Sunday, March 13, 2011

Advisers Value Tribune Co.’s Newspapers Below $1B

By Michael Oneal

Two Tribune Co. financial advisers provided stark evidence of the newspaper industry’s decline Friday when they testified in bankruptcy court that the company’s flagship publishing division may have dropped below an estimated $1 billion in value.

The advisers said they had calculated in January that the Chicago-based company’s publishing segment, which includes the Los Angeles Times, Chicago Tribune, and six other newspapers, had fallen to a value of around $920 million.

That compares to estimates of closer to $3 billion only a few years ago. In 2006, it was widely reported that Tribune Co. fielded offers as high as $2 billion for the Los Angeles Times alone.

Their calculation of the entire company’s value was $6.75 billion. But the big contributors to that number are other Tribune Co. assets: its broadcasting business and a set of minority investments in other companies.

This conclusion and others about Tribune Co.’s value have been hotly contested by hedge fund Aurelius Capital Management and other junior creditors in the company’s bankruptcy case, which will move Monday into a second week of confirmation hearings.

Tribune Co. and a group of allied creditors are lined up against the Aurelius side, each presenting evidence in hopes of persuading U.S. Bankruptcy Judge Kevin Carey to accept their plan for restructuring the company.

The two Tribune Co. financial advisers, Suneel Mandava of Lazard Ltd. and his former colleague, John Chachas, who now runs his own firm called Methuselah Advisors, were called by the senior creditor side as expert witnesses to support their plan. They estimated that the company’s broadcasting assets, including Chicago’s WGN-Ch 9, New York's WPIX Ch-11 and the WGN America “Super Station” were worth $2.5 billion, more than twice the value of the publishing assets.

They valued Tribune Co.’s minority investments in the Food Network cable channel, CareerBuilder and a compendium of Websites called Classified Ventures at around $2.2 billion. The company also has $1.7 billion in cash.

From October to January, Mandava and Chachas said, Tribune Co.’s overall value actually rose from $6.75 billion to $7.02 billion. But because that growth came from solely from minority investments over which Tribune Co. has no control — not the company’s core businesses (which declined in value) — they insisted that the $6.75 billion estimate was more appropriate.

Determining a company’s fair valuation is a crucial step in a bankruptcy case because the amount the judge certifies determines the size of the pie that gets split up among creditors.

The company and its allies among senior creditors — JPMorgan Chase, Oaktree Capital Management and Angelo, Gordon & Co. — have offered Aurelius and the junior creditors a recovery of 34 cents on the dollar for their claims based on the $6.75 billion value estimate.

But Aurelius has argued that the senior group’s estimate is too low, and challenged the assumptions of the two experts Friday during cross-examination. The Aurelius side says the company is worth significantly more, a conclusion that could raise questions about the fairness of the senior lenders’ plan and enhance the junior group’s recovery. They will present their own valuation case next week.

What’s clear by any estimate, however, is that Tribune Co.’s storied newspapers have plunged in value over the last few years of industry upheaval.

Mandava and Chachas said that Tribune Co. has done a good job of slowing cash flow declines through cost cutting and efficiencies. But they argued that because management has yet to find a digital strategy to replace the steady erosion of advertising revenue, the publishing unit’s value is likely still declining.

The management projections they relied on for their estimates, Mandava and Chachas said, showed a steady decline in publishing cash flow thru 2015. Chachas, who left Lazard in 2010 to make an unsuccessful Republican run for the U.S. Senate from Nevada, noted that while profits in the newspaper industry improved in 2010 compared to industry performance in the heart of the downturn, the increase “is entirely to do with firing people…There has been no revenue increase.”

The confirmation hearings were supposed to end next Friday, but based on the pace of this week’s hearings, Carey scheduled more court time in April.

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