For Tribune ( TRB), the same guy who pressured it into dating seven months ago has suddenly turned into a suitor who's coming on too strong. The Chandler family trust, which owns 20% of the media conglomerate, refused to sell any of its Tribune shares back in June when the company was offering to buy back its stock at $32.50 a share. Instead, the trust called on the company to go on the auction block, saying a private-equity buyer would pay at least $35 a share for it. Now that sale process has gone awry, and the trust has turned around and offered to buy the company in a deal valued at just $31.70. The offer from the Chandlers, made public in a regulatory filing last week, appears to be one of three bids now on the table (the other two came to light in media reports) for the nation's second-largest newspaper publisher, whose assets include the Los Angeles Times, the Chicago Tribune, a slew of broadcast properties and the Chicago Cubs baseball franchise. All the offers fell short of the sort of premium that investors have hoped for, and Tribune signaled in a press release over the weekend that it's also considering "actions the company may take alone."
The Chandler bid, however, stands out as a measure of the precipitous drop in optimism about the newspaper industry that has gripped the market in recent months. To be sure, these are difficult times for newspapers. But did expectations for Tribune sour so much in the back half of 2006 that it lost nearly $1 billion in value? Its shares have actually climbed 2.7% since June 1, albeit with the boost of a sale looming, and currently trade around $30. "It would seem more consistent to us that if a premium valuation were expected on the selling end of a transaction, it should also be warranted for any purchase offer by that same entity," says Barrington Research analyst James Goss. The trust, which represents 170 members of the Chandler family, argued in the regulatory filing outlining its proposal that its offer holds an 18% premium for Tribune shareholders, based on where its stock price would have been, $27, if not for the market's expectations of a deal. But the Chandlers' initial argument that a sale could garner at least $35 a share came before speculation of a deal got built into the stock. At the time, the trust also cited analysts' estimates that put a breakup value of the company to a buyer north of $40 a share.
With its about-face on the value of Tribune, the Chandler family trust is merely following a basic tenet of investing: Buy low and sell high. But since shares of Tribune were trading higher than the Chandlers' offer less than one month ago, it not only lacks premium -- it's also a low-ball bid. Unlike the family trusts that own controlling stakes in other newspaper stocks, such as the Grahams at Washington Post ( WPO) and the Sulzbergers at New York Times ( NYT), the Chandler family's relationship with Tribune has been relatively short term. In 2000, the Chandlers sold Times Mirror to Tribune for $8 billion, including debt, and became major shareholders. Whereas the Sulzbergers have clung to their controlling stake in the Times to protect the so-called Gray Lady from the short-term whims of Wall Street, the Chandlers have taken an opposite tack with Tribune, pushing for a sale to cash out of an underperforming investment. If Tribune should now accept the trust's bid, the Chandlers would buy only the publishing business, spin off the TV stations and probably sell off the newspapers piecemeal. It's unclear whether a reported offer for Tribune's television properties from Carlyle Group, a Washington, D.C.-based private equity group, is any better. Meanwhile, a bid for the whole company from Los Angeles business moguls Ron Burkle and Eli Broad proposes a recapitalization that would give them control of the company.
According to The Wall Street Journal, the pair want to add a pile of new debt to Tribune's already precarious balance sheet to fund a $27-a-share payout to shareholders. Then investors would be left with a smaller piece of equity that would effectively give them a stake in a risky leveraged buyout whose success would rest on Burkle and Broad's ability to manage Tribune's TV stations to higher profit margins. For those investors who lack the stomach for such a venture, Burkle and Broad estimate that shares would trade for $7 after the $27 dividend payment, giving their bid a total value of about $34 a share, but that prediction rests on speculation. The best option for Tribune may lie in refusing all these options. The conventional wisdom on Wall Street dictates that the company should enter into a transaction as soon as possible as the outlook for the newspaper business continues to deteriorate. But in its rush to sell itself, Tribune's efforts look panicky. It's becoming clear that its various business divisions would get higher valuations if they were sold individually. Tax burdens and other issues would complicate a breakup of the company, leaving its board with few good options. But if interest rates start to go back down in the future, valuations in the newspaper industry could climb and a better selling environment for Tribune's assets could emerge.
"Maybe what this process has demonstrated is that the change in value
of Tribune in recent years isn't tied to incompetent management on the part of Tribune," says Goss. "Maybe it's a broader issue of how the market is valuing an industry that is under some pressure and going through a major transition." Tribune may feel pressure to get a deal done now for fear that its stock will take a hit if the process is extended again or abandoned altogether. But the stock price will ultimately reward the best decision. Bear Stearns analyst Alexia Quadrani said in a recent research note that she "envisions a proposal that may focus on a comprehensive plan to restore top-line growth and might possibly include the divestiture of noncore assets such as FNTV, the radio broadcast group and the Cubs, and the reinvestment of these funds into improving the current business, acquiring higher-growth properties, further share repurchases or a special one-time dividend." Above all, Tribune shareholders shouldn't be rushed into anything. The company should take its time and better understand its options.