Tribune Company: Low Risk, High Reward

Aug.21.07 | About: Tribune Co (TRBCQ)

[Editor's note: This article was originally published on Sunday, August 19 and was updated on Tuesday, August 21.]

From time to time there are anomalies that dictate a high reward to low risk ratio. Tribune Company (TRB) is one of these anomalies.

Essentially Sam Zell put together a mega deal which is actually a two part process. The first part was to get the Chandler family out of the picture. This was accomplished this past May and the Chandlers no longer have a say in the matter. They got their money and are gone.

The beauty of the way this deal was structured to begin with is; once the first part was completed there is virtually no-way that anyone can back out of the second part. In a nut shell, the Tribune's ESOP (employee share ownership plan) borrows the bulk of funds necessary to complete the purchase and Zell shells out $315M - $325M up front for warrants to purchase 40% of the company at a predetermined price of an additional $500M.

Since the first part has already been concluded, neither the ESOP nor Zell nor the lenders have the luxury of backing out without risking a colossal lawsuit. In addition, Zell for sure doesn't want to back-out because of a 27% drop in cash flow and the lenders can't drop out even if they wanted to just like the employees can't as they are now contractually bound to see the deal through.

The stock dropped due to all the liquidity issues driving fear into investors' minds about all pending acquisitions in general. In fact Lehman Brothers are quoted by the New York Times as putting a 50-50 chance of this deal going through. No reason was given and I assume that Lehman is assuming that all pending acquisition deals that are structured around heavy debt are now in jeopardy. The one difference here is that the first $7B of new and refinanced debt has already been consummated and there is no way out of completing the remaining $4.2B debt placement.

At $25.67 or about, I'm willing to risk buying some shares on Monday, await the shareholders vote on Tuesday and sell at a 20+% profit on Wednesday. Just last week the Tribune issued a statement "Our going-private transaction is on track and the financing for it is fully committed. We anticipate closing the transaction in the fourth quarter." Now you would think that if there was a financing issue, they ought to know it by now. Lehman Brothers, take note of the explicit company statement.

In any event TRB is currently valued as if there weren’t going to be an acquisition so there really isn't any downside risk.

Disclosure: Intend on going long on Monday for my private account. Hopefully, not too many people read this on Sunday. Those of you who do are welcome to join the party.

Update 08/21/2007

Tribune Stock Surges Ahead of Vote Monday August 20, 4:57 pm ET
By Dave Carpenter, AP Business Writer

Tribune Stock Surges 5 Percent on Day Before Shareholder Vote; Sale Still Faces Hurdles

CHICAGO [AP] -- Tribune Co.'s stock jumped 5 percent Monday on the eve of a shareholder meeting on the $8.2 billion deal to take the media conglomerate private, but an expected "yes" vote won't erase the questions still surrounding the transaction.

Standard & Poor's underscored concerns by cutting its rating on the company's debt, citing a deterioration in operating performance and cash flow since the deal was announced nearly five months ago. The rating agency lowered Tribune debt -- already carrying junk-bond status -- to "B+" from "BB-" and said it would reduce it further once the buyout led by real-estate billionaire Sam Zell is complete.

That didn't deter investors from sending Tribune's badly lagging stock on one of its biggest upswings in months. Shares rose $1.35 to $27.02 following the latest statement by Tribune that the deal remains on track.

Approval by shareholders on Tuesday is considered a foregone conclusion, since they will be voting to accept $34 per share when the going price is 20.5 percent below that. Bigger challenges remain before the deal can close, however: getting waivers from government rules banning same-market ownership of television and newspapers and surviving the wild swings in market conditions.

"The shareholder vote is certainly a necessary milestone on the way toward completing the deal, but it is less of an event than several other pending considerations," said Mike Simonton, an analyst for the bond rating firm Fitch Ratings.

He attributed the stock surge to volatility in the markets and heavy speculation about Tribune's sale.

