Tribune (TRB) shares had a big pop last Tuesday after the company announced results of its dutch auction. There was no follow-through since then and the shares are trading just below the $32.50 price at which the tender was complete.
TRB is buying 45 million shares at $32.50, the top end of auction range. The company was willing to purchase 53 million shares, so the auction was not fully subscribed. The next step in the company’s recapitalization is the purchase of 10 million shares from the McCormick Foundation. After that, beginning in mid-July the company will purchase an additional 20 million shares in open market purchases. Open market purchases were originally expected to total 12 million. The larger amount serves to make up for the shortfall from the auction. In total, 75 million shares of 25% of the share base will be repurchased.
The best response I found to the results of the auction appeared in the business section of Wednesday’s Chicago Tribune where Bear Stearns analyst Alexia Quadrani states, “Now it is back to business as usual, and business as usual in the newspaper business is not that good.” The quote captures my own view of current fundamentals but given the high profile dissent of TRB’s new largest shareholder, the Chandler family, it is not clear that weak fundamentals mean that TRB shares will be a poor investment….

Determining what might happen with the Chandler family is impossible. We do know that the family has talked to private equity firms about potential strategies for further enhancing shareholder value at TRB. We also know that the Chandler family and TRB are locked into a tax and valuation dispute over difficult to unwind partnership worth billions. Additionally, we know that so far the independent directors of TRB have shown unanimous support for management and no support for the Chandler’s. Finally, we know that TRB doesn’t have an annual meeting that would enable a proxy fight for until 2007.
Big Shareholders Boycott
What we don’t know is what large shareholders besides the Chandler’s are thinking. We can infer from the unfilled demand in the Dutch auction that many large shareholders did not participate, implying that they think the stock is worth a lot more than $32.50. What we also don’t know is if private equity firms are willing to step to the plate in a deal that could reach $8 billion or more in market cap plus several billion more in assumed debt.
Not Bullish on TRB
I am not really sure what to make of TRB shares. If I had to guess, I’d say that the stock is likely to drift lower over the next couple of months as weak June revenues, a poor 2Q earnings report, and weak guidance for the balance of 2006 trump takeover or restructuring speculation. But I don’t think the shares are likely to fall much below $30 as asset value in excess of $35 definitely exists at TRB, a significant shareholder is publicly agitated, and private equity still seems to have great interest in media assets based on the outcomes at Knight-Ridder (KRI) and Univision (UVN).
A Defensive Stock
The bottom line is that in an uncertain stock market environment over the balance of 2006, TRB shares remain a good place to hide. Upside exists and catalysts are realistic while downside is protected.