Estimated read time: 5-6 minutes
This archived news story is available only for your personal, non-commercial use. Information in the story may be outdated or superseded by additional information. Reading or replaying the story in its archived form does not constitute a republication of the story.
CHICAGO - The auction for Tribune Co. moves into a new, more delicate phase this week.
After a disappointing first round of bids, the company's challenge is to defeat the perception that Tribune is only worth around $8 billion - about as much as it paid for Times Mirror Co. six years ago.
The company is planning presentations for representatives of several of the private-equity firms bidding on the company, hoping to reassure them that the advertising and circulation climate for its key media properties is not as bad as it appears given Tribune's clout in major markets like Chicago and Los Angeles.
Tribune management also plans tours of the company's massive printing facility in Chicago, which has received heavy new investment in recent years to enhance Tribune's ability to offer advertisers more color ads and targeted preprint capability.
The idea: Demonstrate to the potential buyers that despite the seemingly woeful outlook for the newspaper business - a major concern as these firms try to estimate Tribune's future cash flow - Tribune's assets will continue to hold up.
"The problem," said one industry executive who has spoken with several of the firms involved, "is that private equity has to model an exit strategy five years out and they're having trouble seeing that. How much of the problem is cyclical and how much is structural? That's a gamble."
As was widely reported last week, Tribune has also opened the bidding to encompass any and all parts of the company, which includes the Chicago Tribune, Los Angeles Times, television station WGN and a list of other media assets.
The opening round of bidding had been constrained to offers for the whole company. But when several private-equity groups came through with disappointing bids, the company decided to stir the pot by attracting interest in individual assets. The objective, one company executive said, is to seek offers for various assets either to accept them if good enough or to show the private-equity players that there is a secondary market for newspapers like the Los Angeles Times.
"They're trying to continue to build interest and make sure they've got a Plan B and Plan C," this executive said. "They're making sure there's lots of activity. It's more action, and markets drive on action."
Given the headwinds facing the company at this point, however, several close watchers of the process said the market may have already declared what Tribune is likely to fetch - somewhere between $32 and $35 a share. Doing any kind of deal now-either a sale of the company as a whole or a breakup - may simply be an exercise in confirming market expectations, not surpassing them.
Without the takeover speculation that has buoyed the stock in recent months, they said, Tribune shares would likely be mired in the mid-$20s. One Tribune investor who has watched this decline with growing displeasure has begun to resign himself to the idea that a price in the mid-$30s may be all Tribune can hope for at this point.
Before all the takeover talk, he said, the stock was sitting at around $27 a share and the fundamentals of the business have weakened since then.
Typically, he said, when takeover speculation begins, "the stock price will move to what people think it will get in an auction. You probably can't expect a big premium to that. I'm not happy about it, but you have to look at the facts as they stand."
One potential buyer for Knight Ridder Inc. earlier this year noted that the company's stock was trading in the low-$50s when Bruce Sherman, head of a Florida hedge fund called Private Capital Management, first started agitating for a takeover. The stock shot into the mid-$60s on speculation before McClatchy Co. bought Knight Ridder in a deal initially valued at $67.25 per share in cash and stock. By the time the transaction closed, however, a decline in McClatchy's share price valued the deal at just under $60 per share - erasing much of the takeover premium.
"I don't think this situation is going to be so different," he said.
Lauren Rich Fine, a newspaper industry analyst with Merrill Lynch, said Thursday that her breakup value for Tribune was $32 to $33 a share if the company was sold in pieces rather than as a whole. Her viewpoint is especially interesting given that she works for the same investment bank that is advising Tribune management in the sale process.
She said opening up the process to more bidders would help drive prices higher for various parts of the company. "But that is offset by tax leakage on the sale of individual assets," she wrote. What she means is that Tribune has owned many of its assets for so long that the tax bill upon selling them would be huge, making any deals difficult to pull off.
Robert Willens, a tax expert at Lehman Bros. in New York, however, said he thinks the tax concerns are probably overblown. There are so many proven techniques sellers can use to structure tax-free transactions that a low tax basis shouldn't be a deal breaker. In fact, the main reason Tribune and its largest shareholder - California's Chandler family - recently dissolved two controversial partnerships at the center of a summer-long dispute that put the company in play is that it would free Tribune to pursue any tax-free spinoffs that made sense.
"I think the tax thing is a red herring," Willens said.
The bigger issue, said an executive at one of the private-equity firms eyeing Tribune, is the inability to get a clear view of the industry's future as readership and advertising revenue decline. Tribune executives argue that suitors have exaggerated those concerns to keep the company's stock from running higher. But the skeptics also have some real ammunition.
"You saw the circulation numbers that came out," the private-equity executive said, referring to an October report showing a 2.8 percent drop in U.S. newspaper circulation.
"Is there a bottom? No one can determine that. No one has been here before, including the management of these companies. How bad can bad get?"
Investors are starting to ask themselves the same question.
"If they go through this process and the best value they come up with is $35 (per share), we won't be running any proxy fights," one said.
But, he added, doing nothing at this point isn't an option.
---
(c) 2006, Chicago Tribune. Distributed by Mclatchy-Tribune News Service.
