July 25 (Bloomberg) -- Tribune Co., said second-quarter profit fell 59 percent because of a drop in ad sales. The shares surged the most in 10 months after the company said it's moving ahead with plans to be taken private by billionaire Sam Zell.

Net income dropped to $36.3 million, or 18 cents a share, from $87.8 million, or 28 cents, a year earlier, Chicago-based Tribune said today in a statement. Sales fell 6.8 percent to $1.31 billion in the period ended July 1.

Chief Executive Officer Dennis FitzSimons said in the statement that Tribune plans to complete the transaction with Zell in the fourth quarter and expects to be in full compliance with credit agreements. That helped allay investor concern after Los Angeles Times publisher David Hiller said on July 13 that Tribune's largest newspaper had one of its ``worst quarters.''

``They said they're going to try to get it done, which is all that really counts,'' said said Edward Atorino, an analyst at Benchmark Co. in New York, who rates the shares ``hold'' and doesn't own any. ``Revenue was pretty bad, about what I thought, but not worse.''

Tribune shares gained $1.03, or 3.8 percent, to $28.20 at 4 P.m. in New York Stock Exchange composite trading, the biggest jump since Sept. 22. The stock is 17 percent below the $34 a share the company is offering for its stock in Zell's deal.

Spokesman Gary Weitman said Tribune executives wouldn't discuss the report, citing a quiet period the company is observing before an Aug. 21 shareholder vote on Zell's plan.

Classifieds Slide

The company had profit excluding some items of 47 cents a share, compared with the 48-cent average estimate of 11 analysts in a Bloomberg survey.

``Tribune came in in-line with our expectations,'' said Bear Stearns Cos. analyst Alexia Quadrani. If the third quarter misses forecasts, which she called ``a real possibility,'' Zell's $8.2 billion buyout may be in jeopardy, she said.

Newspaper ad sales companywide fell 11 percent as classifieds accelerated their migration to the Internet. Plummeting real estate ads at Tribune publications in California and Florida paced the slide. The company also owns the Orlando Sentinel and Sun- Sentinel in Fort Lauderdale.

Sales of classified ads in Tribune's newspaper group, which includes 11 metropolitan dailies, slid 18 percent, with real estate ads sinking 24 percent. Help-wanted ads dropped 16 percent and auto classifieds fell 12 percent.

Analysts had forecast total sales of $1.34 billion, based on the average of seven estimates compiled by Bloomberg.

Ads Drop Industrywide

Sales at Tribune's broadcast and entertainment division, which operates 23 television stations, were little changed at $393 million. Operating profit fell 2.4 percent to $107.7 million.

New York Times Co. today reported that ad sales at newspapers and related Web sites slid 6.9 percent. Gannett Co., the largest U.S. newspaper publisher, said last week that second-quarter newspaper ad revenue fell 5.3 percent. At Dow Jones & Co., owner of the Wall Street Journal, ad sales dropped 1.6 percent.

Hiller at the Los Angeles Times said earlier this month that second-quarter sales at the newspaper declined 10 percent and cash flow slid 27 percent. In a memo to staff, he said other Tribune newspapers had similar results and that the company's performance was ``worse than the industry.''

Below Forecast

Tribune's performance is also below projections on which the company's leveraged buyout was based. In February, Tribune management predicted sales would fall 0.9 percent this year, according to a June 1 regulatory filing. It also forecast that operating cash flow would drop 2.9 percent, while free cash flow would rise 10 percent, reflecting cuts in investment spending.

Through the first half of the year, the company said sales lost 5.6 percent and operating cash flow declined 22 percent.

Tribune has little chance to catch up to its projections by year-end, Bear Stearns's Quadrani said.

``Good luck with that,'' the New York-based analyst said in an interview. Quadrani had estimated second-quarter revenue of $1.3 billion and profit of 47 cents a share. She rates Tribune shares ``peer perform'' and doesn't own them.

Threat to Deal

Tribune's performance has fed speculation the Zell deal won't happen -- only two other companies involved in pending takeovers are trading so far below their proposed purchase prices, according to Bloomberg data. Zell declined a recent interview request from Bloomberg.

Prices of Tribune's credit-default swaps, financial contracts used to speculate on a company's ability to repay debt, have soared since late May. CreditSights Inc. bond analyst Jake Newman said in a July 9 report that a ``wind shear of fear'' about Tribune's deal was shaking up both the stock and bond markets.

Tribune credit-default swaps traded little changed today at $803,000 to insure $10 million worth of Tribune debt against default. The price implies investors believe there is a 51 percent chance that the company will default on some of its post-deal debt, according to a model developed by JPMorgan Chase & Co. and Bloomberg.

To contact the reporter on this story: Tim Mullaney in New York at tmullaney1f@bloomberg.net.

Last Updated: July 25, 2007 16:15 EDT