Takeover rumors fuel Tribune, Clear Channel

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Private-equity money is said to be circling a couple of media conglomerates whose shares had been stuck in neutral, that is until they were fueled by takeover talk.

Shares of billboard and radio company Clear Channel Communications are up 9% in a week, first because of reports of private- equity negotiations and then because of the company's acknowledgment that it was, indeed, exploring "strategic alternatives."

The stock of Tribune Co., the owner of 11 newspapers and 25 television stations, has been benefiting for months thanks to takeover speculation. It's up 13% since July.

Radio stations and newspapers aren't exactly booming industries, though such concerns might only whet the appetite of some private-equity executives.

Strong, consistent cash flow at companies that are near an inflection point is what private equity looks for, said David Snow, U.S. editor of the Private Equity International newsletter.

Clear Channel showed its mettle Monday, reporting third-quarter net income of $185.9 million. While that is off from the $205.5 million in the same quarter last year, revenue rose 7% to $1.79 billion. The company's billboard unit grew its revenue 8%, while radio revenue was up 5%.

The inflection point for the radio industry, observers have been saying, comes courtesy of satellite radio and iPods, both of which feature commercial-free music.

Clear Channel has been battling those influences with Less Is More, its initiative for slashing the commercial time that its stations air.

Analyst Leland Westerfield of BMO Capital Markets speculates that Clear Channel might have been considering its future takeover prospects when it introduced Less Is More a few years ago.

That is because Less is More translated to lower radio advertising revenue in the near term but, if successful, would stem defections to sat-radio and iPods and allow Clear Channel to charge more money for shorter commercials. While waiting for that long-term benefit, private-equity groups might become attracted to Clear Channel knowing that they could immediately boost revenue by reinflating, as Westerfield puts it, the advertising time it sells.

Tribune, on the other hand, is in a more challenging industry with its primary assets being newspapers.

"Ad revenue and readership are getting destroyed by the Internet," Snow said.

On Monday, the Newspaper Association of America, using Audit Bureau of Circulations data, reported a 2.8% decline in daily newspaper circulation in the six months ending in September. The Los Angeles Times, a Tribune paper, suffered an 8% drop.

Veronis Suhler Stevenson, a private-equity firm, said newspaper circulation fell 0.6% yearly from 1999-2004 and predicts it will fall about 1.8% annually from 2004-09.

No matter. If a private-equity firm can't adopt to technological changes, cut expenses and make other changes to whip Tribune into a more meaningful growth company, there are other ways to extract value.

One way, Snow said, is for the acquirers to borrow funds against the newly acquired asset in order to pay themselves a dividend, a financial behavior known in the industry as dividend recaps.

Tribune is reportedly being looked at by a consortium that includes Providence Equity Partners, Madison Dearborn Partners and Apollo Management. Another interested consortium includes Thomas H. Lee Partners and the Texas Pacific Group and still another consists of Bain Capital and the Carlyle Group. (VNU Group, parent of The Hollywood Reporter, is owned by a consortium that includes Thomas H. Lee Partners and the Carlyle Group.)

As of Monday, Clear Channel's market capitalization was $17.11 billion while Tribune's was at $7.99 billion.

One expert, Barry Kaplan, managing editor of the M&A Advisor, said private equity likely is interested in Tribune for the simplest reason of all: "They just have a lot of cash to put to work."

For example, the Blackstone Group, generally considered one of the largest, is trying to add $5 billion to a fund already consisting of $15 billion.

Private equity, Kaplan said, doesn't like to take on the risk necessary to run a large consumer newspaper business like Tribune. Trade papers, niche newspapers or groups of papers in small geographic areas are far more desirable, he said.

Plus, with DVRs and cable posing threats to broadcast television, "the prettiest asset you have there might be the Chicago Cubs."

Kaplan said private-equity groups considering a purchase of Tribune already might have a plan for carving the company up in several pieces.

"They like to focus on things that are rational, not something as disparate and uneven as a media conglomerate," he said.

Clear Channel, he said, is a more likely bet. "It's a more easily understood property. I can see it going to private equity because it's a rational thing for them to do."
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