Industry Experts Raise Many Concerns About Zell/Tribune Deal

By: Jennifer Saba

Many questions remain for the Tribune Co. and its properties after Monday’s announcement that the Chicago-based company struck a deal to go private with local-billionaire Sam Zell. E&P spoke with several industry insiders today and most of them raised serious concerns.

These include:

— the high debt level

— necessity of cutting staff

— not enough money to invest

— employees taking great risks in the ESOP stock plan

And while many have been touting this potential deal as a way for Tribune to get out under the thumb of Wall Street with quarterly results, Robert Broadwater, founder of Broadwater & Associates, points out that the company is going to be beholden to banks on a monthly basis.

One industry observer who declined to be named raised several flags, saying that the deal is so complicated and unusual “you worry about the employee.”

The heavy burden Tribune is incurring could mean more staff cuts as CEO Dennis FitzSimons alluded to during a company-wide town hall meeting about the deal.

As Broadwater puts it: “It’s not clear to me what this [deal] accomplishes for the operation of the Tribune company other than a change in the ownership.”

Tthe company is taking up a heavy amount of debt to finance the deal during a rough period when newspaper results have been sliding.

Mike Simonton, a senior director of media and entertainment at Fitch Ratings, said it’s extremely risky: “It’s putting a lot of debt on a company that has declining cash flows at a time when there isn’t a major economic downturn. It will remove their flexibility if [a downturn] were to surface.”

The danger Simonton said involves the company’s ability to invest in higher growth assets could be hamstrung since much of Tribune’s free cash flow will be used to pay down debt.

Fitch downgraded Tribune to “BB” from “BB+.” In a note to investors, Fitch said about the ratings cut: “Fitch believes the proposed plan would be detrimental to bondholders.”

One particular question perplexing industry sources E&P spoke with today: Why does Tribune even need Zell?

It’s a complicated transaction where Tribune plans to raise approximately $7 to $8 billion in incremental debt in addition $5 billion in outstanding debt.

Zell is investing a relative pittance — roughly $315 million — to become the chairman of the company.

“What is he doing that someone else couldn’t do?” asks Broadwater. Taking into account the $8.5 billion the deal is currently valued at, Zell’s investment “is not all that much equity,” says Broadwater.

One analyst who represents a Tribune shareholder told the Chicago Tribune: “I think it’s pretty outrageous that Sam Zell is getting control of the company for $300 million. The timing is great for Zell and horrible for [existing shareholders] with the cyclical and secular pressures on the publishing industry.”

Some industry sources speculated that Tribune structured the deal that way in order to ease the minds of shareholders by involving a third-party. “They need someone to come in and do something,” says Prudential Equity Research analyst Steven Barlow. “The private equity Zell is [offering] is necessary because it seems he wants to keep the company in tact.”

Zell could, in effect, act as an ambassador to shareholders since he is on the company’s home turf. John Rogers, CEO of Chicago’s Ariel Capital Management and a Tribune shareholder, told Chicago Business: “This is a terrific result for shareholders in this environment. I’m happy it’s a Chicago businessman helping to pull this together.”



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