Tribune Turns the Page

The publisher's rocky buyout process highlights the skepticism about its prospects.
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The marathon sale of the second-largest U.S. newspaper publisher,

Tribune

(TRB)

, ended on a high note, but the process overall was an expression of skepticism about the company's prospects.

Chicago real estate magnate Sam Zell

claimed victory on Monday, ending an auction that has dragged on since last summer. His offer to take Tribune private in a deal valued at $8.2 billion, or $34 a share, beat out a competing bid from California billionaires Eli Broad and Ron Burkle that drove up the sale price in the final days of negotiations.

The purchase price marks a 16% premium to where the stock opened in June of 2006, just before the company's largest shareholder, the Chandler Family Trust, went public with complaints about the company's strategy. The Chandlers had called for a sale, arguing that a private equity buyer would acquire Tribune for at least $35 a share, but things didn't go as planned.

"It's unfortunate that there weren't many players that came to the party," says John Miller, a portfolio with Ariel Capital, a firm that recently reported owning about 6% of Tribune. "Clearly, these are challenging times for newspaper companies."

The sale process was extended last year after an initial round of bids from private equity firms amounted to a disappointment. It reached a low point early this year when the Chandlers offered to buy Tribune for just $31.70, low-balling their own previous valuation.

Miller says he is pleased with the final sale price, which marks a 20% decline in market value from where Tribune began 2003. In comparison, the

S&P 500

is up 61% over that time period.

"

The major shareholders are not showing much in the way of confidence in the company's prospects by selling at this price," says Richard Dorfman, managing director with Richard Alan Inc., a financial advisory and investment firm focused on the media industry.

How much confidence does Tribune's buyer have? Zell will invest $315 million in the deal, which will take place in two phases. After the deal closes in the fourth quarter, Tribune's employees will own a majority stake in the company's equity under an employee stock ownership plan, or ESOP. Zell, who will take over as chairman of its board of directors, will have a warrant that can be exercised at any time to acquire a 40% equity stake for $500 million.

That means Zell could emerge with a 40% equity stake in a company valued at $8.2 billion by contributing a grand total of $815 million. The disparity between those figures represents the towering pile of debt that will result from this deal on top of the $4 billion in long-term debt that Tribune already reports on its balance sheet.

Tribune said it has financing commitments from Citigroup, Merrill Lynch and JPMorgan Chase to raise about $11.2 billion in new debt.

"This is an awful heavy debt load for a company like this that is in the midst of a secular downtrend," says Dorfman, referring to the revenue and circulation declines that are plaguing the newspaper industry. "It's one thing to have debt like this on a company that is growing and very profitable. But that's not the case here."

To be sure, newspapers remain profitable businesses with attractive cash flows, but the future of the industry remains a question mark as younger consumers turn to the Internet for information. Mid-sized regional dailies, like the

Hartford Courant

and the

Baltimore Sun

, both owned by Tribune, are viewed as particularly vulnerable. Tribune also owns the

Los Angeles Times

and the

Chicago Tribune

, along with a slew of other media assets.

While Zell, along with Burkle and Broad, have expressed optimism about the hidden value that venerable newspaper brands may contain in a digital future, Dorfman says the Tribune buyout likely will result in sweeping payroll cuts and asset divestitures at the company. It already plans to sell the Chicago Cubs baseball team at the end of this season, and its TV stations could also be sold along with other businesses.

"Even if the company's current cash flow can support the debt payments, Zell will make cuts to give himself some cushion, in case the downtrends in the industry accelerate," he says.

Meanwhile, at a company that has already experienced tumultuous job cuts, Tribune's employees will now find themselves in the owner's seat. The ESOP structure of the deal will result in tax advantages, but it will also give Tribune's 21,000 employees a say in management of the company.

"Tribune's workers -- the reporters and editors -- are now going to face the reality of being in business," says Edward Atorino, analyst with The Benchmark Company. "It's one thing to complain about managers. It's another thing to be a manager at a time like this."

The deal is still subject to shareholder approval, and until a vote is taken, the company is free to entertain other offers. A change would result in a $25 million breakup fee paid to Zell. At this point, observers say there is little chance that the deal will not be consummated.

George Gombossy, a columnist with the

Hartford Courant

, says he is happier with Zell as a buyer than other alternatives.

"Zell seems like a sharp guy, and I'm thrilled that a visionary has decided to invest in Tribune," says Gombossy. "I hope he's interested in supporting newspapers rather than destroying them."

A spokesman for Burkle's investment firm, Yucaipa Cos., could not be reached for comment on this story. A spokeswoman for Eli Broad declined to comment, and a spokesman for Tribune could not be reached.

"I am delighted to be associated with Tribune Company, which I believe is a world-class publishing and broadcasting enterprise," said Zell in a statement. "As a long-term investor, I look forward to partnering with the management and employees as we build on the great heritage of Tribune Company."

Shares of Tribune were recently up 75 cents, or 2.4%, to $32.86.