A 'Public LBO' for the Tribune?

Billionaires Ron Burkle and Eli Broad say their offer for the sagging media giant would give shareholders a private equitystyle payout

Two billionaires say they can help restore struggling Tribune (TRB) to health. Supermarket investor Ron Burkle and homebuilding and insurance investor Eli Broad are offering to spearhead what amounts to an unusual public leveraged buyout of the media company.

Tribune, which owns the Chicago Tribune, Los Angeles Times, the Chicago Cubs baseball team, and a collection of other print and TV assets, hired bankers last year to explore a possible sale of the company. Like many media companies, Tribune is facing an uncertain future as readers and advertisers migrate to digital media. The outcome of the auction isn't expected to be known until March; the board is expected to meet on Saturday to consider the offers on the table.

Mauled by New Media

The bid faces a rival offer from Tribune shareholders, the Chandler family. Neither of the bids, which were submitted as a Jan. 17 deadline approached, has blown investors away. They offer relatively modest premiums to the company's current stock price of $30.90, which gained 1.9% Thursday. Credit analyst Dave Novosel of researcher Gimme Credit questioned in a report whether Tribune directors would accept either offer. The stock hit a high of $34.28 after the auction was announced.

Chandler Trust is offering $31.70 a share, including $19.30 in cash and all of the equity in the broadcasting business. The $7.6 billion deal would break Tribune into separate newspaper and broadcast units, according to a letter the Trust's investment bankers at Merrill Lynch (MER) filed with the Securities & Exchange Commission. The offer represented a 4.5% premium to the stock price on Wednesday, although Tribune shares rose to $30.90 on Thursday as news of the bids was figured into the stock.

The auction was sparked by the Chandlers' dissatisfaction with the company's performance. The family controlled Los Angeles Times' parent Times Mirror, which Tribune acquired in 2000 for $8 billion. The combined companies now are worth only $7.4 billion, reflecting the panoply of problems newspapers face, from the rise of the Internet and dwindling readership to higher newsprint costs.

Private Equity Edge

The Chandler Trust faces an uphill battle with investors. The trust argued in a letter to the Tribune board that its offer reflects an 18% premium to the $27 level that some analysts believe the stock would currently be worth if the auction hadn't been declared. But the Burkle-Broad offer is a bit higher, valuing Tribune at $8.2 billion, or $34 a share.

Burkle and Broad are hoping that the unique structure of their proposed deal will be enough to sway investors. In a letter to Tribune's bankers, the men said they &quote;structured our proposal to allow shareholders to partner with us and participate in what is in effect a public leveraged buyout. Shareholders will be provided an opportunity to capture the same financial returns that would be captured by private equity investors if they were allowed to purchase the entire company.&quote;

Burkle and Broad are alluding to the fact that leading private equity investors have consistently beaten the public markets over the years. Several of the largest firms, which tend to be the most profitable, are generating returns in excess of 50% (see BusinessWeek.com, 12/28/06, "Private Equity's Big Winners"). The average return for the the Standard & Poor's 500-stock index has been 8.65%, according to S&P.

Heavy Debt

As more companies go private, there's some concern that profits and management talent will be drained out of the public sector. The Justice Dept. is investigating whether private equity firms collude with each other by forming &quote;clubs&quote; of a few players to acquire their targets (see BusinessWeek.com, 10/10/06, "Justice Probes Private Equity Firms"). Burkle and Broad are hoping their offer will be viewed as a way to share private equity gains with the public. Public shareholders would be able to participate in the upside of a private equity deal without paying the type of steep fees private equity firms typically assess.

Tribune would emerge from a Burkle- and Broad-led buyout with about $10.7 billion in net debt. That would give the company a debt-to-earnings ratio of 7.4, which is considered high by traditional standards. But even so, Burkle and Broad argue that the company would still generate $270 million to $450 million in free cash flow. Debt financing has been lined up through UBS (UBS) and JPMorgan Chase (JPM). That could help them close a deal quickly, within a month or two after a definitive agreement is reached.

The two entrepreneurs have told Tribune's bankers that they hope to boost the value of the company's public shares by up to 25% over the next four years. Both men would work with the board as nonexecutive vice-chairmen, without compensation. Broad, with a net worth of more than $5 billion, is the founder of builder KB Home (KBH) and SunAmerica, now a part of American International Group (AIG). Broad, a board member at Internet giant Yahoo! (YHOO), would offer insight into digital media. Burkle, whose net worth is estimated at more than $2 billion, would bring his experience in the supermarket business, which is a major newspaper advertiser. Both men would offer advice on the sale of noncore assets. The board would be expanded to 16 members, from 11, and the company headquarters would remain in Chicago.

Just a few years ago, few people would have expected that the third-largest newspaper company in the U.S. would be under such financial pressure or that it would have a hard time enticing buyout offers. But the real question isn't how much Tribune will fetch; it's what sort of business model new owners or investors can create at the media giant.

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