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September 26, 2006

Despite Possible Sale Upside in Tribune is Limited

Yesterday, Tribune (TRB) gave up about 25% of its gains since announcing a settlement with the Chandler Family and creation of a committee of independent directors to look at shareholder enhancement opportunities. Supposedly everything is on the table, including the spilt up or outright sale of the company.

Investors expecting a big payday due to published estimates that the company might be worth $40 or more have to be disappointed so far. I think that my StreetInsight.com colleague Chris Atayan basically has it right when he says that the company already looked at all the alternatives the independent directors will consider and decided to complete a dutch auction and buy back additional shares from the McCormick Foundation. Chris is likely correct in his analysis that management and the Board already know that the dutch auction created as much value as any other alternative. In other words, management knows what I and some others have been saying for awhile: TRB shares are not significantly undervalued when they are trading in the low $30s.

In fact, if you put public market multiples on the separate TV and newspaper parts, at best, you get to a mid $30s target....

Historically, private market values might have been as much 20% above public values but due to lousy near-term fundamentals, severe secular challenges, strict cost cutting, and the addition of substantial leverage in the dutch auction, I suspect that public market values are about right in this case.

The only thing that worries about my analysis is that it has quickly become conventional wisdom that TRB isn’t worth much more than the current stock price. After all the company is for sale in what is essentially an auction process. I know there aren’t many buyers for the whole company due to regulatory and other issues. But just like at an antique auction (yes, I am calling TRB an antique!), all it takes is one buyer willing to pay more than anyone else. I don’t expect that buyer to show up at TRB’s auction, so I plan to sit this one out.

Should TRB shares fail to advance much further, there are implications for newspaper and TV valuations as this would be the second major asset sale (Knight Ridder was the other) that would confirm that public market values are accurate and fairly reflecting the challenging near-term and long-term fundamentals faced by these industries.

Posted by Steve Birenberg at September 26, 2006 11:31 AM in TRB