Zell's Big Plans for Tribune

The billionaire real estate mogul has won the bidding for the struggling media company. Now, he needs to figure out how to solve its problems

By taking the beleaguered Tribune Company (TRB) out of Wall Street's gun sights with his $8.2 billion deal to buy the Chicago-based newspaper and TV giant, real estate billionaire Sam Zell solves some big problems for the outfit's managers. But he's taking on a host of others.

On the plus side, the feisty Zell's $34-a-share buyout plan, accepted on Apr. 2 by the media company's board, placates the Chandler family, the former Los Angeles Times owners and Tribune board members who put Tribune into play in a nasty public dispute with management in June of last year. It also removes the company from the pressure public investors have brought to bear, as they've seen their shares plunge from nearly $61 a share in the fall of 1999 to a low near $27 last spring.

But as part of Zell's bid, Tribune will have to take on a truly staggering amount of debt—possibly as much as $13 billion, an enormous sum for a company that turned $1 billion operating profit in 2006. With that heavy burden, Zell, a newcomer to TV and newspaper ownership, will have to wrestle with the knotty problems that have beset veteran executives operating big city properties.

The Bigger They Are

Circulation figures have been sliding at such properties as the flagship Chicago Tribune, the Los Angeles Times, and Newsday, as the Internet steals younger readers. Advertising in the papers has been spilling onto the Internet where sites like Craigslist, Google (GOOG), and Yahoo! (YHOO) offer potent alternatives to newspaper classifieds. And mainstay advertisers like department stores have shrunk their purchases in print as they've consolidated.

Tribune has been slammed particularly hard by the industry-wide headwinds. Besides being the nation's second-largest newspaper publisher by revenue, and no. 3 in total circulation, its 11 metropolitan dailies are concentrated in the more challenging big markets. It built itself into this national media powerhouse in 2000, when it bought Times Mirror mere months before the Internet bust hit.

The company eked out an increase in operating revenues last year of just 0.1%, to $5.5 billion, while operating profit slipped 3.7%, to $1.1 billion. Tribune was able to post an 11.1% gain in net income, at $594 million, only because of increases in income from its investments.

TV Troubles

The publishing operations are a particular albatross, despite the fact that Tribune has 8 million readers each weekday and 11 million on Sundays in markets that include New York, Los Angeles, Chicago, Baltimore, and South Florida. Operating revenues in publishing declined 0.1% last year, to under $4.1 billion, and operating profits there slipped 1.4% to $749.2 million. That slope is steepening. Publishing revenues in February fell 5.1%.

The broadcasting operations—which include 23 stations nationwide and superstation WGN—have provided no help to the bottom line. Most of Tribune's TV stations, 14 of them, are in the struggling CW network, home of teen-oriented fare such as Smallville, Gilmore Girls, and Beauty and the Geek. Operating revenues in the segment rose just 0.8% to $1.4 billion, while operating profits slipped 6.1% to $391.5 million.

Just how Zell plans to restore growth in the face of such bleeding is unclear. Other would-be newspaper magnates have resorted to slash-and-burn tactics, slicing costs by cutting staff aggressively in a bid to keep profits up. Indeed, Tribune itself has made such belt-tightening efforts at the Los Angeles Times, leading to several high-profile editorial resignations and complaints of a culture clash between the globally minded Times and the more locally focused Chicago Tribune.

The tensions may have been exacerbated because the money being made in newspapers these days has increasingly been from locally oriented outfits that aren't as afflicted by Internet competition.

ESOP's Fables?

Still, Zell will be asking employees to start acting like owners who are mindful of the bottom line. He signaled as much in referring to "partnering with the management and employees" in the company announcement of his plans. Tribune CEO Dennis FitzSimons echoed that, noting, "Importantly, our employees will have a significant stake in the company's future." A spokesman for Zell said he was not available for comment on the transaction.

The deal is built on an Employee Stock Ownership Plan (ESOP) that will buy up the company stock. Zell himself will put in just $315 million at first, and will also get a warrant letting him later buy 40% of the stock for $500 million. "Going forward, employees participating in the ESOP will be invested alongside Sam Zell, one of today's most successful investors," crowed FitzSimons. The ESOP's chief edge, however, is tax-oriented: It reduces the company's tax burden enough that Tribune will be able to cover the carrying costs of debt it will take on in the deal.

Tribune will end up as one very debt-heavy company. It will raise some $11.2 billion in debt in two stages to get the deal done, using an initial $4.2 billion for a tender offer for the outstanding stock and another $2.8 billion to refinance its current borrowing. In the second stage, it will raise another $4.2 billion to buy up any remaining stock. Along with company bonds that will remain outstanding, Tribune could start out with a debt burden topping an estimated $13 billion.

Unloading the Cubbies

The company will try to ease that burden by selling one of its trophies, the Chicago Cubs. Tribune, which bought the team and its historic Wrigley Field in 1981 for about $20 million, could get more than $500 million for it now, according to investors who have looked at the team. Already, groups are gathering to pursue the championship-challenged team, with an eye toward improving its fortunes. One such potential buyer, private equity firm chief Thomas M. Begel of Chicago's TMB Industries, says he plans to feed his "long-time affliction"—his lifelong fanship for the team—with a group of fellow Chicagoans that will take it off Tribune's hands for a "formidable bid."

The move may be as much necessity as strategy. Zell is part of a syndicate that owns the Chicago White Sox, the team on the city's South Side. So he probably has to sell off either one or the other.

The Cubs, who were just eight outs away from going to the World Series in 2003 when they bombed, delivered an on-field performance last year that gave them the worst record in the National League. But Begel says they nevertheless posted the second-best attendance in baseball, drawing more than 3 million fans to Wrigley last season. Still, he allows that no buyer could expect to turn an annual profit on the team and would be buying with "a lot of emotion involved." Tribune does not break out the team's financial results.

As he figures out ways to make money on Tribune, hard-headed businessman Zell, however, sees the Cubs as a non-core asset. The big question, for him and for the Tribune employees who now will have a stake in his success, is how many more properties at the company will eventually become disposable?

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