Analysts: Tribune outlook murky as ever

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CHICAGO -- Tribune Co.'s embrace of an $8.2 billion buyout offer from real estate mogul Sam Zell leaves the outlook for the nation's second-largest newspaper publisher as murky as when it began a business review in September.

"The transaction leaves little room for error, particularly in this challenging newspaper operating environment," Goldman Sachs analyst Peter P. Appert wrote in a research note Tuesday.

A hefty chunk of new debt will be required to pay the $34-a-share cash buyout offer that the media company accepted on Monday. Zell is counting on repaying the debt largely through tax benefits from a new employee stock ownership plan that would supplement existing retirement accounts for the company's 20,000 workers.

Aside from selling the Chicago Cubs baseball team and its stake in Comcast SportsNet, Zell and Tribune executives were mum about prospects for the rest of the company's assets. Nine newspapers -- ranging in size from the Los Angeles Times and Chicago Tribune to the Daily Press in Newport News, Va. -- and 23 television stations will remain after two papers in Connecticut are sold.

"Whether someone whose experience is in commercial real estate -- in steel and cement and bricks and leases -- can navigate the ungainly media structure for success remains to be seen," said Rich Hanley, a journalism professor at Connecticut's Quinnipiac University. "This is unlike any other business he's touched. ... The stakes are very high."

Dennis FitzSimons, Tribune's chairman, president and CEO, said there are no plans to sell Tribune's newspapers or TV stations. But officials said there likely would be "limited staff reductions" within the company's individual business units. Most of the cuts would come through attrition, but there was no timetable for when they might be made.

"This is a good outcome for our shareholders and a good outcome for our employees," FitzSimons said in an interview with The Associated Press.

But industry observers said more divestitures or spinoffs are likely, especially as Zell learns the ropes of the newspaper business and a company that has been losing readers and advertisers to the Internet.

"There tends to be a fairly long learning curve with respect to how newspapers operate," said Sammy Pappert III, the chief executive of Dallas-based newspaper consultant Belden Associates.

The company's complex deal with Zell has a relatively small breakup fee -- $25 million -- leaving open the possibility of another counter bid from Los Angeles billionaires Eli Broad and Ron Burkle, who also submitted $34-per-share offers for Tribune.

"A low breakup fee could encourage a trumping bid from the Ron Burkle/Eli Broad partnership or another bidder, but this seems unlikely given the lengthy and very public nature of the review process," Citigroup analyst William G. Bird wrote in a research note.

Representatives for the pair declined to comment Monday.

Zell plans to invest $315 million in the media company and eventually will become chairman of Tribune's board when the buyout is complete sometime in the fourth quarter. The offer needs shareholder approval.

The buyout will be conducted as a two-part deal, the company said. The first stage, expected to be completed in the second quarter, will involve a cash tender offer of $34 per share for 126 million shares, more than half the outstanding Tribune shares. The remaining shares will be purchased later at the same price.

Tribune has about 240 million shares outstanding, according to a regulatory filing.

"The strategic review process was rigorous and thorough," William Osborn, a Tribune director who led the review process, said in a statement. "We determined that this course of action provides the greatest certainty for achieving the highest value for all shareholders and is in the best interest of investors and employees."

The buyout already has the support of two of Tribune's largest shareholders, including the Chandler family, which has about a 20% stake in the media company.

Tribune purchased Times Mirror Co. from the Chandler family in 2000 for about $6.5 billion. In the years following the deal, Tribune's stock began to fall, dropping about 50% from early 2004 until last spring. It has languished just above $30 per share for months.

Charles Bobrinskoy, vice chairman of Ariel Capital Management, said his money management firm also would support the Zell deal. Ariel Capital owns about 6.1% of Tribune shares.

"These are clearly challenging times for all newspaper companies, but we're very pleased by today's announcement and plan to support the proposed transaction," Bobrinskoy said.

Opponents of media consolidation predicted a staunch fight with regulators in Washington, especially regarding Tribune's cross-ownership of TV stations and newspapers in the same media market.

"There will be fierce opposition to the sale and it will be used as a vehicle to underscore the fight over media consolidation at the FCC and in Congress," said Andy Schwartzman, president of Washington-based Media Access Project.

Tribune said Zell will use an employee stock ownership plan to finance part of the deal and lower the taxes on any sale. The ESOP, which resembles a profit-sharing plan, will become the majority owner of Tribune once the deal is complete. Zell will be entitled to buy 40% of the company's common stock.

"I am delighted to be associated with Tribune Co., which I believe is a world-class publishing and broadcasting enterprise," Zell said in a statement. "As a long-term investor, I look forward to partnering with the management and employees as we build on the great heritage of Tribune Co."

An ESOP allows the company to borrow money and repay loans using pretax dollars. Payments of both interest and principle are tax-deductible and would create more leverage for a buyer.

"The ESOP can only help pay down this mountain of debt with a positive corporate culture that drives performance but does not deflate the motivation of workers," said Joseph Blasi, a professor at Rutgers University who is an expert on the structures.

Bear Stearns analyst Alexia Quadrani said that after the deal is completed, Tribune will have about $13.4 billion in net debt. The company has about $5 billion in debt now.

"After an exhaustive six month review we believe this complicated and heavily levered transaction is another indication of the waning interest in the newspaper business given the ongoing secular challenges that are weighing on the fundamental outlook," she wrote in a research note published Monday.

Analysts have estimated that the Cubs could fetch $600 million or more. Tribune bought the team in 1981 for $20.5 million.

Its strength as a sports franchise -- and the lure of potentially steering them to their first championship in a century -- has attracted the interest of many potential buyers. Billionaire entrepreneur Mark Cuban, actor Bill Murray and columnist George Will are among those rumored to have interest, along with numerous Chicago business figures.

Tribune's share price fell about 50% from early 2004 until last spring and has remained just above $30 for months, down from an all-time high above $60 in 1999.

Zell, 65, made his fortune reviving moribund real estate. After a bidding war culminated in February, he sold his Equity Office Properties Trust to the private equity firm Blackstone Group for $23 billion.

Tribune shares climbed 70 cents, or 2.2%, to close at $32.81 in trading Monday on the New York Stock Exchange.
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