Friday, December 07, 2007

a step toward finalizing the tribune buyout

tribco will sweeten the deal for sam zell's nervous bankers by contributing $500mm of its own cash on hand.

Tribune said it has told the lead arrangers of its second-step financing that it intends to use up to $500 million of its cash to cut its bridge loan commitment to $1.6 billion from the original amount of $2.1 billion.

Many investors had expressed concern that Tribune's large debt load would jeopardize real estate mogul Sam Zell's plan to take the company private in deal valued at $8.2 billion, or $34 per share. The financing of the transaction involves the creation of an employee stock program that would incur a massive amount of debt, and for several months, the stock has traded well below Zell's offer price as shareholders fretted that the buyout would fall apart.

trib shares jumped 8% to $32 on the news, closing the deal arbitrage gap to 6.3%.

but the deal is still a headscratcher for many, as offered by the wall street journal.

Deal Journal has covered hundreds of mergers and acquisitions. We can't recall one that was publicly contingent on the receipt of a solvency opinion.

Until now: Sam Zell's planned buyout of Tribune Co.

The requirement gives us some pause on the same day Tribune's shares rose $2.31 to $32 on the New York Stock Exchange, inching closer to the $34-a-share takeover price offered in Mr. Zell's exotic employee-stock ownership takeover plan.

Solvency opinions typically are used in highly leveraged financial transactions, to test -- surprise -- a company's continuing solvency.

They are designed as a legal protection for board members against the concept of "fraudulent conveyance." This is a term most often used in bankruptcy court, in situations where assets are cash or are disbursed in a way that is deemed unfair to creditors.

These opinions are notoriously easy to obtain, and people close to the deal say they expect Tribune to pass the test without problem. Still, the fact that it exists is instructive of the nature of the deal.

When the original solvency opinion was granted on May 9, company advisers Valuation Research Corp. estimated Tribune's fiscal 2008 earnings before interest, taxes, depreciation and amortization would be $1.42 billion, according to SEC filings.

Current fiscal 2008 analyst estimates -- about seven months later -- show a mean projection of $1.076 billion, according to Factset, or 24% lower.

Tribune has improved its cash position beyond its original projections, says one person familiar with the deal. That should well make up for any shortcomings in the near term.

Still, it is worth remembering just how thin Tribune's operating cushion is as it embarks on its journey with Mr. Zell.

the deal looks much closer to being done today than it did monday. but that may not be the best news in the world for tribune's investors. following the last time we talked about this, i said:

maybe the best way to state it is this: IF the deal goes through, i suspect the involved banks will probably lose money, the debt investors in tribune will almost definitely lose money, and tribune itself (either as a whole or in parts) becomes a fine candidate for future bankruptcy proceedings.

i'm clearly not alone in that opinion.

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