Run, Don't Walk

Imagine this: you're in an industry that hasn't changed much in 100 years.  For the last 5 years the number of customers has been declining, as have revenues.  Your long-time users are aging and younger potential users say they have little interest in your product.  User interviews regularly say your business is out of date.  And new technology exists which completely obsoletes your product.  Would you find the answer to your dilemma in loading your company up with a HUGE amount of debt while selling off your most profitable assets?

That is of course the situation at the Tribune Company (see chart here), owner of The Chicago Tribune, The Los Angeles Times, the Chicago Cubs and 25 television stations.  If you ever wanted to know when a company moves from the Swamp into the Whirlpool, this is the time for the Tribune.  The Tribune Company has been horribly Locked-in to a failing Success Formula with declining results for years.  Now it is going to make any alternatives impossible by cranking up the debt load while selling the Cubs and other assets that are profitable and have potential for future growth.  Instead of using White Space to find a new Success Formula, which would require more understanding and success on the web, the Tribune is moving to Defend & Extend it's dying newspaper business! (See article on company sale here.)

The Tribune's newspaper business is in decline as readers abandon traditional print news for the web, and advertisers are following the subscribers.  So not only is the company selling off the Cubs and its investments in growing targeted television, but it is adding $7Billion of new debt (and yes, it's keeping all the old debt) in order to buy back all the outstanding equity.  Yes, they are ADDING debt almost equal to the entire oustanding market value of the company  ($8billion).  Shades of Michael Milkin and the Junk Bond craze! What paper equity remains will be in an ESOP.  But for $320million (that 4% of the new debt added) billionaire Sam Zell gets a warrant to own 40% of the equity should this ever work out.  That $320M is less than 1% of the $39billion Sam just recently got for selling his REIT business - so you could say for him this represents a relatively small portfolio investment in a long shot.  If Tribune survives, his $.32B becomes worth $3.2B - or 10x return (see MarketWatch article here).

And of course all of this is for a valuation that is only half what the business was worth in 2000, and only 60% of its value as recently as 2004.  But that of course reflects the market Challenges which face the Tribune going forward.  Challenges completely ignored in this crazy financing scheme.

Meanwhile, the employees of the Tribune now get to spend all their energy looking for yet MORE cost cuts - after 5 years of cost cutting - in order to service this staggering debt load.  Just what you need in a situation where you missed the new technology boat.  They now have no resources for creating and managing any White Space to find a new Success Formula.   Amidst these financial machinations, the newspapers have turned over the publisher at the LATimes and several leading editors in just the last year (see latest article on editor resigning in protest here) demonstrating the disarray inside the business. 

The forecast here is not hard to make. I live in Chicago and read the Chicago Tribune.  It, as well as The LA Times and other Tribune-owned newspapers have a great history and many Pulitzer Prizes to their credit.  But that was the past. If you are an investor, or an employee, or thinking about being a bondholder in this new enterprise I would be looking for a far better future than is promised at Tribune Company.

Comments

[Andy Martin]

I agree with your analysis. That is why I am fighting the deal.

NEWS FROM:
ANDY MARTIN

FOR IMMEDIATE RELEASE: April 2, 2007

ANDY MARTIN SAYS TRIBUNE VOTE FOR ZELL IS "SUICIDE PACT" FOR QUALITY JOURNALISM IN AMERICA

"EMPLOYEES LEFT WITH ALL THE RISK AND ALL THE DOWNSIDE," MARTIN SAYS. "BUT WE WILL GIVE ZELL HELL"

(NEW YORK) Internet publisher, broadcaster and media critic Andy Martin told a New York news conference that he will continue to oppose the takeover of Chicago's Tribune Company by Asset-stripper Sam Zell, and will shortly file a competing proposal with the Securities and Exchange Commission.

"I think it is ironic that on the day when new Century Financial filed for bankruptcy, the Tribune Company agreed to a takeover with a 2% down payment. That sure looks like a risky deal to the stock market, which has posted a tepid response in early trading," Martin said. "Talk about a subprime corporate deal. Mr. Zell knows nothing about newspapers, but he is expected to now 'know more' than the entire industry. It makes no sense. And who gets left holding the bag when Zell parachutes out? Why the employees, of course.

"Once again, the investment bankers and brokers will profit by all of the transaction fees, and the public will be the loser. The Tribune will be left weaker, and under the direction of a man with no commitment to journalism and very little financial commitment to the enterprise. Mr. Zell has little risk and some upside; the employees have virtually all the risk and all the down downside.

"I would call the Tribune's 'Strategic Review Process'
nothing more than a suicide pact for quality journalism in America. It will not end well. Instead of 'private equity' Zell is proposing what amounts to no equity.

"You have to wonder about Dennis FitzSimons. He says he will now have 'greater flexibility' and an 'eye to long-term growth.' What has he been doing during the past several years? Is he saying that public ownership and media properties are incompatible? That claim also devalues the stock of the New York Times Company and the Washington Post Company.

"There are many additional steps in Zell's scheme that need approval. I think we can block them at the pass, and also counter with our own superior proposal.

"I said earlier that a vote for Zell would be an act of infamy. And infamy has taken root at the Tribune. Colonel McCormick must be turning in his grave. The Tribune's acceptance of Zell's financial legerdemain marks the death knell of serious journalism in America. If a premier franchise such as the Tribune can't make it and is forced to sell out to an asset-stripping pump and dump artist, then no other newspaper company will survive at the national level. Quality journalism is on the way to extinction. I expect to see the Tribune Tower converted to condos.

"I hope we can succeed in overturning Zell's agreement. But I do not remotely minimize either the risks or the challenges. Nevertheless, we are prepared to proceed and we will fight on for the public interest and the People of Chicago and Illinois," Martin said. "We will give Zell hell."

Media contact: (866) 706-2639

See ContrarianCommentary.com for ongoing document posting in this struggle to save the soul of a city.

------------------------------------------
Chicago-based Internet journalist, broadcaster and critic Andy Martin is the Executive Editor and publisher of ContrarianCommentary.com. © Copyright by Andy Martin 2007. Martin covers national and world politics with forty years of personal experience. Columns also posted at ContrarianCommentary.blogspot.com; contrariancommentary.wordpress.com. Comments? E-mail: AndyMart20@aol.com. Media contact: (866) 706-2639.

[music]

very interesting.
i'm adding in RSS Reader

[Pol Mahov]

Hello! Good article and very Informative blog, I russian webmaster, my name Pol, and i have many websites.. If you want to sell your blog or exchange links, write in my email.
Thanks...

[foodcachisism]

According to a recent and unscientific national survey, smiling is something
everyone should do at least 6 times a day. In an effort to increase the
national average (the US ranks third among the world's superpowers in
smiling), Xerox has instructed all personnel to be happy, effervescent, and
most importantly, to smile. Xerox employees agree, and even feel strongly
that they can not only meet but surpass the national average... except for
Tubby Ackerman. But because Tubby does such a fine job of racing around
parking lots with a large butterfly net retrieving floating IC chips, Xerox
decided to give him a break. If you see Tubby in a parking lot he may have
a sheepish grin. This is where the expression, "Service with a slightly
sheepish grin" comes from.

----------------------------------------------------------------------------------------------------
http://solomoncolemanit.easyjournal.com