Tribune action moves at more delicate phase

November 07, 2006|By Michael Oneal | Michael Oneal,Chicago Tribune

CHICAGO -- The auction for Tribune Co. moves into a new, more delicate phase this week.

After a disappointing first round of bids, the company's challenge is to defeat the perception that Tribune is only worth about $8 billion - about as much as it paid for Times Mirror Co. six years ago.

The company is planning presentations for representatives of several of the private-equity firms bidding on the company, hoping to reassure them that the advertising and circulation climate for its key media properties is not as bad as it appears given Tribune's clout in major markets like Chicago and Los Angeles.

Tribune management also plans tours of the company's massive printing facility in Chicago, which has received heavy new investment in recent years to enhance Tribune's ability to offer advertisers more color ads and targeted preprint capability.

The idea: Demonstrate to the potential buyers that, despite the seemingly woeful outlook for the newspaper business - a major concern as these firms try to estimate Tribune's future cash flow - its assets will continue to hold up.

"The problem," said one industry executive who has spoken with several of the firms involved, "is that private equity has to model an exit strategy five years out and they're having trouble seeing that. How much of the problem is cyclical and how much is structural? That's a gamble."

As was widely reported last week, Tribune has also opened the bidding to encompass any and all parts of the company, which includes the Chicago Tribune, Los Angeles Times and The Sun, along with television station WGN and a list of other media assets that include eight other newspapers.

The opening round of bidding had been constrained to offers for the whole company. But when several private-equity groups came through with disappointing bids, the company decided to stir the pot by attracting interest in individual assets.

The objective, one company executive said, is to seek offers for various assets either to accept them if good enough or to show the private-equity players that there is a secondary market for newspapers such as the Los Angeles Times.

"They're trying to continue to build interest and make sure they've got a Plan B and Plan C," this executive said. "They're making sure there's lots of activity. It's more action, and markets drive on action."

Given the head wind facing the company at this point, however, several close watchers of the process said the market may have already declared what Tribune is likely to fetch - somewhere between $32 and $35 a share. Doing any kind of deal now - either a sale of the company as a whole or a breakup - might be an exercise in confirming market expectations, not surpassing them.

Without the takeover speculation that has buoyed the stock in recent months, they said, Tribune shares would likely be mired in the mid-$20s.

One Tribune investor who has watched this decline with growing displeasure has begun to resign himself to the idea that a price in the mid-$30s may be all the company can hope for now.

Before all the takeover talk, he said, the stock was sitting at around $27 a share and the fundamentals of the business have weakened since then.

Typically, he said, when takeover speculation begins, "the stock price will move to what people think it will get in an auction. You probably can't expect a big premium to that. I'm not happy about it, but you have to look at the facts as they stand."

One potential buyer for Knight Ridder Inc. this year noted that the company's stock was trading in the low $50s when Bruce Sherman, head of a Florida hedge fund called Private Capital Management, first started agitating for a takeover. The stock shot into the mid-$60s on speculation before McClatchy Co. bought Knight Ridder in a deal initially valued at $67.25 per share in cash and stock. By the time the transaction closed, however, a decline in McClatchy's share price valued the deal at just under $60 per share - erasing much of the takeover premium.

"I don't think this situation is going to be so different," he said.

Lauren Rich Fine, a newspaper industry analyst with Merrill Lynch, said last week that her breakup value for Tribune was $32 to $33 a share if the company was sold in pieces. Her viewpoint is especially interesting given that she works for the same investment bank that is advising Tribune's management in the sale process.

Fine said opening the process to more bidders would help drive prices higher for various parts of the company. "But that is offset by tax leakage on the sale of individual assets," she wrote. What she means is that Tribune has owned many of its assets for so long that the tax bill upon selling them would be huge, making any deals difficult to pull off.

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