Should You Buy It? Zell Gives Tribune an Extra
David Peltier
07/04/07 - 09:15 AM EDT
Tribune(TRB Quote) shareholders are set to vote Aug. 21 on a $8.2 billion takeover bid led by real estate investor Sam Zell. While the deal, announced in April, values the company at $34 a share, Tribune closed Tuesday at just $30.14.
Tribune already bought back 126 million shares, or 52% of the company, on June 5, as part of Zell's strategy. But a major hurdle remains between Zell and his second round of efforts to acquire Tribune's assets, which include 11 newspapers such as the
Chicago Tribune and
Los Angeles Times, in addition to 23 television networks and various Web sites.
Namely, three hedge funds that hold about $690 million of the company's 2% coupon convertible debt are claiming that Zell's intention to sell the Chicago Cubs baseball team, owned by Tribune since 1981, would violate covenants in the bond offering.
The sale would help Zell pare some of the debt needed to finance a leveraged buyout (LBO), but if Tribune does default, the debtholders are demanding to be repaid their principal investment when that happens, which isn't otherwise due until 2029.
While Zell and Tribune have defended their actions to sell the Cubs, debtholders have had recent success in demanding more money from motivated buyers in recent LBOs.
Even when Zell sold his own company, real estate investment trust Equity Office Properties, to
Blackstone Group(BX Quote) in February, bondholders were successfully able to demand a 15% premium to the original bid.
With that in mind, I'm here to answer readers' questions: Should you buy shares in Tribune? Does Tribune offer almost certain 15% upside potential over the next couple of months, or will the company's debtholders wreck a potential gain for investors?
Let's take a brief look at Tribune and its troubles. Tribune shares are struggling because its newspapers and television stations are losing eyeballs to the Internet, and advertisers are moving their spending as a result. The company said last month that May revenue fell 11.1% from the previous year to $406 million, led by double-digit declines in each of its publishing, advertising and broadcast divisions.
All of the newspaper publishers have struggled in recent years as more incremental advertising spending has moved online. And I believe that Zell, similar to Rupert Murdoch's pursuit of
Dow Jones(DJ Quote) is more motivated by the power that Tribune's publishing and broadcasting platforms offer, than their current financial strengths.
This creates an opportunity for investors. Given the weak climate for newspapers in general, which certainly cannot give any Tribune executives a restful night sleep, investors would not buy shares in Tribune for the strength of its business. If Zell were not interested in the company, every investor with any sense would wisely pass it over. Fortunately, Zell is making a play for Tribune.
In the meantime, according to a research note issued by Deutsche Bank July 1, where the brokerage raised its rating on Tribune from hold to buy, Zell has already secured the financing to execute his tender offer. While the debt holders may ultimately squeeze a higher bid from Zell, there's been little regulatory resistance about the takeover, and I don't believe they'll be able to block the Tribune deal at this late stage.
With that in mind, I believe the stock is attractive to purchase at current levels, as investors are likely to approve the $34 a share offer for Tribune's remaining shares next month.
