Tribune Publishing Builds A Southern California War Chest

| About: tronc, Inc. (TRNC)

Summary

Next week, eyes will turn from Chicago to southern California as the company bids for papers and related real estate.

Freedom's in-house group buying group and Digital First Media, owner of the adjacent Los Angeles News Group, will bid competitively.

As usual with TPUB, there's lots here to watch.

Chicago entrepreneur Michael Ferro will soon move across town, into the third-floor chairman's suite in the legendary Tribune Tower.

Yes, he'll be 16 floors below Tribune Publishing (TPUB) CEO Jack Griffin, and the Tower is for sale anyway, but his new presence there will be something to watch.

On Thursday, Ferro pulled off a neat only-in-Chicago cross-town move. In one day, he became the single largest shareholder of the third- or fourth-biggest newspaper company in the country and its non-executive board co-chair. At the same time, he separated himself from the Chicago Sun-Times, which he'd bought along with a group of Chicago's elite business players four years before.

Now, he leaves those partners to their own devices and puts an even bigger question mark on the future of the Second City's struggling second paper, the Sun-Times. Could it end up being further connected with the Chicago Tribune, in some form?

While retaining financial interest in the Sun-Times, through his Wrapports company, he's given up any operating role with it, given the Tribune stake and involvement.

As Ferro joins Griffin in the Tower, look for their relationship to become pivotal in the success or failure of the Tribune's business transformation. Ferro, a strong-minded, strong-willed entrepreneur, has been vocal in his criticisms of the newspaper industry and in promoting his beliefs about what it should do differently, even as the Sun-Times itself has struggled. He's been described as a firehose of ideas, backed up by manic energy. As Tribune chairman, he'll be able to advocate and effect some of those beliefs - and that will make the post-Sam Zell Jack Griffin Tower an even more intriguing place.

The question is how well Ferro's ideas match up with Jack Griffin's 18-month-old, oft-cited five-point transition plan? Griffin, who got to know Ferro well when the Tribune and Wrapports put together a contract last fall that turned over the Sun-Times' suburban properties to the Tribune and secured a valuable, long-term printing-and-distribution-of-the Sun Times contract for TPUB as well, believes the new partnership will work. Today, that contract serves as one of the Chicago Tribune's top profit generators, if not the top.

The timing of the deal makes sense, though the question of greatly diluting Tribune stock in exchange for EBITDA-creating revenues in southern California - should TPUB end up buying the Orange County Register - hangs in the air. We'll noodle it below.

Jack Griffin needed a new monied partner, and he needed one quickly. As Tribune Publishing prepares to bid for what could be the linchpin in its southern California strategy - the Orange County Register - next week, TPUB required a war chest to back up its offer in bankruptcy court.

Ferro plunked down $44.4 million in cash that provides that funding, gaining a 16.6% stake in TPUB.

For current TPUB investors, the price of the investment is steep. TPUB issued 5.2 million new shares, in return for the $44M, substantially increasing the number of shares in the company - without increasing its market value. That has meant a fundamental 20% loss in value to current shareholders. Among the big losers are Oaktree Capital, which sees its own stake reduced to 14.9% from 17.9%. Oaktree, a key player in the larger break-up of the Tribune Company, had and has been noticeably quiet publicly about what direction Tribune Publishing should go.

TPUB packaged the big Ferro news with one other blockbuster announcement. It told the markets that its dividend of 70 cents per share per year was a thing of the past - effective immediately. TPUB's investors have endured a precipitous decrease in share price, from an initial $25.50 when TPUB was split off from the Tribune Company 18 months ago, to a closing price of $7.98 on Thursday. That's a 70% drop.

Financial analysts I've consulted tell me the one reason many investors had hung on to TPUB, or bought in more recently, has been the dividend, considered a rich one of about nine percent, given TPUB's now-low share price. Now the dividend is gone, and the markets over time will tell us how much damage its removal will do. (TPUB's share price dove as low as all-time low of $6.36 on Thursday, before recovering somewhat. It ended up 11.3% down for the day and is now down 14% since the announcements.)

It can be well argued that TPUB, given its financial tightness navigating a marketplace in secular decline, should have given up its dividend earlier. Tribune Publishing had first prescribed that dividend, at the split, but it has taken Tribune's board 18 months to come to the grips with it. It would have made more business sense to stair-step down the dividend, rather than remove it in one fell swoop, but that's not what the company did. Lastly, consider that the total paid in dividend last year was a small $18 million. Even such a relatively small amount of money makes a real - and symbolic - difference in times like these.

Making Sense of the Numbers

How do we put all the numbers into perspective?

TPUB's acquisition strategy has been a dominant theme through the first year and a half after it was split off from the larger Tribune Media entity ("The newsonomics of Tribune's orphanage"). And a complex one: On the one hand the new company has been highly acquisitive, on the other, it has been something of an acquisition target.

One of CEO Jack Griffin's top five points of strategy has been the buying up and consolidation of print properties in TPUB's nine core markets. He bought up those Sun-Times weeklies as well as numerous properties around the Baltimore Sun and the San Diego Union-Tribune, most notably. That U-T purchase, urged on Griffin by his then-L.A. Times publisher Austin Beutner, has turned the Orange County Register into a near must-have for the company's regional strategy. The Register, and to a lesser degree its sister Riverside Press-Enterprise, sits plum in between the U-T and the Los Angeles Times on a map. Today, those two papers drive 40% of the revenues of TPUB. Add in the Register and P-E, and southern California becomes half of them. The - ahem - Chicago Tribune really becomes a California-centric property, with its other titles scattered from Hartford to Baltimore to south Florida.

