By Robert MacMillan and Kenneth Li - REUTERS - Analysis
NEW YORK (Reuters) - Tribune Co is at risk of defaulting on its debt in as little as 18 months if the newspaper business deteriorates further, and it fails to unload more properties.
By some estimates, Tribune could fetch $1.6 billion for the Newsday daily paper and the Chicago Cubs baseball team and related properties, the assets it has already put on the block.
Still, Tribune has nearly $4 billion in debt and interest payments due by the end of 2009, according to Gimme Credit analyst Dave Novosel, making it all but certain that the company will be forced to sell more marquee properties and make deeper cost cuts to avoid violating debt covenants.
"Tribune is a big microcosm of issues across the industry, and Sam Zell made an unfortunate bet, if you will, jumping into a business he knew nothing about," said veteran newspaper analyst Miles Groves.
Zell, a Chicago real estate tycoon, took Tribune private last year in an $8.2 billion leveraged buyout that restructured the publisher of the Los Angeles Times as an employee-owned company, saddling it with more than $10 billion in debt.
As recently as December, at the time of the deal's closing, Zell was pledging to keep Tribune intact, except for the Cubs.A major asset sale would be seen not only as a failure for the man who dubs himself "The Grave Dancer" for coaxing big profits from distressed businesses, but also as a warning to other would-be saviors of the troubled newspaper industry.
Reached at a real estate conference in New York on Thursday, Zell, Tribune's chief executive, declined to comment. He plans to hold a conference call with lenders on April 17.
So far, Zell has shared few of his plans to turn around the business. He portrays himself as a roll-up-the-sleeves change agent, using profanity and humor to boost morale.
One YouTube video of Zell swearing at an Orlando Sentinel photographer has cemented his reputation for tough, blunt talk.
That may not be enough.
Analysts say Newsday could fetch up to $600 million, while the Cubs and related properties could fetch $1 billion.
According to data from Reuters Loan Pricing Corp, Tribune needs to repay at least $1.6 billion of its loan facilities in 2008 and 2009.
But Gimme Credit's Novosel has slightly higher numbers after factoring in amortization payments.
Novosel estimates that Tribune has to make $1 billion in debt and amortization payments in 2008, and has another $850 million in debt and amortization payments that will mature in 2009.Tribune also faces nearly $2 billion in combined interest expenses for 2008 and 2009, he said.
That could be covered by anticipated free cash flow, unless the newspaper industry sinks further amid the weak U.S. economy and the recession in advertising spending.
So far, the outlook is grim. Goldman Sachs analyst Peter Appert said he expected first quarter newspaper ad revenue to decline by 10 percent. "Managements will find it nearly impossible to fully offset this level of revenue decline with cost cutting," he said.
The declines in the industry and the company, unforeseen by the deal's architects last year, have narrowed what analysts have said is Zell's already slim margin of error.
Tribune's previous management, who negotiated the deal, had overestimated 2007's anticipated cash flow by about 20 percent, according to a source familiar with Tribune's finances before it went private. "They were very aggressive," the source said.
In February, Tribune's own Baltimore Sun reported that Zell told Sun employees that an unexpected 16 to 18 percent decline in Tribune's newspaper revenue -- worse than the projected 2 to 3 percent fall -- could force it to sell more assets.
Tribune has an existing bank facility that could cover $260 million of $1 billion debt obligations this year, said Fitch analyst Mike Simonton.
But Novosel said that was a stop-gap measure. "Tribune could tap credit lines, but this could impair cash needed for operations, so it is only a temporary solution," he said.Tribune's lackluster results at the beginning of the year prompted Standard & Poor's to lower its corporate credit rating on March 17 to "B-" from "B" with a negative outlook.
Weak operating trends at Tribune could depress newspaper ad revenue by 10 percent and overall EBITDA in the mid-teens percentage range in 2008, S&P said.
"To date we have not seen them or anyone turn the corner so to speak," Fitch's Simonton said. "There is no real evidence from even the best cost cutters in the industry, they (publishers) can offset these revenue declines."
If ad revenues keep falling, Tribune could drift perilously close to violating covenants on its senior secured debt. These require the ratio of the company's debt to the trailing four quarters of EBITDA (earnings before interest, tax, depreciation and amortization) to not exceed 9 to 1.
Fitch estimated the company was at 8 to 1 at the end of 2007. By the first quarter of 2009, that covenant tightens to 8.75 to 1, "further pressuring flexibility around the covenants," Fitch said of Tribune on March 24.
As recently as February, Zell said the company expected to meet those conditions.
As for what Tribune could sell, its 31 percent stake in the Food Network is a candidate, but it is a bad time to go to market. Hot cable networks generally sell for 14 times cash flow valuation, according to SNL Kagan analyst Derek Baine, but the current market commands a multiple of 11 to 12 times.
Thus, Tribune's stake in the Food Network would yield $775 million to $1 billion based on estimates from Goldman Sachs and Gimme Credit.
Tribune also owns a stable of local television stations and well known, but financially strapped newspapers like the LA Times and Chicago Tribune, as well as stakes in companies including jobs network Careerbuilder.com.
Zell wouldn't talk about Tribune at the real estate conference on Thursday. But he did acknowledge the state of the business, joking to the audience that going from property to newspapers was like "going from leprosy to cancer."
Tribune Could Default In '09: Analyst
Friday, April 4, 2008; 1:07 PM
The massive debt load carried by Sam Zell-owned Tribune guarantees a paper-thin margin for error in its operations. Credit analyst David Novosel estimates that the company has $4 billion in debt and interest payments to make in 2009, practically requiring major asset sales, reports Reuters. This is the context behind the planned sale of the Chicago Cubs, as well as Long Island paper Newsday.
So how close is Tribune to actually defaulting? The company's debt covenants require it to maintain a debt-to-trailing-EBITDA ratio of 9-to1, a ratio that will narrow to 8.75-to-1 in 2009. According to Fitch, the company was at 8-to-1 at the end of 2007, meaning there's very little wiggle room.
The Reuters (NSDQ: RTRSY) piece also looks at what else Tribune could offload if it needs to rustle up cash. It holds a 31 percent stake in the food network, as well as other broadcast operations. But eventually you're just talking about gutting the core business, which undermines any effort based on a turnaround.