Goldman Lifts Tribune Rating, Says Odds 'High' for Restructuring

By: Jennifer Saba Goldman Sachs analyst Peter Appert and his team upgraded Tribune Co.'s rating to "in-line" from "underperform" based on the Chandler family's opposition to Tribune's buyback program today. He also observed, "we think the possibilities are high that Tribune will be forced to undertake some form of restructuring action."

But he downgraded both The New York Times Co. and Dow Jones. After that report, shares of The New York Times Co. fell Friday by 72 cents, or 3 percent, to $23.32 in morning trading on the New York Stock Exchange, after falling to a 52-week low of $23.13 earlier in the session.

Appert had stressed the Tribune upgrade had nothing to do with a change of heart about industry fundamentals -- circulation and advertising revenue will still be a challenge. To prove the point, Goldman downgraded Dow Jones and The New York Times Co. both to "underperform" from "in-line."

"While we believe both companies have attractive franchise properties and management teams that are aggressively addressing industry challenges, in the context of our relative rating system, these stocks rank at the lower end of our valuation matrix," Appert wrote.

Since both Dow Jones and the New York Times are family-controlled, it's highly unlikely that either company would benefit from restructuring -- as Tribune might.

Goldman Sachs covers several possible outcomes for Tribune and the likelihood of each scenario noting that in the past 18 months Tribune's stock is down 27% compared to the S&P 500's 11% gain.

The report on Tribune added: "We see upside to the upper-$30s in a break-up or LBO [leveraged buy out] scenario."

Analysts believe Tribune's financial restructuring strategy that includes selling off select assets and a share-repurchasing program has the highest possibility of going through. But Goldman notes, "It's not clear whether this approach results in a material change in the stock's valuation given the challenging fundamental dynamics facing the industry."

Taking the Knight Ridder sale into consideration, with interest from only one newspaper company, analysts think there's a low chance that Tribune would be sold to a strategic buyer or even a financial buyer because the company's high debt and "modest expected cash flow" would be a deterrent. Goldman Sachs' investment bank arm, separate from the research division, advised Knight Ridder in the sale to McClatchy.

Tribune could also buy out the Chandler Trust's stake estimated at $1.2 billion. While it's possible, since Tribune could afford it, it might not be well perceived by other holders. Plus, it would be tax inefficient for the Chandler Trust.

"With the Chandler family apparently interested in eliciting change, we think the possibilities are high that Tribune will be forced to undertake some form of restructuring action. Complicating our scenario analysis is the complex structure of two partnerships between the Chandler Trusts and Tribune ... These partnerships could therefore hinder a restructuring of Tribune," the report concludes.