Tribune Co. - Attractive Arbitrage Play

Tribune Co. (TRB) is changing to an S-Corporation under Sam Zell before the end of the year. Shareholders holding TRB shares will receive $34 per share without having to pay for commission after the transaction is completed.

However, as of yesterday's close, TRB is trading at $29.60, an eye-popping 14.86% spread left on the table.

Why doesn't an arbitrageur swoop up the shares and enjoy the annualized 178.32% returns? Well, it's fear and uncertainty.

The two most prominent hurdles have been overcome, the first being the shareholder vote, which was overwhelmingly positive, and the second being the waivers from the FCC which Tribune needed to complete the transaction before the end of the year, which were approved last week.

Now, shareholders are fretting that the transaction won't get the necessary financing in time to complete the transaction before Dec 31st. Once the date lapses, all bets are off: the financing needs to be re-negotiated, and there is an 8% payout to compensate the halting of dividends when the deal was announced. And if the whole thing doesn't go through (knock on wood!), some have suggested TRB's share price is only worth $18.

However, I feel that this is an overreaction to some of the recent failed transactions and the general pessimism currently pervading the entire newspaper industry. Even Chicago Tribune staff wrote a pessimistic article titled "Biggest hurdles await Tribune. Deal's path cleared, but can private entity make ends meet?"

An astute arbitrageur should not confuse the industry dynamics with the company being acquired. Once the transaction is complete, the work is done and the investors receive their $34 and move on to the next deal.

I have 3 reasons to be optimistic that the deal will be completed on time:

1. Recent research reports by The Benchmark Company, Deutsche Bank and Wachovia do not foresee TRB violating any debt covenants and therefore expect the deal to be completed in Q4.

2. While $12 billion in debt is a frighteningly large number, $4 billion has already been issued since July, while an additional $4.2 billion is being offered up by the same issuers. I really doubt if banks would want to go back on their terms and possibly lose credibility and future business from famed investor Sam Zell.

3. Lastly, Sam Zell has been vocal about changes at the Chicago Tribune and L.A. Times. He has been giving speeches and interviews on Tribune Co. I believe Mr. Zell is serious about owning Tribune Co. and won't let this deal fall through.

Disclosure: Author is long TRB