Tribune's Troubles Continue

Earnings do little to comfort investors, and the publisher has no news on its strategic options plan.
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Tribune

(TRB)

reported higher third-quarter profits Thursday, thanks to a series of one-time items that affected comparisons, but revenue continued to slump and the publisher had no news for investors about its plan for strategic alternatives.

Tribune's board agreed last month to explore such alternatives, and it has said it will make a decision about the company's future before the end of the year. After years of poor financial performance, Tribune is under pressure from its largest shareholder, the Chandler family, to break up the company, and some have speculated that it could even be taken private in a leveraged buyout.

Murray Schwartz, a mergers and acquisitions attorney with law firm Katten Muchin Rosenman and a former senior executive with a newspaper conglomerate that eventually became the

Journal Register

(JRC)

, says Tribune will probably spin off a business that largely resembles the old Times Mirror company, another newspaper publisher that Tribune swallowed up in an ill-fated media merger six years ago.

"You would have to work hard to find a bigger mismatch in culture and expectations than the Chandler family and the traditional Tribune company," says Schwartz. "The Chandlers are an iconic newspaper family whose identity is completely intertwined with the city of Los Angeles. They were bound to clash with the buttoned-up, institutional management of Tribune, coming from halfway across the country."

Like other media mergers that took place at the height of the Internet bubble in 2000, Tribune's union with Times Mirror has been an exercise in disappointment. Revenue from across Tribune's range of business units has consistently disappointed investors, and its stock is now trading 16% below where it began 2001.

The ill-will came to the fore last summer when the Chandlers, whose storied control of the

Los Angles Times

ended when they sold Times Mirror, called publicly on Tribune to either break up or be sold. The family threatened to wage a proxy fight aimed at ousting the company's management.

Even as the two sides have come to terms on a decision to wind down two complicated financial relationships between them, a move that clears the way for more dramatic restructuring efforts, Tribune's grip on the

Times

appears exceedingly tenuous.

Wealthy buyers in California, like music mogul David Geffen and supermarket tycoon Ron Burkle, have reportedly expressed interest in a deal. Other local business interests in L.A. have voiced concern about Tribune's personnel cuts in the newspaper's editorial staff.

Meanwhile, Tribune recently ousted its publisher at the

Times

for refusing to make deeper staff reductions. The newspaper's editor, Dean Baquet, remains onboard despite his own public protests against the cuts ordered by its corporate parent, but morale at what is arguably Tribune's marquee news gatherer has seen better days.

The same can be said for other market-leading newspapers that joined the Tribune umbrella when it acquired Times Mirror, including the

Baltimore Sun

,

Newsday

and the

Hartford Courant

. All the organizations have seen staffing cuts in the face of circulation and advertising declines, and there is reportedly concerns about more cuts at each.

Tribune's earnings report on Thursday did little to dispel that notion. The company said it earned $162.2 million, or 65 cents a share, compared with $21.9 million, or 7 cents a share, in last year's third quarter. Excluding one-time items, it earned 43 cents a share for the quarter, missing expectations on Wall Street for earnings of 45 cents a share.

On the top line, revenue fell almost 3% to $1.35 billion from $1.38 billion as revenue from publishing advertising decreased 2%. Analysts had expected revenue of $1.37 billion.

The publishing division's operating profit fell 17% to $141 million from $170 million.

In a research note, Gabelli & Co. analyst Barry Lucas said "the quarter was not a good one

for Tribune, and is reflective of ongoing difficulties faced by owners of large metro dailies."

The advertising market for newspapers has been hurt by waves of consolidation in the auto and retail industry, along with a slow year for the film and entertainment business. Also, the rise of the Internet has diverted precious ad dollars away from traditional media outlets like newspapers and TV stations to online content providers like

Yahoo!

(YHOO)

and

Google

(GOOG) - Get Report

.

John Morton, a newspaper industry analyst, says it's unlikely that Tribune will sell any of the major newspapers it acquired in the deal for Times Mirror.

"The company's strategy remains trying to own newspapers and television stations in major markets, so it's more likely that they'll sell off some television stations in markets where they don't have newspapers, and newspapers in markets where they don't own television stations," says Morton. "They won't sell any properties where they've got dual properties."

Schwartz says that if the two parties can come to a suitable tax arrangement that makes sense, the Chandlers will likely part ways with Tribune. He maintains that media companies that continue to invest in robust editorial departments that produce quality journalism will ultimately be in a good position when the industry's technological transformation shakes out.

"They will be the premier newsgathering sources of record in whatever format their market demands," says Schwartz.