Sunday, April 20, 2008

Tribune Faces Default On Debt

Hartford Courant’s Parent Is Seen Flirting With Default


Tribune Co., a newspaper and broadcasting conglomerate whose holdings include the Hartford Courant, is perilously close to defaulting on its debt by the end of next year if it doesn’t access its bank credit lines.

Tribune, which also owns WTIC-TV61 in Hartford and WTXX-TV20 in Waterbury, currently doesn’t have enough money and previously approved credit to make debt and amortization payments of $1 billion due this year and another $850 million due in 2009, according to David Novosel, senior investment grade analyst at corporate bond research service Gimme Credit.

To avoid bankruptcy, owner Sam Zell, the billionaire investor who bought the media conglomerate for $8.1 billion in June, could extract Tribune’s entire $750 million credit line as well as sell a handful of its biggest properties. They include the Chicago Cubs baseball team and its Wrigley Field stadium, the Long Island newspaper Newsday, and its one-third ownership of the cable TV channel the Food Network.

Zell already put up for sale the Cubs and Newsday — which has interested News Corp. chieftain Rupert Murdoch, owner of the New York Post and the Wall Street Journal, as well as New York Daily News owner Morton Zuckerman.

Trouble In 2009

But selling Tribune properties may not be enough to forestall a dire future beyond 2009 because of deteriorating economic conditions in the newspaper world.

“When he originally bid for Tribune, Chairman Sam Zell was adamant that he was not interested in selling assets other than the Chicago Cubs, its ballpark, and its 25 percent interest in a regional sports network,” Novosel said. “He has since changed his tune, lamenting that advertising declines are greater than the 2 percent to 3 percent drop he initially expected.”

Gimme Credit analysts were skeptical from the start.

“We questioned his optimism from the onset, as the company is facing pressure from both secular and cyclical trends,” Novosel said.

The sale of Tribune’s various properties may be only a stopgap measure, Novosel said.

As for Newsday, which has annual revenues of $500 million, Novosel said: “At estimated margins of about 17 percent and a multiple of slightly more than seven times, we estimate that Tribune could get roughly $600 million for the paper. Given the challenging operating environment for newspapers and TV stations, a higher multiple seems unlikely.”

Sale of the Cubs, along with Wrigley Field and naming rights and a sports network stake, could generate proceeds of as much as $1 billion, Novosel estimated.

Tribune also has sold its studio production lot in Hollywood for $121 million.

Gimme Credit estimates the combined value of those asset sales at roughly $1.72 billion. “Therefore the actual and rumored asset sales would not be sufficient to meet the debt maturities of $1.85 billion,” Novosel said. “That leaves free cash flow.”

Gimme Credit expects Tribune to generate revenue of $4.9 billion this year, a 3 percent decrease versus last year.

Circulation Trends Down

“We expect continued weakness in the classified advertising category, while circulation continues its downward trend,” Novosel said. “We project earnings before interest, taxes, depreciation and amortization to be slightly lower than last year at just under $1 billion.

“Our forecast for interest expense, which is benefiting of late from the steady decline in rates but could easily reverse itself, is nearly identical,” he added. “Consequently, it appears that coverage will be extremely tight, with little margin for error.”

Since the proposed asset sales and free cash flow are not enough to meet outflows, Novosel said, Tribune will need to look for other asset sale opportunities. He listed Tribune’s stake in the Food Network, estimating the valuations of Tribune’s interest from $500 million to $1 billion.

Tribune’s other newspaper holdings include the Los Angeles Times, Chicago Tribune, Baltimore Sun, and the Orlando Sentinel. Its broadcast properties include TV stations in New York, Chicago, Los Angeles, Seattle, Philadelphia, Washington and St. Louis.

Reducing staff is another option for Zell, according to Novosel. “He has made some headcount reductions, but Tribune has already been through this process, so further gains will likely be minimal,” Novosel said.

Internet advertising with its current growth spurt is a benefit, but, Novosel said, it “is not nearly robust enough to cover the shortfall in print advertising.”

One problem, he said, is that the trading levels for Tribune’s 2015 bonds suggest “the company is on the verge of bankruptcy.

“We think asset sales will provide sufficient coverage of interest and principal this year, but 2009 could be more problematic,” Novosel added.

From Hartford

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