As I evaluate the information that emerged last week from the apparently about-to-be-restructured Tribune (NYSE: TRB) and its eventual new chairman, Chicago real estate tycoon Sam Zell, I must admit to mounting confusion. It appears that once the deal concocted by Zell is completed, Tribune will be groaning under the weight of about $12 billion in debt. That seems patently excessive for a company whose assets will continue to be in the declining newspaper and broadcasting industries.
Following six months of tire kicking by a variety of parties, initiated by Tribune's largest shareholder, who became disenchanted with the company's direction and its prospects, last week it was announced that Zell's proposal would win out over a similar one proffered by two Los Angeles billionaires. Zell's proposal will apparently involve $34 per share for the company's common stock, the formation of an employee stock ownership plan (ESOP), and a $315 million cash contribution by Zell himself. The other proposal, set forth by Eli Broad and Ron Burkle of Los Angeles, ultimately appeared to be similar to Zell's.
But as it seems destined to shake out, the reorganized Tribune appears almost certain to be bowed by its increased debt levels. Of course, asset sales could reduce the anticipated borrowings of the company. For instance, Los Angeles music mogul David Geffen offered a reported $2 billion last year for the company's Los Angeles Times newspaper and apparently remains interested in acquiring the property. Similarly, the Baltimore Sun, which Tribune also owns, is apparently being eyed by former Baltimore County politician Theodore G. Venetoulis.
And Zell has said that he'll sell Tribune's Chicago Cubs baseball team at the conclusion of the recently begun 2007 season. The primary question being asked by prospective buyers (who appear to include several Chicagoans, along with Dallas billionaire Mark Cuban, who also owns the Dallas Mavericks basketball team) is whether the sale will include historic Wrigley Field. Even without the ballpark, expectations are that the Cubs could fetch between $700 million and $1 billion for Tribune and Zell.
But arcane financial engineering notwithstanding, Tribune, like other publishing giants like New York Times (NYSE: NYT), McClatchy NYSE: MNI), and Gannett (NYSE: GCI), has watched its advertising revenues and circulation statistics wane over the past several years. Even if Tribune were thriving and growing, and despite the tax advantages afforded by an ESOP, its expected debt payments in the vicinity of $1 billion will clearly tax the $1.3 billion to $1.4 billion in EBITDA (earnings before interest, taxes, depreciation, and amortization) that the company currently produces annually.
"If you are relevant, people are going to buy the newspaper," Zell apparently told Chicago Tribune business writers and editors last week. "If you're not relevant, then people will stop buying the newspaper and stop advertising and we'll all be in a stew of trouble," he warned.
Unfortunately, there are no signs that the movement of readers' eyeballs from published newspapers to Internet news sources is at all a temporary phenomenon. So if you hear groaning from the direction of Chicago's Michigan Avenue, it's likely the result of debt-induced pain at Tribune. Don't be surprised if the company has ground to a complete halt within the next few years.
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Fool contributor David Lee Smith does not own shares in any of the companies mentioned. He welcomes your questions or comments.
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