn., that sued Hollinger over the summer for the right to inspect the company's books. "There are still serious issues being investigated, and we continue to ask for information." (Cardinal Capital Management owns roughly two million Hollinger shares.)

The CEO's resignation comes on the heels of an internal investigation that found that Black and other Hollinger executives accepted about $32 million in unauthorized payments between 2000 and 2001. The company's own probe came to the conclusion that these so-called "noncompete" payments weren't properly disclosed and hadn't been approved by Hollinger's audit committee. David Radler, Hollinger's president and chief operating officer, also quit on Monday.

The disputed payments stemmed from the sale of $760 million worth of newspapers owned by Hollinger. As part of the deals, buyers paid noncompete fees that kept Hollinger from turning around and launching a rival publication in the same market. While those types of arrangements are employed in the media business to protect the value of a purchase, some investors argued that the full payments should've gone directly to Hollinger rather than to individual executives. Black and Radler, who each pocketed $7.2 million, agreed to repay the proceeds plus interest. Another company official, Executive Vice President Peter Atkinson, agreed to fork over $600,000. Executive Vice President John Boultbee, who also received $600,000, was fired on Monday. Boultbee didn't agree to disgorge his gains. None of these executives could be reached for comment.

The internal investigation also uncovered that Toronto-based Hollinger Inc. received a $16.6 million payment from Hollinger International that was never disclosed publicly. Black said he'll try to get the Canadian company to repay the money by June 1. As far back as March 2002, Hollinger defended the noncompete payments to regulators, though the company now admits it was wrong at the time.

Hollinger's byzantine ownership structure has long attracted the ire of investors. The company pays hefty management fees to privately held Ravelston, in which Black has a large stake. Much of these fees are funneled into Hollinger Inc., the cash-strapped parent of Hollinger International that's also controlled by Black. Shareholders, led by New York investment firm Tweedy Browne, have argued for months that $73.7 million in noncompete fees paid to Black and Ravelston should've instead gone to Hollinger International. On Monday, Hollinger said it would stop paying management fees to Ravelston by June 1.

The demise of Black, who turned two Quebec newspapers into an international media empire during his 37-year career, began to unfold on Friday. That's when Chicago-based Hollinger delayed release of its quarterly earnings due to inaccuracies in prior filings with the Securities and Exchange Commission. The company, which also owns publications as far afield as Israel and Australia, plans to disclose the numbers on Wednesday. Gordon Paris, the chairman of the special committee that investigated the noncompete payments, will become acting chief executive. Hollinger has also hired investment bank Lazard to evaluate its strategic alternatives, including a possible sale of the company or some of its properties.

As for Black, it's unclear whether he — or Hollinger, for that matter — is out of the woods yet. The company said the SEC has been informed of the findings and it would cooperate with any official inquiry.

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"We believe there could be additional findings by the special committee and that this could be just the beginning," wrote Jefferies & Co. analyst Jan Loeb in a note Monday reiterating his Buy rating. "Hollinger has hired an investment bank to explore the alternatives for the company. There are several options to consider, but we continue to believe the company will be sold.? We think that there could be other opportunities to cut unnecessary expenses going forward and that after a comprehensive 'clean-up' a valuation toward mid-$20s is within reason." (Loeb doesn't own shares of Hollinger International; Jefferies & Co. doesn't have an investment-banking relationship with the company.)