Wednesday, June 6, 2012

Tribune set to emerge from bankruptcy

By Emily Steel, David Gelles and Nicole Bullock in New York
Financial Times

Shortly after Sam Zell led the $8.2bn leveraged buyout of the Tribune Company in 2007, he was caught on camera spewing profanities at a journalist at the Orlando Sentinel, one of the newspapers he acquired in the deal.

It was an inauspicious start for what Mr Zell himself was to call the “deal from hell”. 

Mr Zell, the cowboy-boot-wearing real estate tycoon, invested $315m of his own money to take over one of the most storied US media companies.

Tribune is home to newspapers including the Los Angeles Times and Chicago Tribune, as well as television networks. His audacious bet came at the peak of a wave of leveraged buyouts in the last decade.

But the deal soon fell apart. It layered debt on the company on the eve of the collapse of the US economy and the deterioration of the newspaper industry. 

Tribune filed for Chapter 11 protection in 2008. It spent more than three years in bankruptcy court, with so many false starts over an exit that the company itself stopped predicting when it might emerge.

Tribune is expected to break free from bankruptcy later this year. Following hearings starting on Thursday, a judge is expected to approve Tribune’s fourth proposed reorganization plan, setting the stage for Tribune to take the exit from bankruptcy by the end of the year.

Tribune will emerge from bankruptcy protection as a slimmed-down business in a different media landscape. 

While lawyers have been paid more than $230m on the deal, Tribune has cut about a quarter of its staff.

The company also pared down its properties, selling off a 95 per cent stake in the Chicago Cubs baseball team and related assets in 2009 for $845m.

Meanwhile, the market has become less hospitable for diversified companies. Media ownership rules in the US make it difficult for conglomerates to exploit synergies between print and broadcast assets in the same local market.

The fundamentals of some of Tribune’s businesses continue to deteriorate. Newspaper advertising revenues in the US have halved since Mr Zell bought the company in 2007.

Tribune’s most recent financial projections anticipate declining revenues at the publishing division through 2014, though the division is expected to remain profitable.

“Tribune is in a cycle of decline,” said James O’Shea, a former editor at the Chicago Tribune and the Los Angeles Times who wrote a book about Tribune called The Deal from Hell: How Moguls and Wall Street Plundered Great American Newspapers.

To many industry observers, Tribune is a case study of the erosion of US newspapers.

After boom times in the 1990s, more than a dozen big newspaper companies in the US have filed for bankruptcy protection, said Ken Doctor, a newspaper analyst.

“It’s the decline of what once were the powerhouses of journalism,” he said.

Tribune’s broadcast assets face a somewhat brighter future, with the local television business proving resilient. Financial projections show the broadcasting division generating increasingly more operating cash flow than the publishing division up to 2014, despite having roughly half the revenues this year.

The divergent futures for the TV and print businesses lead many in the media industry to believe that Tribune will sell assets soon after it comes out of bankruptcy.

Though some media companies, including News Corp, hold broadcast and newspaper assets, others are breaking apart.

The most likely scenario, say people familiar with the company, is that Tribune will sell its newspapers to a host of local ownership groups. These people say that a sale of its broadcast assets is also possible, but less likely.

Fueling speculation are court filings that show Tribune reorganizing its business in a way that would make it easier to sell off its newspapers separately.

Billionaire Eli Broad has signaled interest in buying the Los Angeles Times. A group of Chicago investors who recently bought another local newspaper, the Chicago Sun-Times, had been reported to be interested in the Tribune.

But last month Michael Ferro, chairman of the Sun-Times, said his group was not interested.
Mr Broad believes that the Los Angeles Times should be locally owned, a spokeswoman said. “If there was a group of wealthy families or foundations that would be interested in purchasing the Los Angeles Times, he would be interested in joining them,” she added.
Sam Zell

Before any decisions are made about what Tribune will or won’t sell, the company is likely to see an overhaul of its management. A new board will be appointed as part of the exit from bankruptcy and could replace Tribune’s management team.

The fate of Tribune is a cautionary tale for media companies to invest in the future during the good years, said Mr O’Shea.

Tribune “just tried to recreate the past,” he said.

Ed Atorino, media analyst at Benchmark, a research firm, said the timing of the deal was especially bad.

Mr Zell “borrowed money to buy the companies. The bottom fell out of the economy. The bottom fell out of newspapers”, he said.


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