What will Zell sell?

With billions of dollars in debt in the deal, Sam Zell needs to find buyers for parts of the Tribune company -- and nothing is sacred.

By John Simons, writer
FORTUNE

(Fortune) -- While speculation continues to swirl about the possible sale of Newsday to the likes of Rupert Murdoch or Mort Zuckerman, the Long Island newspaper's owner, real estate magnate Sam Zell, won't confirm whether the estimated $600 million asset is actually for sale. Some analysts, in fact, believe it doesn't make sense for Zell to sell.

Last April, Zell acquired Newsday when he choreographed a complex $8.2 billion deal to purchase the Tribune Company. Zell took the company - with its 11 newspapers including the Los Angeles Times, Chicago Tribune, and 23 television stations - private.

Zell put up $315 million of his own money and took on a sizable debt to finance the transaction. The deal's structure sparked considerable conjecture at the time that the magnate would sell some of Tribune's assets to whittle away at the debt. So far, the company has said that it is selling the Chicago Cubs and the team's baseball park, Wrigley Field.

"It's company policy not to comment on speculation about asset sales," said a Tribune Company spokesperson.

Even so, the Newsday sale rumors persist. And in the last week, the New York Times, New York Observer and others have quoted unnamed sources that claim to have knowledge of ongoing sale negotiations.

"I think it's illogical that Newsday would be for sale," says John Morton, newspaper analyst and president of Morton Research Inc. "Newsday is one of Tribune Company's higher cash-generating properties. I really doubt that anything is going to happen with Newsday."

Indeed, Newsday, with no direct competition for relatively affluent suburban New York readers, had a net operating income of $498 million in 2007.

Aside from Newsday, there are other assets within the Tribune Company that might make for more rational sales, according to observers. One of them is the company's 31% stake in the Food Network, a stake that could be worth as much as $1 billion.

The Food Network's cable fare can be seen in more than 96 million U.S. households. Last year, according to the network's own data, six million unique Web users visited the network's site each month.

E.W. Scripps, the Food Network's majority owner, would be amenable to a deal that would give it full ownership, believes Jake Newman, a debt analyst with CreditSights, an independent capital structures research firm in New York.

"That would reduce leverage for Tribune the most among all the assets Tribune has," says Newman.

John Miller, senior vice president of Ariel Capital Management in Chicago, agrees.

"I wouldn't be surprised if Sam Zell sold his part of the Food Network."

Hinting that informal talks may already be underway between Scripps and Tribune, Miller says that "Scripps wants to pay one price for the piece, and Tribune is a seller at a higher price."

Zell's moves are being closely watched because he needs to sell something soon. According to his agreements with lenders for his Tribune purchase, Zell has to repay $650 million in December 2008 and $750 million in May 2009.

"The company has no other visible means of repaying that," says CreditSights's Newman. Therefore, Newman posits, "nothing can be sacred, not Newsday, not even the L.A. Times.The only asset that may be untouchable is the Chicago Tribune, Zell's hometown paper."

First Published: March 28, 2008: 7:32 AM EDT