Industry News

Tribune's Breaking Story: Will A Buyback Suffice For The Stock, Or Is Media Firm Better Off In Parts?

Stephen Grocer

Will Tribune Co. stay together? An acrimonious dust-up between Tribune and its largest shareholder, the Chandler family trusts, has speculation flying that a breakup or outright sale is likely. The media company, which owns properties such as the Chicago Tribune, the Los Angeles Times and Chicago television station WGN, has seen its shares tumble in the past two years despite management's efforts to cut costs. Its shares are up nearly 20% from their 52-week low set in April and currently sit at $32.43, helped recently by a $2 billion stock-buyback plan. Some think a spinoff of the company's TV unit could push shares above $40, while others doubt a breakup would generate much value and say the buyback will saddle the company with debt.

THE BULL CASE

Buyback Boost: Tribune plans to borrow as much as $2 billion to repurchase 25% of its stock, sell $500 million in non-core assets and cut costs by $200 million over the next two years. The company's "Dutch auction" to buy its own shares ended June 26 with weaker-than-expected shareholder participation -- suggesting investors believe the Chandlers will succeed in their activism and push the share price higher, says James C. Goss of Barrington Research. The buyback should improve per-share earnings because of the reduced number of shares outstanding, Mr. Goss says, adding that the company's initiatives "should help to effectively set a floor on the stock around the $30 level." Meanwhile, Credit Suisse's Debra Schwartz notes "the potential value realized from a restructuring could be $40 to $45 per share."

Greater than the Whole: A breakup, something the Chandler family has been pushing, could unlock value for shareholders, several analysts believe. It would make it easier for buyers to snap up Tribune's TV stations and possibly its newspapers. J.P. Morgan's Frederick Searby says Tribune trades at a steep discount to the sum of its parts. Prudential Equity's Steven N. Barlow estimates the company could be valued at $43 a share after a breakup. Bear Stearns's Alexia S. Quadrani says a split "could result in a higher valuation …" given that buyers are paying a higher premium for television assets than for newspapers. Tribune's TV assets, therefore, could fetch higher valuations alone than if tied to the rest of the media giant. Activism has had mixed results recently. Knight-Ridder's largest shareholder was able to force the company to sell, while Carl Icahn abandoned a campaign for control of Time Warner. But Credit Suisse's Ms. Schwartz believes the Chandlers are resolute about breaking up the company.

Cleared for Takeoff: Several analysts say rules restricting cross-ownership of television and newspapers in the same market has weighed on Tribune's stock, as has its cross-ownership strategy. The lifting of the Federal Communication Commission cross-ownership rules would mean Tribune would have more potential suitors for its assets and would thus be dealing from a position of power, UBS's Brian S. Shipman writes. The FCC recently voted to take another look at the matter. Also, the addition of Robert McDowell to the FCC gives the Republicans a majority and bodes well for the loosening of cross-ownership regulations, writes Mr. Shipman.

THE BEAR CASE

Breaking Up Is Hard to Do: A spinoff of the broadcasting unit is far from certain, and many analysts have doubts. The Chandlers' 14.3% stake isn't large enough to deliver the company to a buyer, and few other shareholders have joined the breakup quest. Tribune's board structure and poison pill would also make a breakup difficult, and the board has been vocal about its choice to stick with the buyback instead, Lehman Brothers's Craig Huber says. Also, questions remain about whether a breakup would add value. The company's broadcasting unit is made up mostly of stations affiliated with the upstart CW Network. Its potential for success has been questioned and has had limited appeal to investors. While a spinoff could make the company more attractive to buyers, Merrill Lynch's Lauren Rich Fine says she doubts there is one buyer for each separate asset, and the sale of individual newspapers or television stations would generate less value. Meanwhile, the taxes that would result from multiple sales would cut significantly into the value created.

A Heavy Load: Repurchasing 25% of its outstanding shares boosted the company's debt load of 4.7x EBITDA, making it one of the most-leveraged firms in the industry, and it did nothing to combat the pressures all media firms face, says Lehman's Mr. Huber. On June 15, Moody's cut the company's credit rating to "junk" status, which will limit Tribune's access to commercial paper, a form of short-term borrowing. The debt will also limit the company's options going forward, according to a Moody's report. "Moody's remains concerned that, until Tribune demonstrates sustainable organic growth, future shareholder pressure may test Tribune's resolve to reduce leverage to below 4.0x EBITDA by 2007 and constrain [Tribune's credit] rating ..."

Sagging Fortunes: Tribune, like many big media firms, has struggled to generate growth. Its revenue has been flat for the past five years, while its newspaper circulation has continued to decline. For Lehman's Mr. Huber, it is these eroding fundamentals that will govern share price, not the buyback. Thomas Weisel's Christa Sober Quarles was encouraged by the buyback plan, but writes, "Until we see evidence of an ad pickup or that the company is able to further improve on its current circulation volume trends, our outlook is likely to remain dampened." The newspaper industry did get a lift in May, when many firms, including Tribune, reported better-than-expected revenue for the month. But most analysts see the results as a blip, and "do not expect a material, nor prolonged, improvement in ad-revenue growth trends," Bear Stearns's Ms. Quadrani writes. Meanwhile, the company's online efforts, although growing rapidly, still don't contribute significantly to its results.


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