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October 25, 2006

Private Equity Shows Interest In Tribune

Newspaper stocks rose strongly yesterday after the Wall Street Journal reported that private equity groups were showing an active interest in Tribune (TRB). On its earnings call last week, TRB reiterated that it hoped to have the strategic review complete by the end of 2006. The Journal is reporting that TRB prefers to sell itself whole. If correct, this suggests to me that the Board has lost confidence in the current management team. Given operational and strategic missteps that have caused TRB to have far worse financial performance than events struggling newspaper peers, throwing in the towel on the current management team is not surprising. Also, earlier this year when the dispute between the Chandler family and Tribune was at its peak, the company looked at restructuring alternatives such as selling the TV stations and concluded that a massive share buyback via dutch auction was a better approach. At the time, I felt that breakingup the company would not produce much excess value as the pieces wouldn’t sell or trade at significant premiums to TRB’s current valuation....

I still believe that is the case today. The Board probably agrees and realizes that selling the whole to a private equity group which specializes in squeezing value out of assets is the best change to get a significant premium. Besides their expertise in selling assets, private equity would be less restricted by complaints about cost cutting measures like layoffs or selling sacred cows like the Chicago Cubs.

Unfortunately for TRB longs, the Journal says that the Chandler family, which owns 15% of TRB, will accept a price in the mid-$30s. The Chandler’s have three Board seats so their opinion matters. I’ve felt all along that amid to upper $30s price was the best TRB would get and I see no reason to change my opinion as fundamentals have only gotten worse at both the newspapers and TV stations.

Other newspaper stocks rallied hard yesterday as well. Presumably, investors were better that if private equity were interested in TRB, they would also come to the rescue of Gannett (GCI) or Dow Jones (DJ caught an upgrade which might have contributed to the pop). Anything is possible but GCI has higher margins and fewer extraneous assets than TRB and DJ has family control that seems willing to support management as it aggressively reorients the company toward electronic publishing.

The bottom line is that beyond selling non-core assets at a premium, the only way to make a lot of money on a newspaper stock, either as a public or private investor, is if sustainable revenue growth returns to the industry. With the secular shift of key advertising categories like automotive, movies, help wanted, and retailing to the internet and national TV, the odds of a renewed growth in newspaper advertising are low.

Posted by Steve Birenberg at October 25, 2006 08:02 AM in TRB