Then, there's the other side of acquisition, and, there too, the Ferro investment provides new grist, or maybe gristle, to chew on.

Last fall proved dramatic for TPUB as Griffin fired Beutner (some four months after the U-T buy) and stared down an attempt by Beutner associate and L.A. businessman Eli Broad to buy the Times and U-T. Then, Apollo Global Management, which had walked away at the last moment from its acquisition of Digital First Media in November, made its own inquiry about buying TPUB as a whole - but it, too, was rebuffed. As 2015 ended, a key question hung in the air: Would CEO Griffin and TPUB Board Chairman Eddy Hartenstein acquiesce and entertain buying interest for the company as a whole or any of its parts, most probably southern California?

Now, that script changes. Hartenstein stays on the board, but simply as one new member of seven. Ferro becomes chair and moves into the Tower. Will chair Ferro look at buyer interest any differently from Hartenstein - or Griffin? One big question: how does he plan to get his investment out?

By the nature of the transaction, Ferro is now subject to two strictures:

· A standstill: Ferro can't accumulate more than 24.99% of TPUB stock overall.

· A lockout: Ferro can't sell any of his shares for three years, and thereafter only 25% of them per year.

So, Ferro can't cash out for an eternity (considering current newspaper economics) - unless and until the whole company is sold. We have no indication that's his plan (and he says he is in for the long-term), but if TPUB were to "pursue strategic options" and be put on the market, Ferro might be able to achieve a 10-20% premium over the approximate $8.50 a share he just paid. Further, he could lower his per-share cost, further buying shares at current, below $8 pricing, up to that 25% ceiling.

Though Apollo hasn't shown interest since fall, a share price in the mid-$6 range could well rekindle its interest, say those with knowledge of the situation. Likely though, Apollo - with its own ideas about how to re-create local media for our times - would want the Chicago Tribune included any deal, even if it were willing to re-sell the L.A Times and U-T to Eli Broad. Ferro's ascension, though, marks a re-Chicagozation of the company, with its headquarters and chairman working out of the Tower - outgoing chair Hartenstein is an Angeleno. Add it all, and it looks like a sale of TPUB becomes more unlikely after the Ferro investment.

Next week, then, eyes will turn back from Chicago to southern California as the bids for the papers, and related real estate, come in. TPUB faces two competitors, though it is the likeliest strategic buyer, given its current holdings there. ("Southern California roll-up gains impetus"). Freedom's in-house group buying group and Digital First Media, owner of the adjacent Los Angeles News Group, will bid competitively.

The trick for TPUB: buying the papers directly out of the auction, rather than having to pay a premium for them to another winning bidder.

The yin and yang of buying the Register

TPUB ended 2015 with $41 million cash in hand. How much might it need to buy Orange County-based Freedom Communications, which includes the Riverside Press Enterprise, Orange County Register and property near the Register valued at $45-55M? The Register isn't making money - still cutting jobs as we speak - and the P-E's range of profit may be in the $5 million range. At a sales multiple of 3X, that might mean it would take $60-70 million plus to win the company out of bankruptcy, one that should conclude within six weeks. (If TPUB or DFM win the properties, they are likely to quickly re-sell the real estate to the local developer, which is part of the in-house bidding group.)

Yet, with other bidders in the competition, the price could go higher.

Jack Griffin needed backing, and quickly. He couldn't easily get it from the credit markets, usually a source of such financing. Why?

Those markets have tightened up generally, and besides Tribune's own balance sheet with $400 million in debt, small cash and uncertain revenues and profits ahead makes obtaining such financing at reasonable rates difficult.

Griffin has championed the "accretive nature" of its previous acquisitions, and largely has the numbers to back that up, especially with the San Diego one. That means he had added financial value to TPUB by doing the deals.

On the surface, the acquisition of Freedom Communications looks like another link in that chain.

I'm told that TPUB might achieve $15-20 million in annual operating savings in southern California, if it can add the Register. Those savings come largely in production, printing and distribution, which could be better aligned from the Tijuana border to Simi County. Such synergies always carry lots of caveats, which we can explore at a later date. Yet they are real here, even if the annual savings come in lower.

The trade-off, in this case, is that Tribune has diminished its own shareholder value by 20% in order to get the money to achieve the synergies, and projected SoCal accretiveness. When investors do that math, it's hard to see how they would be ahead.

One final question emerges out of Tribune's moves: Do they make TPUB more stable? It got a vote of confidence from Moody's on Thursday, calling the moves "credit-positive."

Its early report on financials, while not sterling, did affirm the revised guidance Griffin had offered, to some consternation, in the fall. But as The New York Times' own annual report showed Thursday, print ad revenues - still the driver of overall revenue decline - remain highly un-forecastable, month by month.

As usual with TPUB, there's lots here to watch, but we can focus on three of them in the month ahead: TPUB's share price, the bankruptcy court in Santa Ana and that Tribune Tower elevator.