Zell's $8.2 billion buyout on the table
The two most important Wall Street indicators for beleaguered Tribune Co. were headed in opposite directions Monday in advance of today’s shareholders vote in Chicago on the $8.2 billion buyout deal the company’s board struck in April with real estate mogul Sam Zell.
Amid much speculation that the deal was poised to fall apart, investors sent Tribune shares climbing more than 5% to close Monday up $1.35 to $27.02, albeit still below the $30 or so at which the stock was trading in the spring when Zell clinched his complex buyout pact, valuing the company at $34 a share.
But the stock’s Monday surge was surprising since Standard & Poor’s cut the rating of Tribune’s debt on the same day.
Standard & Poor’s already had Tribune’s debt bonds rated at junk status given the hefty debt load (estimated at $13 billion) that the company will be carrying should the Zell transaction go through as outlined. Monday’s move by S&P sent it down another notch below investment-grade with a continued negative outlook, and it came with the promise that S&P will further downgrade Trib’s debt once the transaction is completed.
Zell declined to comment on the situation Monday. Tribune was officially standing pat on the deal going through as originally outlined, transforming the company from a publicly traded entity to a private entity owned largely by its 20,000 employees under the sophisticated financing scheme known as a Employee Stock Ownership Plan.
“Our going-private transaction is on track, and the financing for it is fully committed,” Tribune said in a statement. “We anticipate closing the transaction in the fourth quarter, following FCC approval, and expect to be in full compliance with our credit agreements.”
Indeed, Tribune shareholders are widely expected to approve the Zell buyout when they gather this morning for the vote at Tribune’s Chicago HQ — given that the terms of the deal value it at a nearly 21% premium over the current stock price.
What’s more, the timing of the deal last spring was fortuitous given the crunch in Wall Street’s capital markets during the past two months spurred by troubles in the home mortgage financing sector. Tribune’s reps continued to stress on Monday that the financing for its multistage deal remains secure with top-tier lenders including Citigroup, JPMorgan Chase and Merrill Lynch.
But servicing the company’s heavy debt load over the long term could get a lot more expensive if the credit crunch continues in the broader market. That has spurred speculation that Tribune may seek to shed more assets in the short term to whittle away at its existing debt, especially if cash flow from existing operations continues to sag, as it did in the first half of this year.
The Zell deal initially faced criticism because the Chicago-based real estate mogul was gaining control and options to purchase up to 40% of the company for an initial investment of only $315 million. But speculation has increased in recent weeks that Zell, known in the real estate world as the “grave dancer” for his skill at resuscitating distressed properties, would seek to negotiate a lower price given the slide in the company’s performance and its slumping stock price.
Tribune’s net income plunged 93% in the first half of this year to $12.9 million, partly as a result of writeoffs related to layoffs at the Los Angeles Times and costs associated with arranging the Zell buyout. The company’s first-quarter earnings reports showed weakness in ad sales at its newspapers, which include the L.A. Times, Chicago Tribune and Newsday, and TV stations, including WPIX New York, KTLA Los Angeles and WGN Chicago.
“The numbers still don’t work for this deal,” said analyst Dave Novosel of the bond research firm Gimme Credit, citing high costs, unstable credit markets and deteriorating operational performance.
Tribune has already announced plans to sell its Chicago Cubs baseball franchise as part of the ESOP transaction. The company’s more recent operational woes, which come amid an overall downturn in the newspaper and local broadcast TV biz, have spurred speculation that it may seek to unload some of its 23 TV stations, its partial stake in cabler Food Network and perhaps even all or part of the Los Angeles Times.
For some observers, the bigger issue remains the securing of necessary waivers from the Federal Communications Commission to continue owning newspapers and TV stations in major markets like New York and L.A. The FCC has had a longstanding ban against such dual ownership; Tribune and other media giants have lobbied fiercely to repeal the regulation in recent years.
Adding to the pressure on Tribune was a statement from the Teamsters Union promising to urge shareholders at today’s meeting to vote against the deal. The Teamsters have been agitating against the Zell buyout for months, saying the ESOP provision is too risky for employees’ retirement funds, which will bear the burden of losses if Tribune’s profit picture continues to decline.
(The Associated Press contributed to this report.)