Analysts Call Tribune Buyback 'Smart,' But Concerns Remain

By: Jennifer Saba Shareholders and financial analysts have been keeping a close eye on the Tribune Co. -- especially in light of the forced Knight Ridder sale -- with the hopes the company would do something to goose its value. Yesterday, Tribune finally answered and said it would buy back 25% of its shares.

Wall Street was appeased (for now) and sent Tribune's sagging stock up 7.2% on Tuesday. The Associated Press reported that it was Tribune's largest one-day increase since March 14, 2000 -- the day after Tribune purchased Times Mirror.

Goldman Sachs analyst Peter Appert wrote in a note that the move was "smart" and "shareholder friendly" and that it makes "sense given the challenging operating environment facing Tribune (and the newspaper industry)."

But beneath the optimism, there is a lurking concern that this buyback only serves as more evidence the industry is on a long downturn, not a temporary slump.

Both Appert and Bear Stearns' Alexia Quadrani said that while this will make shareholders happy in the short term, problems still exist. "While this announcement is not wholly unexpected," Quadrani wrote, "we do believe it underlines the soft fundamental outlook across the industry and reflects management's recognition that the current downturn may be more secular in nature than cyclical."

Tribune signaled yesterday that May results should show improvements in ad revenue but analysts don't expect that to be a trend. Print is weakening, Bear Stearns observed, and online properties still don't contribute enough to the bottom line.

There are other factors to consider: "The low share price premium for the tender offer, further material cost cutting measures, and the negative perception generated by the selling of large share blocks by insider groups does not send a very positive signal and underlines the difficult operating environment," Quadrani wrote. Analysts questioned Tribune executives during a conference call yesterday about why the McCormick Tribune Foundation, Cantigny Foundation, and possibly the Chandler trust were interested in selling now. While it may be these foundations need cash to meet grants, Quadrani notes the perception is negative.

Analysts also speculate which company will be next to follow Tribune's lead. The money is on Gannett. Both Merrill Lynch and Bear Stearns said they would not be surprised if Gannett announced a similar strategy.

"We have been saying for some time that this type of move would be good for a newspaper company with low debt," Quadrani wrote.

Merrill Lynch's Lauren Rich Fine runs the numbers on Gannett and wrote that if the company were to repurchase 25% of its stock, she estimates it would be up to 15% earnings accretive.

Fine also floats out the possibility The New York Times Co. could also announce a buyback but that it has less free cash flow to do so.

Prudential Equity Research raised its rating on Tribune yesterday from "neutral" to "overweight." Goldman Sachs, Merrill Lynch, and Bear Stearns maintained their ratings.

Tribune's stock was trading down $.03 to $29.87 late this morning.