Friday, November 03, 2006

Private party?

Although many analysts believe the Tribune Co. is poised to follow Knight Ridder into liquidation, it actually is a prime candidate for going private in a management-led buyout.

In an LBO, the company would be purchased from public shareholders by private investors supported by substantial loans. Management, which would be retained and powerfully motivated by attractive incentives, then would be free to radically restructure the business without worrying about producing the orderly earnings demanded by Wall Street.

Radical restructuring would include, but not be limited to, trimming non-strategic newspaper circulation, slashing expenses (including headcount at newspapers and broadcast properties) and investing more aggressively than today in new print and digital products.

If the stars aligned correctly and management executed well, the company could emerge from private ownership within three to five years as a lean, mean media machine. The payday for investors and management would come in one of two ways: Either the company would refloat as a public stock or it would be sold as a plumb strategic asset to another media company like Gannett, Google or Fox.

As discussed here and here, private ownership would put a heavier burden of debt on Tribune than it carries today. And the loans would have to be paid on time. Or else.

The local investors who bought the Philadelphia newspapers in an LBO just a few months ago are planning layoffs and other cost reductions to assure they meet loan payments of some $40 million this year.

Although the Philadelphia papers generated $100 million in profits in 2004 and $76 million in profits in 2005, management estimates that it will make only $50 million in 2006. That leaves less than $10 million “to invest in the business,” according to the Philadelphia Inquirer.

With due respect to the known knowns of private ownership and unknown unknowns of the newspaper business, Tribune Co. is a bargain by historic standards.

At an enterprise value of less than $8 billion, the company is trading at 7.4 times its trailing operating cash flow, while Knight Ridder sold earlier this year for 9.5x earnings and Pulitzer sold in 2005 for 13.5x earnings.

The biggest risk investors in Tribune would take is whether these multiples would rebound to earlier levels or continue trending lower. If multiples kept declining, it would be difficult to preserve, much less improve, the value of the company.

At the insistence of dissatisfied investors, the Tribune management has shopped the company among private-equity groups and likely buyers in the newspaper industry. The initial expressions of interest were lukewarm from financial buyers and, so far as can be determined, nonexistent from newspaper publishers.

Now that the present market value of the company has been verified by third parties as being near a historic low, management has a chance to line up the financing necessary to take the company private and get about the business of fixing the business.