Sunday, May 11, 2008

Why Tribune has to sell Newsday

If you can imagine your mortgage payment tripling at the same time your take-home pay is shrinking, then you can understand the financial pain forcing the Tribune Co. to sell Newsday.

The first-quarter earnings release issued by the company late Friday, which touts a $1.82 billion “profit” based on an technical accounting adjustment, dances around the magnitude of the challenge the company faces in servicing a debt load that climbed to $263 million in the first three months of this year from $83 million in the same period a year ago.

As Tribune’s interest payments surged 317% in the three-month period, revenues fell 7.8% from the prior year to $1.1 billion. The situation would have been worse, if the 11.2% drop in newspaper revenues in the first period had not been offset by a 5.2% increase in broadcast sales.

The huge sums necessary to service Tribune’s debt, as well as the requirements that some of the $12.6 billion it has borrowed be paid down at yearend and in mid-2009, has motivated the company to sell its Connecticut newspapers, dispose of its Hollywood studio, put Newsday on the block and promise to auction off the Chicago Cubs. More dispositions could be in prospect, if revenue-generating or cost-cutting initiatives don’t produce cash fast enough to satisfy the lenders.

The magnitude of Tribune’s indebtedness at the most perilous time in the history of the American media is best illustrated by one simple fact: Its interest obligations in first three months of the year were equal to 24% of the company’s total sales. A year ago, interest payments represented only 7% of its revenues.

Although the Tribune may be the most heavily leveraged publishing company, it is far from alone. McClatchy, Lee, Media News Group, Journal Register, the Minneapolis Star Tribune and the Philadelphia Newspapers all borrowed vast sums to fund acquisitions in recent years.

They, like Tribune, today find themselves struggling with rising principal and interest obligations at a time of deteriorating sales and rising expenses for paper, fuel and health care. Some of them, including JRC and the Strib, appear to months from potential default, assuming they cannot boost sales, divest assets or significantly lower their operating costs.

The Tribune’s bodacious interest bill results from the $7.6 billion in debt that was added to the company’s existing $5 billion in obligations when Sam Zell took the company private in December in a complex employee stock ownership plan (ESOP).

One place that cash won’t magically appear to pay down Tribune’s loans is from the $1.82 billion in “profit” that the company claimed as the result of a bookkeeping adjustment in its first-quarter financial statement.

The “profit” is a legitimate accounting transaction occasioned by the reorganization of the New Tribune as a Subchapter S corporation, which is not required to pay taxes as Old Tribune did when it as a Subchapter C corporation. Gains and losses in an S corp are passed through to shareholders, who then are personally on the hook for any resulting taxes.

While Old Tribune was required to carry $1.86 billion of deferred tax liabilities on its balance sheet, New Tribune doesn’t have to, because any future taxes would be the obligation of such S-corp shareholders as Mr. Zell and the ESOP.

Even though the accounting adjustment didn’t produce any extra cash to fund interest payments or retire Tribune’s debt, the company this year did get to save the $19.4 million it spent on taxes in the first quarter of 2007. The $19.4 million in savings, however, hardly puts a dent in the $180 million in additional interest payments that the company had to pay in 2008.

Given the circumstances, it’s easy to see how an extra $70 million for Newsday could come in handy.


Anonymous Anonymous said...

nice post

2:40 PM  

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