Tribune stock's volatility may stymie buyback

Dispute spurs bets on a restructuring

June 09, 2006|By MICHAEL ONEAL AND SUSAN CHANDLER | MICHAEL ONEAL AND SUSAN CHANDLER,CHICAGO TRIBUNE

CHICAGO -- When Dennis FitzSimons, chairman and chief executive of Tribune Co., announced a $2 billion stock buyback May 30, he was confident that the stock's value would rise.

He just wasn't counting on it moving this quickly.

Tribune shares surged 4.2 percent yesterday as investors bet that an increasingly public dispute between the company and the Chandler family, its second-largest shareholder, would lead to a restructuring that dwarfs the buyback.

Several large Tribune investors and other market observers said the volatility in the stock threatened to disrupt the buyback plan and put the company in play.

At issue, said sources close to both sides, is that as Tribune and the Chandlers contemplate how to unlock the value of Tribune's assets, their interests have diverged over what to do and when to do it.

One key example is a dispute over how to untangle assets caught up in two complicated partnerships worth $3.5 billion, an effort that could be made more complicated still by the stock buyback.

If the buyback ever gets off the ground, that is.

Investors speculated yesterday that if the price of Tribune shares were to move from yesterday's close of $31.58 per share past the top end of the buyback range - $32.50 - there would be no incentive for investors to tender their shares.

Tribune could boost the offering range, but that would require buying back fewer shares or borrowing more money to buy the same number - 75 million, or 25 percent of the outstanding balance.

Even at the current price, shareholders may hold out for a better deal - as evidenced by a flurry of analyst reports assigning "best guess" estimates of the breakup value of Tribune assets.

"The way things are going, the buyback will be moot," said Eric McKissack, chief investment officer of Channing Capital Management in Chicago, which owns 600,000 Tribune shares.

A Tribune spokesman reiterated the company's position that the buyback, scheduled to close June 26, will move forward. But the rampant speculation it has caused is clearly not what the company had in mind.

FitzSimons' conundrum is but the latest problem stemming from Tribune's controversial $8 billion merger with Times Mirror Co. in 2000. That merger, which gave Tribune the Los Angeles Times, Newsday and The Sun, has weighed on the stock as newspapers have fallen out of favor with Wall Street.

Sources say the current headache stems from a long-simmering negotiation between the Chandlers and Tribune management over how to allow the Chandlers to unlock the value of their investments in the wake of a 40 percent drop in Tribune's share price over the past two years.

The family, which had long controlled Times Mirror, owns a 12.2 percent stake in Tribune stock as a result of the merger worth $1.1 billion. It also owns a large interest in two partnerships that hold $3.55 billion worth of assets. Those include Tribune stock, various investments and such real estate as the buildings that house The Times, The Sun and Newsday, sources said.

Robert Willens, a tax and accounting analyst at Lehman Bros., speculated that a buyback might be the last thing the Chandlers want. Because the basis in their stock is near zero, selling shares back to the company would trigger unwanted taxes.

Also, borrowing $2 billion might discourage suitors willing to pay a premium for Tribune stock. And it resulted in a downgrade in Tribune's credit rating, which might have an impact on the value of the assets in the partnerships.

"Acquiring Times Mirror may have made sense for journalistic reasons," Williams added. "But from a tax standpoint, it was a nightmare."

Just how much of a nightmare remains to be seen. There is no denying that a rising stock price has many investors cheering. But some speculated that FitzSimons could easily lose control of the situation if arbitrageurs continue speculating on a restructuring that would break up the company or usher in a new owner.

"The company is in some sort of play now," Channing Capital's McKissack said. "There's open discussion of strategic alternatives that could include spins or sales. That doesn't mean anyone is ready to step up and take the entire thing. But I'm sure a lot of work is being done right now on the value of the pieces."

Michael Oneal and Susan Chandler write for the Chicago Tribune. Staff reporter Mike Hughlett contributed to this article.

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