Thursday, January 18, 2007

Fasten your belt-tightening belts

The future of the Tribune Co. may be a mystery but one thing is almost certain: Regardless of the outcome, major expense cuts are coming to every corner of the company, with the possible exception of the Chicago Cubs.

It doesn’t matter whether Tribune’s board of directors this weekend accepts or rejects the competing proposals to buy the company. Unprecedented belt tightening is on the way. Here’s why:

:: If the board agrees to the recapitalization (Broad-Burkle plan) or outright sale (Chandler proposal) of the company, spending will have to be throttled to ensure the company’s ability to pay off the massive debt incurred to finance the transaction. The company’s debt load, which now is nearly $5.3 billion, would be more than doubled by either plan.

:: If the board rejects the aforementioned proposals, management will have to tighten spending to lift the company’s earnings in hopes of forestalling an almost-certain collapse of the Tribune’s stock price.

The speed and depth of the cost reductions will be determined by the perceived ability of Tribune to significantly lift its revenues in the immediate future.

To be on the safe side, however, any near-term scenario likely would require cuts in headcount, newsprint consumption, circulation and production costs at newspapers and in headcount, programming and promotion costs in the broadcast division.

How low? Based on common industry metrics, a case could be made for cutting the newsroom of the Los Angeles Times by 17.5% to 775 from the current force of 940 journalists.

As the Chandler family correctly argued in its letter offering to buy the company, Tribune’s stock price, though anemic by historic standards, is trading for more than it would in the absence a prospective takeover of the company. Shares that sold as high as $51.99 in early 2004, are selling today around $31.

How low would shares go if all hopes for a buyout were dashed? The Chandlers reckon about $26, which is as good a guess as any (though they haven’t always been right in the past.)

The Broad-Burkle proposal would require Tribune to shoulder about $10.5 billion in additional debt (vs. the current $5.3 billion) to pay existing shareholders a one-time dividend of $27.

The Chandler proposal initially would saddle the company with $11.3 billion in debt until it spun off the broadcasting division. A successful sale of the broadcast assets could help reduce the debt load.

In either case, the new debt would have to be repaid from future increases in the profits of the Tribune’s media properties. In the absence of far better sales gains that the properties have been able to achieve in the recent past, the only way to improve profitability is by whacking expenses.

One of the few exceptions to the likely belt tightening might be the Chicago Cubs, which is believed by some analysts to be on track to increase payroll by $20 million to $30 million this year from $117 million in 2006. That would represent an increase of 17% at the low end and 25% at the top.

Noting that the team added a cluster of high-priced players to its roster last fall, James Peters, an analyst at Standard & Poor’s, told Marketwatch.Com that “you'd be hard pressed to make the argument that they're minimizing their expenses.”

Then again, the Cubs are estimated by Forbes Magazine to be worth $448 million, or 2033% more than they cost when Tribune bought them for $21 million in 1981.