Tribune Co.: Ad Slump? What Ad Slump?

It's not stopping CEO John Madigan from pressing ahead with his acquisition spree

With ad revenues in a slump, newspaper readership in a long-term slide, and TV viewership splintering among a broadening array of choices, Tribune Co. (TRB ) Chief Executive John W. Madigan might be expected to pull in his horns a bit. After all, he built the nation's No. 2 newspaper and TV company less than a year ago by snapping up Times Mirror Co., and he still is absorbing that $8 billion deal. Yet Madigan is out scouting for more purchases. "We don't have all the major markets," he says. "There are opportunities out there."

Another megadeal on the horizon? Not likely, but the onetime Salomon Brothers banker--who since June has controlled major dailies and TV stations in New York, Chicago, and Los Angeles--sees plenty of room to expand his sprawling media empire. For some on Wall Street, however, Madigan's ambitions seem as grandiose as the gargoyle-laden, 36-story neo-Gothic tower that houses Tribune's offices in downtown Chicago. After all, the vaunted promise of the Times Mirror acquisition has yet to be realized a year later. Adding more properties now seems downright perilous, particularly in an ad downturn.

Indeed, investors have been anything but enthusiastic. They shaved 17% off Tribune stock on news of the Times Mirror deal last March, and while it has bounced back, at about $40 a share, it remains far below its late 1999 high of about $61. With additional empire-building, stockholders might flee. "Investors would probably look at any more deals with a bit of a skeptical eye" because it would dilute earnings, warns Prudential Securities Inc. analyst Brian S. Shipman. "The stock would get pummeled."

Madigan is plowing ahead, though, looking to add to the Tribune's 22 TV stations by buying up more outlets in the nation's top 40 TV markets. Tribune still has room to grow under a Federal Communications Commission rule that restricts station ownership. Madigan and his key managers say they don't want to miss out on any bargains, now that the current ad softness could drive down station prices, just as the last ad slump did in the early 1990s. That drop triggered Tribune's nationwide expansion push, leading it to Times Mirror.

FALSE HOPE? Even in the face of investor doubts, Madigan continues to bet that he will lure national advertising into his big-city network of newspapers via package deals. But he's keeping expectations modest--perhaps under $50 million in additional advertising revenue this year, a fraction of the company's $6 billion annual revenue base. He doesn't forecast hefty gains until 2005, when he expects slow-growing sales to hit $200 million. Madigan also is aiming to build up sales across media, giving advertisers the chance to buy space in newspapers at the same time that they buy airtime on local TV--traditionally a tough sell. Cross-media promotions have left advertisers and their agencies cool, says George Hayes, an executive vice-president at media-buying outfit Universal McCann. Such deals rarely "result in better discounts or some unique combination," says Hayes.

But don't count out the taciturn 63-year-old, who has worked in Tribune senior management for the past 26 years and is clearly looking to establish his legacy. Madigan points to a number of synergies among his media properties. In New York, Newsday and WPIX-TV teamed up on pre-election polling last fall in the Senate race between Hillary Clinton and Rick Lazio. Ads in Newsday have helped cement WPIX' No. 3 position in New York in recent sweeps periods. Likewise, frequent mentions on the air are helping build readership for the Long Island-based newspaper as it boosts coverage of New York City. More recently, Tribune outlets shared savvy reporting about auto-racing safety, which eerily preceded Dale Earnhardt Sr.'s fatal Feb. 18 Daytona 500 crash.

And by using other assets, most notably the Chicago Cubs baseball team, Tribune has been winning still more new business. Last season, the company coaxed a video-game maker into running a $250,000 series of TV spots on its Cubs broadcasts even though the ads were slotted for the networks. "It isn't enough to go to an advertiser and say, `Let me steal some of your network money for New York.' The answer would be no," says Betty Ellen Berlamino, general manager at WPIX-TV. "When you go in and say, `New York, L.A., and Chicago'--all of a sudden they listen more."

Cross-promotion and new uses for the data his news-gathering machine produces are a big part of Madigan's efforts on the Net as well. Ever since a $5 million investment in 1991 in the company that became America Online Inc. turned into a $1.2 billion gain, Tribune has backed promising Net ventures. Like others, it has made a few mistakes along the way. Outfits such as Pseudo Programs Inc. and iOwn Inc., a couple of dot-coms that Tribune invested in, are in bankruptcy protection or have been sold off. But other Net efforts, such as, a popular sports site, and the California classified ads site, continue to draw visitors. Still, Tribune, after a $50 million loss last year, expects to lose an additional $25 million this year on its interactive division.

In multimedia, as elsewhere, Madigan insists he's cautious. Expansions, he argues, must be profitable. At the Los Angeles Times, for instance, he has let daily circulation drift downward 4%, to 1.03 million, reversing the costly readership-building strategy previous managers pursued. And he will almost surely see a further slide after doubling the paper's newsstand price on Mar. 5, to 50 cents. Early on, Madigan overhauled senior management at the Times, and he has trimmed 400 jobs. It's all in an effort to hike profit margins in the company's publishing group that slipped from 33% to 27.7% after the Times Mirror purchase.

As he moves to boost profitability companywide, Madigan will be more dependent than ever on his TV stations and newspapers. To reduce debt to some $4 billion and to repurchase stock, he raised about $2 billion after taxes late last year with a rapid-fire series of sales. He sold Times Mirror's magazine division to Time Inc.; its Jeppesen Sanderson flight-information services operation to Boeing; and its education unit to The McGraw-Hill Cos. (publisher of BusinessWeek). The moves, though, have made Tribune far more dependent on sometimes fickle advertising revenues--which lately have made for a "horrendous" top line, warns Merrill Lynch & Co. analyst Lauren Rich Fine. Indeed, on a pro forma basis, the company's operating revenues rose just 5% in 2000, to $5.7 billion, and operating profits 12%, to $1.1 billion.

"WELL-MANAGED." For all the risks he's taking, Madigan has believers, even among the competition. Rival publisher and Gannett Co. (GCI ) CEO Douglas H. McCorkindale nods to Tribune's national-consolidation strategy, noting it echoes Gannett's acquisition approach--even though Gannett sticks mostly to small-town papers and TV stations. Concedes McCorkindale: "Tribune is a very well-managed company."

Madigan's biggest bet may be on a revival in the advertising market in the second half of the year. But even if the slump lasts longer than that, Madigan expects to emerge from it in a better spot than rivals who are less oriented to multimedia. The company had more than $400 million in cash at the end of January. "When the advertising downturn goes away, we're going to be there with these great assets and a great financial position," says Executive Vice-President Dennis J. FitzSimons. Perhaps. But with Madigan's appetite to buy, the company has to work to avoid a prolonged case of indigestion.

By Joseph Weber in Chicago

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