Tribune is the second-largest newspaper publisher in the country by circulation and owns the Los Angeles Times, Chicago Tribune, Newsday and The (Baltimore) Sun as well as 23 television stations. The comparative lack of strong bids for the company when it put itself up for sale last fall dramatically illustrated the fading fortunes of the newspaper industry, which is hemorrhaging readers and advertisers to the Internet.

Zell stepped in April 1 to put together a deal in which he is to gain control in a highly leveraged buyout that will take the company private under an employee stock ownership plan. Since then, the newspaper industry's overall outlook and advertising revenues have weakened; fueling speculation the deal could fall apart under Tribune's increasing debt.

"The numbers still don't work for this deal," said analyst Dave Novosel of the bond research firm Gimme Credit, citing high costs, unstable credit markets and deteriorating operational performance.

Zell declined comment through a spokeswoman. But the growing consensus among experts is that the mogul, who has sunk $250 million into the deal including a $200 million loan, is not walking away from it.

"It appears as though he has both the desire and the incentive to remain in the deal," Simonton said.

Banks remain bound by their lending commitments unless Tribune's performance worsens significantly and it fails to meet certain financial requirements.

Tribune already has borrowed $7 billion to finance the first step of the transaction and buy back shares but had to commit to repaying $1.5 billion of it in two years in order to secure the loan. Once the deal wins approval from shareholders and federal regulators, it must borrow an additional $4.2 billion to buy all remaining shares not owned by the ESOP.

The company reiterated Monday that its financing commitments are secure.

"Our going-private transaction is on track and the financing for it is fully committed," spokesman Gary Weitman said. "We anticipate closing the transaction in the fourth quarter, following FCC approval, and expect to be in full compliance with our credit agreements."

Once again, the company has reiterated in plain English that this deal is going through. This is like buying a 90 day T-bill that pays 25% interest per quarter! The deal should close within the 90 day period.

LOS ANGELES (MarketWatch) - Shares of Tribune Co. jumped by nearly 6% at one point Monday, even as Standard & Poor's cut its rating on the company's debt.

At the close, as shareholders prepared to vote Tuesday on Tribune's proposed leveraged buyout proposal worth $8.2 billion, Tribune Company (TRB) ended the day up by $1.35, or 5.3%, to $27.02.

The Standard & Poor's cut didn't seem to deter investors as the rating agency lowered Tribune debt to "B+" from "BB-." S&P also said it plans to cut Tribune's debt rating further to "B" once the $8.2 billion leveraged buyout organized by real-estate mogul Sam Zell is complete.

Tribune is now rated well below the "BBB-" threshold which separates what S&P considers to be investment-grade debt from what it labels as speculative debt, often referred to as "junk" bonds. "BBB-" is S&P's lowest non-junk rating.

Investors had worried in recent weeks over whether the buyout actually had a chance of going through, with concerns focusing on whether the estimated $13 billion in debt would be more than the company could withstand. Shares were cast down below the $23 level intraday at one point last week.

The current market value is still well below the LBO proposed strike price of $34 a share. Since April, when the company accepted Zell's offer to take it private, doubts have mounted that Tribune's increasing debt would make it difficult for the deal to go through at that price. Tribune recently reported a big drop in ad revenue for the second quarter.

Still, company officials said Monday that the deal still will go through.

Tribune owns the Chicago Tribune and Los Angeles Times, along with numerous other daily newspapers and television and radio stations. It also owns the Chicago Cubs baseball team.

Russ Britt is the Los Angeles bureau chief for MarketWatch.

I find it hard to believe that investors are concerned about the S&P debt rating. As a new shareholder, who cares? I'm not holding the debt; I'm holding the stock (yup, I'm in) that is literally guaranteed to be bought from me within 90 days at $33.95.

Or take it short and sweet from Barron's:

Tuesday 21

Shareholders of Tribune vote on the takeover offer of $34 a share by Sam Zell. The shares have been trading well below the offering price, at around $25 a share, on concerns that the deal may not go through. But Tribune says that the transaction will take place and that the financing for it is "fully committed."

Disclosure: Author has a long position in TRB

TRB 1-yr chart