Monday, November 06, 2006

free cash flow

events keep moving inexorably forward on the biggest off-field event surrounding the chicago cubs since 1981. tribune company, the team's owner since that year, continues to field bids from investors for isolated bits of business -- the los angeles times, baltimore sun, newsday and the cubs have all received mention as attractive properties.

but the auction, which has (as these things often do) taken on a life and momentum of its own, has been a singularly disappointing and disheartening event for all involved. the executive clan surrounding tribco ceo dennis fitzsimons has been all but sidelined since its leveraged stock buyback failed to boost the company's stock price, which has been deteriorating for more than two years under the weight of perceived mismanagement and a declining core business. but the chandler family, former owners of the la times and current victorious party in the boardroom, have also been forced to consider that a cherished view of their holding may be just wrong. as reported in today's wall street journal:

Now that Tribune has finally taken their advice, putting the company on the market, the situation isn't looking so bright. With conditions in the newspaper industry deteriorating rapidly, the consensus on Wall Street is that Tribune shareholders should expect a sale to generate no more than the $32-$33 level at which the stock has lately been trading.

Yesterday, a day after reports emerged that several private-equity groups had submitted preliminary bids valuing Tribune in the "low $30s," Tribune stock fell 1.1% to $32.26 on the New York Stock Exchange. And even though Tribune is signaling it is now willing to accept offers for individual assets -- and many well-heeled buyers have been circling some of Tribune's better-known properties, such as the Los Angeles Times -- analysts are doubtful the combined value of a breakup of the company would be much higher.

Several analyst reports issued yesterday predict that Tribune's assets will fetch about the same amount broken into parts as it is valued at today: about $8 billion in market capitalization.

bids across the board suggest that wall street, smelling the blood in the water, is convinced that tribco can be pried apart for bargain prices -- and such a situation, if any can, could dissipate some of the momentum behind the complete breakup that has seemed all but inevitable in recent weeks. some assets will almost certainly be divested, however, even if tribco merely reorganizes itself into a more focused and managable company with a lower debt load.

But some investors feel that Tribune could still sell of some of its larger assets, such as the Los Angeles Times and the Chicago Cubs baseball team, where potential buyers may be willing to pay more for their "vanity" value, some investors say.

the cubs have been receiving ever more frequent mention in financial publications addressing tribco's situation, and for some good reasons. the team is a cash flow generator but a poor growth asset -- which is exactly the same definition that might be applied to newspapers, making the team a small and redundant part of the portfolio of tribco. and a baseball club in a media company is all but the paragon of "non-core asset" -- an enterprise far from tribco's expertise or interests. perhaps the inevitability of a change of ownership helped motivate the resignation of andy macphail last month, and the nomination of a conspicuously "interim" president who has some of the earmarks of a placeholder.

that is of course not to say that the team is of no interest to anyone. this page has before said that the team is at this point "not a good investment for the tribune" -- but it could be a good investment for a buyer with a different set of priorities. as was noted in this week's economist:

Private-equity firms like media companies better than public markets do. Public markets love a growth story. Private equity appreciates cash flow. Radio and television stations and even newspapers throw off loads of cash, which private-equity firms can borrow against, using this leverage to repay their equity fast. That is true even of businesses whose cash flow is in long-term decline, such as newspapers, as long as the rate of decline is relatively predictable. The biggest risk in many of the current batch of deals is that the private-equity firms discover the cash-flow models to be less predictable than they thought, says Colin Blaydon of Tuck Business School's Centre for the Study of Private Equity and Entrepreneurship.

Private equity's biggest advantage today is its access to vast quantities of debt, on what old-time bankers might regard as recklessly generous terms. They can borrow at far higher multiples to earnings than the public stockmarket is willing to sustain. That makes it hard for public companies to compete against private-equity buyers.

it has long been hoped that the cubs could attract a wealthy individual (most americans fantasize about mark cuban, but the global exemplar has to be roman abramovich) whose outsized ego and need to win would drive management far more than concerns for reliable profitability. but, as has been noted by some commenters, the cubs could also make an attractive target for private equity funds seeking a reliable source of strong cash flow, which could be used to pay down the significant debt used to purchase the club in a leveraged buyout. and the truth is that there are a hundred such funds for every would-be abramovich. moreover, historically low interest rates continue to fuel an international debt boom that has pushed private dealmaking to the fore of public financial consciousness -- this is the heyday of cheap debt, and that makes a private deal just that much more likely.

such purchases are hardly unprecedented -- indeed, they're quite common. wycliffe grousbeck, of highland capital, and steve pagliuca, partner is private buyout giant bain capital, snared the boston celtics in 2002 in just such a deal. and bain itself bid first $3.5bn, then $4.3bn for the entire national hockey league in 2005. and they needn't be soulless searches for percentage points.

but most any such deal for the cubs should be accompanied by reasonable expectations. the need for cash to service debt incurred at purchase would continue to require the cubs to direct significant cash away from payroll. and the team would continue to take steps -- as it has under tribco, but perhaps more aggressively -- to maximize cash flow through increased advertising sales, park renovations, and (perhaps most importantly) new deals for broadcast rights.

that isn't a forecast of devastation -- the tribune has been running the club in all these directions for years. but it may mean changes to the heavily nostalgic "wrigley experience" as constructed by john mcdonough. and this writer can see reason to expect that an lbo deal could translate into a compromised payroll. it certainly has for some other clubs similarly structured, such as the celtics -- who have, however, notably gone young under danny ainge in an effort to rebuild a franchise that hasn't won its league title in 20 years and whose team payroll came in 19th of 30 in 2006, down perhaps 15% from 2002-3.

so that for the future, perhaps -- but what of the present? it may be worth recognizing tribune is not in a position now to actively depress the bids that may come in for its assets, including the cubs -- and that the likely bidders are more probably now than ever interested in free cash flow -- and that a major splurge into the free agent market may be, for these reasons at this time, inopportune. much has been made in cubdom about the possibility of the club expanding payroll significantly in an effort to effect a one-year turnaround -- indeed, the only way this page can see such an unlikely avenue working out is a huge free agent binge. and perhaps just a few months ago, when many in tribco still considered that the team would be part of the same basically intact company, it would have made some amount of sense given the late-season collapse in attendance.

but what is the intelligence of taking such a step just now? for better or worse, this writer just doesn't see it. as talks with aramis ramirez linger on with the player in a convincing position of strength, the fiscal wisdom of granting a five-, six- or seven-year free agent contract to any player for the better part of $100mm has seemed to fade (regardless of what it means on the field). that's not to say, of course, that the cubs will be a $80mm team come april -- they won't -- or even that they won't resign ramirez. but it is to say that the hope a sudden revitalization under a wave of money looks terribly chimerical.

No comments: