April 3 (Bloomberg) -- Billionaire Sam Zell's takeover of Tribune Co. would saddle the publisher of the Chicago Tribune and the Los Angeles Times with about $13 billion of debt as advertising sales and circulation decline.

``Tribune is about to double its debt at a time when they've already cut significant costs out of the company, and revenue to pay off these loans is declining,'' said Ken Doctor, an analyst with Outsell Inc., a Burlingame, California market-research company. ``That could really cripple this company when they need to invest in Internet operations as well as printing plants.''

Tribune yesterday said Zell will take the company private for $34 a share in a transaction that will leave employees as the owners of Tribune. The Chicago-based company will add $8.4 billion to its $5 billion in borrowings to fund the offer for Tribune's stock.

Zell's plan leaves employees as owners of a company with debt that is more than 10 times earnings before interest, tax, depreciation and amortization. Standard & Poor's and Fitch Ratings yesterday cut their credit ratings on the company by two levels to BB- from BB+ and said they probably will reduce the ratings further once the deal is complete.

Credit default swaps in Tribune jumped yesterday, indicating a higher perceived chance of default. The company's bonds fell.

Fitch said it probably will make a ``multiple-notch'' downgrade once the deal closes because of the added debt. The rating probably will drop to about B, two levels below BB- and five levels below investment grade. S&P, which had an A rating on the company 18 months ago, said it may take similar action.

`The Challenge'

Tribune Chief Executive Officer Dennis FitzSimons put the company up for sale in September under pressure from the Chandler family, the largest shareholder. Advertising revenue was in decline and the stock had fallen almost 30 percent in the previous two years.

Now FitzSimons, who will remain CEO, will have more debt to pay as he confronts waning demand from advertisers and readers.

``The work is beginning but that's the challenge,'' FitzSimons said yesterday in a telephone interview. ``We think we have very valuable assets, and we think we can operate in a way that will create additional value focusing on the great local media businesses we have.''

In the six months it took to find a buyer, the shares fell as low as $28.81. Shares of Tribune, which ranks second to Gannett Co. among U.S. newspaper publishers, fell 13 cents to $32.68 at 4 p.m. in New York Stock Exchange composite trading.

`Grave Dancer'

Zell, fresh from the sale of his Equity Office Properties Trust to Blackstone Group LP for $39 billion last month, will invest $315 million of his own money and receive a warrant giving him the right to 40 percent of the company. An employee share ownership plan will be created to buy Tribune and become the owner of the private company.

The 65-year-old Zell, who has dubbed himself ``The Grave Dancer'' for his ability to resurrect companies, said last month that he will sell the Chicago Cubs baseball team and its 25 percent of Comcast Corp.'s Comcast SportsNet Chicago to help reduce debt. Zell, whose office is in an art deco building that housed the now-defunct Chicago Daily News, may be able to turn the company around, a former associate said.

``He's a very smart guy,'' said Ned Spieker, who sold his West Coast commercial properties to Zell in 2001. ``I'm sure he has a good chance of being successful.''

Zell's first foray into media generated billions of dollars in profit. He bought distressed radio station operator Jacor Broadcasting in 1992 for $79 million and sold it seven years later for $4.4 billion.

Employee Ownership

While the employee share plan will own the company, it won't be liable for the debt, which will be taken on by Tribune Co. The plan will be funded by contributions from Tribune of about 5 percent of employees' compensation. Employees will also have the option to invest more in the plan, Tribune said.

The Cubs, bought by Tribune for $21 million in 1981, may fetch $800 million, said Charles Bobrinskoy, vice chairman at Ariel Capital Management in Chicago, which owns 6 percent of Tribune. The company may also sell the Los Angeles Times, Bobrinskoy said.

Tribune's 4.875 percent notes due in 2010 rose 0.21 cents on the dollar to 96.2 cents, bringing the yield to 6.15 percent, according to the Trace reporting system of the NASD.

The perceived risk of owning Tribune's bonds rose, indicating deterioration in the perception of credit quality.

Credit-default swaps based on $10 million of the company's bonds jumped $11,000 to $274,000 yesterday in New York, according to prices compiled by CMA Datavision.

The five-year contracts, used to speculate on the company's ability to repay its debt, have surged more than $100,000 since March 23, London-based CMA data show.

Revenue Slide

Tribune could put some of its 23 television stations on the block, particularly in the markets where it also owns a newspaper.

Profit at the broadcast unit fell 6.1 percent last year. Revenue at Tribune's newspapers, which make up three-quarters of the company's revenue, deteriorated in January and February. Advertising for the two months dropped 6.1 percent to $501 million from a year earlier.

Circulation, which helps set advertising rates, fell 9 percent at the company's three largest newspapers, the Los Angeles Times, Chicago Tribune and Newsday in New York, from 2004 to 2006.

``To get this to work you're either going to have to see lots of cost cutting or significant growth,'' Doctor said. ``There just isn't a scenario that shows how this industry or this company is going to get significantly better.''

To contact the reporter on this story: Leon Lazaroff in New York at llazaroff@bloomberg.netAndy Fixmer in Los Angeles at afixmer@bloomberg.net

Last Updated: April 3, 2007 16:57 EDT