Thursday, January 18, 2007

tribune auction fails to generate interest

though it has been cast into the background by events relating more directly to the team on the field, the travails of tribco have not stopped in the interim whilst cub fans have been distracted. a four month auction period technically expired at 3pm yesterday in which no entity came forward to buy tribune as a whole.

The Chandler family, which owned the Los Angeles Times for more than a century, and a partnership of local billionaires Eli Broad and Ron Burkle made competing offers Wednesday for Chicago-based media giant Tribune Co.

The Chandler proposal would put the family and its unnamed minority partner in control of Tribune's 11 newspapers, and would seek to spin off the company's 23 television stations into a separate entity. The billionaires, by contrast, would leave Tribune intact. They would rely on heavy borrowing to take a roughly one-third interest in the company.

The details of the Chandler offer remained unknown Wednesday night, but were expected to be outlined in a regulatory filing this morning.

The Broad-Burkle proposal, a so-called recapitalization that one person described as a "public" leveraged buyout, would roughly triple the company's long-term debt to more than $10 billion, sharply raising the company's financial risks and increasing pressure to sell assets or cut expenses.

The most unusual feature of the proposal is a gigantic cash dividend of $27 a share — about $6.5 billion total — that would be paid to Tribune shareholders soon after the closing of the deal. For many shareholders, the large dividend could be an attractive selling point: receiving cash yet still retaining stock that Broad and Burkle say would be worth $7 a share after the recapitalization. That estimate, however, is much in doubt on Wall Street.

Under the proposal, Broad Investment Co. and Burkle's Yucaipa Cos. would control six of 16 seats on a reconfigured Tribune board and the principals would be named co-chairmen of the panel. The pair promised to leave the company's headquarters in Chicago and to keep Tribune Chief Executive Dennis J. FitzSimons and other top executives in place.

in short, the chandlers continue to seek the breakup of the company in order to unlock value. the broad-burkle bid constitutes a leveraged buyout which is probably tantamount to a breakup -- as they have stated, they are interested mostly in the los angeles times and would likely dispense with the majority of the remaining assets of tribune in order to pay down the enormous debt of acquisition, particularly in the environment of declining ad revenue that tribune faces along with all other newspapers.

the expected bids from private equity simply have not materialized, except for one offer for the broadcasting properties.

Chicago-based Madison Dearborn Partners had been expected to lead one bid. But sources close to the firm said that its consortium, which included Providence Equity Partners and Apollo Management, decided not to make an offer after examining Tribune's books. The investment firm found declining revenue and potential tax problems.

"Everybody there was hoping they could make sense of this and when you added up the value of each of the properties that you would get to a price above market," said one person familiar with Madison Dearborn's thinking. "But when they added up all these prices, they just couldn't get above market price."

In addition, Chicago-based Madison Dearborn took a rosier view than its partners, New York-based Apollo and Rhode Island-based Providence Equity, which were even less inclined to go forward with an offer.

The flagging revenues at Tribune's papers left one Madison Dearborn advisor to conclude, "It's just a crappy industry. I hate to tell you that. But you know."

many possibilities still remain for tribune and the cubs as things are sorted through, but clearly there continues to be good reason to think a sale of the ballclub more likely than not. although this page concluded that a spending splurge was inopportune at a time when throwing off free cash flow could be considered a paramount goal, the organization clearly decided otherwise -- finally deciding to direct a larger proportion of the considerable revenues to payroll, though heavily backloading contracts in an effort to depreciate their real value. this is a move that may do more than hamstring the club over the next few years if revenue growth does not continue to rise -- the impingement upon free cash flow may also serve to scare off some potential buyers, whose costs of borrowing are heaviest immediately following acquisition. still, that will serve probably to marginally depress the price more than kill the deal.

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