Thursday, November 15, 2007

it's in the bankers' hands now

i haven't written a damn thing on this blog in a month, and i can't say i'm sorry about it. putting some considerable distance between oneself and one's ballclub is a healthy mental enema which i highly recommend to all baseball fans, and particularly cub fans.

but i wish i could say that i had used the time to repose upon the meadows and convene with the fish and fowl. instead, i've been elbows-deep in the developing disaster of the credit crisis, which seems to take on ever more scandalous and frightening dimensions day by day. i've come to the sullen conclusion that baseball clubs going forward aren't going to matter nearly as much as they perhaps seemed to in the last couple of years to many of us, with fantasy "problems" taking place in some conveniently-remote dugout or playing field replaced by real problems in our homes and workplaces for more of us than anyone would like.

but, as that relates to the chicago cubs:

most readers here understand the outlines of what happened when sam zell took his pile of cash out of the now-stumbling commerical real estate market (at what now appears to have been the top tick -- wise old man, that mr. zell) and claimed tribune company. let me quote myself from july:

when sam zell bought the trib, he did so with a small amount of equity and pile of debt -- a "leveraged buyout". investment banks offered something called a "bridge loan" to zell so he could make the purchase, with the debt later to be collateralized into bonds which are sold down the chain (at a profit) to investors that zell and tribune then have to pay back.

it's very important to note that these deals are conditional on the object being purchased having enough free cash flow to pay the interest and principal on that mountain of debt back to investors. the entire purchase is predicated on the stability of revenues and cash flow.

however, the newspaper business isn't going very well, and tribune's cash flow is rumored to be dropping like a stone.

in an environment where investment banks are becoming wary of bridge loans (for fear that they won't be able to sell the debt on at a profit because investors will demand more interest) and in several cases demanding repricing or killing deals, this is bad news for zell's deal. a nervous market has turned against it, with tribune's initial debt offering already trading underwater.

in the time since, zell's deal has continued to stagnate. it has encountered obstruction from the federal communication commission, which appears to be clearing now with some concessions to divest tribune of television stations in hartford and possibly (yes) chicago.

but the more interesting and salient point is this:

Tribune shares rose 72 cents, or 2.5 percent, to $29.25 yesterday. Holders will get $34 a share if the buyout is completed by Jan. 1, and an additional 8 percent on an annualized basis if it closes later.

skepticism of the deal actually being completed is still sufficient to maintain a 16% discount on tribune stock which will supposedly be bought by tribune at $34 within weeks.

why? in short:

``Bankers are like dogs,'' said Hands, the chief executive officer of London-based Terra Firma Capital Partners Ltd., at the industry's SuperInvestor conference in Paris today. ``They hunt in a pack and go into a feeding frenzy. When hit, they whimper, and hide in their baskets. The bankers have been hit very hard, and they're not going to come out of their baskets.''

leveraged buyout bids are failing everywhere you look. all the titans of the lbo business have called off major deals -- cerberus, kkr, blackstone and others have been beset by the inability of the bankers that provide them the leverage necessary to complete their deals. this is because the banks themselves doubt their ability to sell the incurred debt on to investors without taking severe losses.

and the bankers have more to worry about than their bridge loan portfolio. with loss estimates suddenly mounting into the hundreds of billions related to their exposure to the crashing residential mortgage market, they are paying terrible prices to roll over their own debt because of widespread concerns over balance sheet weakness. in an effort to shore up by obtaining capital and reducing leverage, bankers are killing deals as best they can.

will zell's deal be one of them? i can't say, but the equity market is clearly not optimistic -- extremely rarely do traders leave a sure 16% profit on the table.

while some optimists are proclaiming tribune's intention of picking the winning bid for the cubs by the end of the year, it's become clear that no deal will be done this offseason. the glacial pace of the transaction is met by dissembling wonder at the office of bud selig:

But two highly placed MLB sources confirmed Thursday that Commissioner Bud Selig had been unable to keep the process moving at that timetable, ruling out a sale before the end of the year and making one before the Cubs go to training camp next spring highly unlikely.

"I'm afraid that is right," a source said. "I can't say for sure why this is moving at the pace it is, but the pace of it has been frustrating. We had hoped it would pick up some steam, but it hasn't."

but there's no mystery here. one must realize that if the banks kill zell's deal all bets about the cubs are off -- and indeed, the reason the process is being strung out is precisely because zell doesn't own tribune yet and won't until another $4.2bn in debt is taken on by his bankers.

the sale of the cubs is in the hands not of the fcc nor of tribune nor of selig nor of zell at this point. the ball is in the court of citigroup, merrill lynch, jpmorgan chase and bank of america -- zell's bankers. we'll have to wait and see what their decision will be.

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