DealTalk: Tribune share price reflects deal concerns

The Tribune Tower in Chicago, April 2, 2007.

NEW YORK (Reuters) - Tribune Co. TRB.N shares have been trading significantly below the price offered in an $8.2 billion buyout of the media company led by Chicago real estate magnate Sam Zell, a sign of nervousness over whether the deal will be completed.

The takeover of the newspaper and broadcasting conglomerate could be threatened by an industry-wide decline in newspaper advertising revenue, some say. As Tribune approaches the second stage of its deal, concerns have been raised about whether it will generate enough cash flow to meet a leverage test detailed in its deal agreement or if Zell will seek to renegotiate the terms.

Meanwhile, in the past few weeks, investors in the debt markets have become more risk-averse amid growing problems in the subprime home loan market.

"There are two schools of thought on Tribune," said analyst Ed Atorino of Benchmark Co. "One is they will make it happen and do what they have to do to complete the transaction by the end of year and be able to meet one of the stringent guidelines in the debt covenant, which is a 9-1 debt-to-cash flow ratio.

"The other ... says earnings will be short of expectations, they'll have a tough time meeting the numbers and they may have to delay the closing until they fix it -- or perhaps maybe not complete it."

SHARES FLUCTUATE

Tribune agreed on April 2 to be bought for $34 a share but the stock has since fluctuated between $28.95 and $33.30. On Monday, the shares fell 1.8 percent to $30.03.

The spread -- the difference between Tribune's current price and the $34 offer -- was relatively wide at 13 percent on Monday. A spread higher than 5 percent indicates the degree to which investors lack confidence the deal will close.

The buyout is being executed in two stages: the first was a tender offer completed in May at $34 a share for 52 percent of the shares; the second stage to buy out the remaining stock is still to come. The May offer was oversubscribed, with shareholders tendering almost twice as many shares as Tribune sought to repurchase.

Following the deal, Tribune would be privately held with an employee stock ownership plan holding all outstanding common stock. Zell would have a subordinated note and a warrant entitling him to buy 40 percent of the company's common stock.

But a key issue for some is a condition, detailed in a April 5 filing, that Tribune's ratio of indebtedness to trailing four quarter of earnings before interest, taxes, depreciation and amortization shall not exceed a 9 to 1 ratio.

"The way the numbers are going right now they will be pretty tight making that 9-to-1 cash flow number," said Atorino. But he adds that Tribune still has asset disposals planned, such as its expected sale of the Chicago Cubs major league baseball franchise. And the company has the flexibility to do additional sales to raise money, Atorino said.

"They need $4.2 billion to get the rest of those shares bought," he said. "The banks have agreed to pay it, it's committed, but there are covenants you've got to meet."

DEAL RISKS?

According to analysts at Deutsche Bank, risks to the deal include the possibility that Zell or his lenders could attempt to exit or renegotiate the transaction, a significant deterioration in revenue that puts the leverage test at risk, or delays in completing asset disposals, although they stress a low probability for "an intervening event".

These analysts cite a clause that lets Zell exit the deal if there is insufficient financing.

Tribune's April 5 filing cites that the company needs to have obtained financing "on the terms set forth in the financing commitments, or alternative financing on substantially similar terms that are not materially more onerous."

However, Deutsche Bank analysts wrote in a research note to clients that they believed the deal would be completed and they have a "buy" rating on the stock.

"There may be some unhappy lenders in the end, but equity investors are more likely than not to get their $34 in the second tender," the report, published July 1, read.

Even taking a bearish outlook for the second half of the year, Tribune should still exceed the minimum threshold of earnings, the Deutsche Bank analysts said.

John Orrico, portfolio manager of the Arbitrage Fund, which does not have a position in the Tribune, said a risk is that the second part of the deal doesn't happen, leaving the company with significant debt.

"They have already completed the first half of this transaction, the tender offer for half the shares at $34," said Orrico. "If come December this ... fails, you'll just have a highly leveraged company."

Deutsche Bank's analysts think if the deal falls through Tribune shares could fall to about $25.

DEBT WOBBLES

The decline in the debt markets' appetite for risk was seen in the past week, as Canada's Quebecor Media pulled a $750 million junk bond sale, the latest of several casualties of a more jittery U.S. junk bond market, according to an analyst at KDP Investment Advisors on Wednesday.

Bid levels on Tribune's $5.6 billion term loan, which is part of the deal financing the first stage of the buyout, have weakened from its debut trading level of 99.25 cents on the dollar in mid-May to 95.4 cents on the dollar as of July 12, according to Reuters LPC data on Friday.

According to LPC, aggressively structured bank loans such as the Tribune's have been weakening as the overall market softens and loan investor appetite for risk readjusts. In Tribune's case, loan investors have expressed concern about the debt that the company is raising to finance Zell's acquisition, said LPC.

Tribune was not immediately available for comment.

(Additional reporting by Caroline Humer and Robert MacMillan in New York and Faris Kahn from Reuters LPC)