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June 08, 2006

Interesting Developments at Tribune

The Wall Street Journal reported on Wednesday about some interesting developments at Tribune (TRB). The three Board members nominated by the Chandler family voted against the company's plan to buy back 25% of the shares outstanding. The Chandler family controls 12% of TRB shares that were acquired via their sale of Times Mirror. It is not clear what further action, if any, the Chandler family might take but public opposition to a significant corporate initiative which is supported by senior management suggests that turmoil exists in the TRB Boardroom.

Back on May 30th, TRB announced that it would repurchase 75 million shares, or 25% of its outstanding shares. 53 million shares will be purchased in a Dutch auction at a price of $28-$32.50. An additional 10 million will be purchased from the McCormick Foundation, currently TRB's largest shareholder, with the final 12 million coming in open market purchases.

At $30, the repurchase will cost $2.2 billion to be financed with debt and asset sales totaling $500 million pre-tax (an Atlanta TV station has already been sold to Gannett (GCI) for $180 million). TRB also announced that incremental cost savings of $200 million annually were being targeted. Pro forma for the buyback, debt to EBITDA will be about 4.7 times and shares outstanding will be about 235 million....

The Journal noted that some investors view the company's share buyback as a first step in a larger plan to create shareholder value. The article quotes a TRB spokesman saying "the Board considered a broad range of strategic alternatives" before settling on the leveraged buyback. This comment certainly allows lots of room for rumors. Some analysts have suggested that the company should consider splitting its broadcast television assets, which account for approximately one-third of EBITDA, from its newspaper assets. Other speculation has centered on much larger asset sales possibly including the Chicago Cubs.

With the Chandler family's opposition to the buyback possibly indicating a lack of confidence in management and frustration with the lack of appreciation in the shares since the Times Mirror sales in 2000, one has to wonder if this could be the beginning of the end for TRB as we have known it. If so, the question is whether there is significant incremental value that could be unlocked in TRB shares.

Analysts have TRB trading at 8-9 times 2006 estimated EBITDA. With pure play newspaper companies trading at similar multiples, it doesn’t seem like public market values offer much upside from the newspaper assets. On a private market value basis, Knight Ridder (KRI) is being sold for around 10 times EBITDA. TRB owns major market newspapers including leading papers in the top three markets, so even though the KRI bidding was subdued, TRB might attract more attention. A takeout of TRB would cost around $12 billion, an amount that private equity could seemingly raise easily.

Where value might exist at TRB is in its broadcasting assets. A number of TV stations have been sold recently at 12-14 times EBITDA. Placing that 5 multiple point premium on TRB's $400 million of TV EBITDA theoretically creates $2 billion in value or close to $7 per TRB share on the current share base.

So would I buy TRB here? I would not. I think the leveraged recap creates potential value by transferring it from bondholders to shareholders and adding asset value per share. However, I continue to think that multiples in traditional media will contract until top line growth picks up to at least the mid-single digits. I don’t see that happening at TRB anytime soon, so I'll sit on the sidelines with the expectation that I can buy the stock around the current price months from now. As for the Chandler family actions leading to a raid on TRB, it is a risk I'll take. I don’t think it will happen.

Posted by Steve Birenberg at June 8, 2006 04:40 PM in TRB