Monday, December 8, 2008

Tribune's Descent Sends New Shock Waves

By: Ken Doctor

Has it less than a single year? One year since Sam Zell took over the Tribune Company as its management, like Knight Ridder's two years earlier, simply ran out of juice and said, "hey you try it, we've run out of ideas and energy?"

In one quick year -- who's doing the photo slideshow online? -- we've seen what happens when the barbarians do enter and start to rule within a formerly genteel kingdom. If it were any other industry, we might see it more as entertaining, but when it comes to the news industry, it's been jaw-droppingly sad.

As the Tribune prepares for the possibility of a bankruptcy filing this week -- and, if not now then probably later -- we can see the shock waves radiating out from the news:

Yes, Sam Zell's words and actions have been outrageous, sometimes outrageously and even refreshingly true -- on non-commissioned salespeople, on subscription pricing, on trying new things -- but in the end, it's not about Sam Zell. Look around. Just in the last couple of weeks, we've seen Scripps sign the Rocky Mountain News' death warrant; reports that McClatchy has shopping around the Miami Herald (an offer that insiders tell me has been floating around South Florida for months); the Journal Register Company, living on borrowed time and about to shut down two dailies; and Freedom's East Valley Tribune testing the very meaning of "daily" newspaper.

The business model's busted.

Whether you are good journalism advocate Gary Pruitt or it's-just-another-business Sam Zell, the cards dealt are fairly similar. What separates Zell from the pack, but maybe just barely, is the mountain of debt he gorged on to make the ill-conceived ESOP scheme work. From Day One, he put the sword over his own head and then cried wolf.

We've learned that Zell isn't too good with math. He told Portfolio's Joanne Lipman just last month that:

"When we looked at the historical numbers, we saw an average erosion of about 3 percent. At the time we underwrote the transaction, we used a 6 percent erosion."

But look at Tribune's 4Q, 2007, the quarter running up immediately to Zell's finalization (on Dec.21, 2007) of the buyout, and you see that its publishing operating revenues compared to a year earlier weren't down three percent or six percent. They were down 13% for the quarter (and 9% for the year overall). So why would Zell budget half of what the last quarter was telling him, as newspapers' deeper decline was evident for all who, well, evident for all those those who read newspapers.

I suppose in a more trusting time we might have expected lenders Citibank, Bank of America, Merrill Lynch and JP Morgan to have actually vetted his numbers. But hey, it was probably a no-doc loan.

We'll see if this is the first bankruptcy domino in the newspaper business. In the wider financial meltdown, newspaper companies have become just part of a much larger problem. Creditors have been eager to work with McClatchy, Lee, MediaNews, Freedom, Gannett and others -- just about everybody -- to adjust lending terms. They've loosened (in the short term) covenants linking (diminished) cash flow to debt, given term extensions -- and picked up a little vig on interest rates. They seem to so far figure that that's a better route than forcing the companies into bankruptcy. A Tribune filing though may lead to lender rethinking, in what we've learned is a herd trade.

If talk of default increase and bankruptcy is ramping up now, what about March? The consumer recovery, at the most Obamamistic, is six months away. As with the sudden Rocky announcement Friday, we're seeing newspaper companies increasingly throwing in the towel. Once those 4Q revenue numbers trickle out, it'll be worse.

There are two bad markets determining the fate of newspaper companies now. One, of course, is the news and advertising market. Print ads are down toward 20% and online will decline mildly this year. And here comes the latest 2009 forecasts -- down 3-6% overall -- to be presented at Monday's UBS Media Conference.

The second, of course, is the real estate market. We all know the story there, yesterday's story. If you had to bet, though, which market will come back first, newspapers or real estate, you'd have to bet on real estate. And therein may lie the next newspaper industry act. Whether it is McClatchy trying to sell bayfront Miami Herald land, or Tribune selling the Colonel's Tower, the fate of newspaper companies may depend on the real estate recovery. If that land and/or the buildings on it seem to be coming back to commercial life, newspaper companies or their lenders may see new moves. And that may determine a good deal about what we'll have for daily reading by 2010 and 2011.

Tribune Co. Mulling Bankruptcy Filing: Report

Media conglomerate Tribune Company is contemplating bankruptcy and may file for the same as early as this week, The Wall Street Journal reported on its website today.

Believed to be the nation's second-largest newspaper publisher, it owns the Chicago Tribune, Los Angeles Times, Hartford Courant, Orlando Sentinel, and The Morning Call, among others. Through its subsidiaries, the Tribune Company also owns Tribune Broadcasting, Tribune Entertainment, Tribune Media Services, and the Chicago Cubs baseball team.

The newspaper said the publisher and broadcaster, owned by real estate moghul Sam Zell has hired investment bank Lazard Ltd. as its financial adviser and legal firm Sidley Austin to advise the company in possible Chapter 11 filings.

The company, however, refused to comment on the story. The company however told Chicago Tribune "It’s an uncertain and difficult environment. We haven’t made any decision. We’re looking at all of our options.”

According to the report, the company's cash flow might not be sufficient to allow it to handle more than $1 billion in interest payments due in 2008. Tribune must also make a payment of more than $500 million by June.

Currently, the company is struggling under a $13 billion debt load. Much of the debt was incurred last December when Sam Zell took the company private in an $8.2 billion leveraged buyout. Tribune also faces a Monday deadline on $70 million of unsecured debt taken on by publisher before the deal.

In November, Tribune reported that it swung to third-quarter loss of $121.6 million compared to earnings of $152.8 million in same quarter a year ago. Advertising revenue declined 19%.

Media companies have seen their revenues falling off the cliff. Major advertisers have cut back on their ad spending as they tighten their belts to face what is being seen as the worst crisis since Great Depression of 1929. Newspapers have been especially hit hard as more and more readers are shifting to the internet, away from print. According to the Newspaper Association of America, during the third quarter of 2008, national ad sales in newspapers plunged 18.4%, compared to a drop of 2.5% in the corresponding quarter in 2007.

Recently, Fitch warned that more newspapers and newspaper groups will default, be shut down and be liquidated in 2009 and several cities could go without a daily print newspaper by 2010.

Standard & Poor's Ratings Services downgraded Tribune's debt to junk in November.

The company has resorted to cost cutting measures and has put many of its assets on the block. A few days back Los Angeles Times eliminated 75 newsroom positions, or about 10% of the editorial staff. The cuts follow earlier staff reductions this year of about 180 Tribune employees. The company has also cut jobs at its other publications.

The company is also mulling the possible sale of Chicago Cubs and their stadium (Wrigley Field). Earlier, in May this year, US cable television group Cablevision acquired New York-based Newsday - the nation's eighth largest newspaper - from Tribune Co. for US$650 million.

Tribune Co. Considers Bankruptcy Filing

The Associated Press

CHICAGO -- The Tribune Co., owner of the Los Angeles Times and the Chicago Tribune, other newspapers and the Chicago Cubs and Wrigley Field, has reportedly hired financial advisers ahead of a possible filing for bankruptcy-court protection.

The Chicago Tribune reported that its parent has hired investment bank Lazard Ltd. and law firm Sidley Austin as it considers its financial options.

Tribune Co. spokesman Gary Weitman called it "an uncertain and difficult environment." He said company executives haven't made any decision but are looking at all their options.

The Wall Street Journal, quoting people familiar with the matter, reported that a bankruptcy filing could come as early as this week.

It said Tribune Co.'s cash flow may not be enough to cover nearly $1 billion in interest payments that are due this year.

Tribune was taken private last December in an $8.2 billion buyout led by real estate mogul Sam Zell.

Copyright 2008 by The Associated Press.

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