| NEW YORK
NEW YORK Tribune Co is at risk of defaulting on
its debt in as little as 18 months if the newspaper business
deteriorates further, and it fails to unload more properties.
By some estimates, Tribune could fetch $1.6 billion for the
Newsday daily paper and the Chicago Cubs baseball team and
related properties, the assets it has already put on the block.
Newsday has already attracted interest from News Corp's
NWSa.N Rupert Murdoch and New York Daily News owner Mortimer
Still, Tribune has nearly $4 billion in debt and interest
payments due by the end of 2009, according to Gimme Credit
analyst Dave Novosel, making it all but certain that the
company will be forced to sell more marquee properties and make
deeper cost cuts to avoid violating debt covenants.
"Tribune is a big microcosm of issues across the industry,
and Sam Zell made an unfortunate bet, if you will, jumping into
a business he knew nothing about," said veteran newspaper
analyst Miles Groves.
Zell, a Chicago real estate tycoon, took Tribune private
last year in an $8.2 billion leveraged buyout that restructured
the publisher of the Los Angeles Times as an employee-owned
company, saddling it with more than $10 billion in debt.
As recently as December, at the time of the deal's closing,
Zell was pledging to keep Tribune intact, except for the Cubs.
A major asset sale would be seen not only as a failure for
the man who dubs himself "The Grave Dancer" for coaxing big
profits from distressed businesses, but also as a warning to
other would-be saviors of the troubled newspaper industry.
Reached at a real estate conference in New York on
Thursday, Zell, Tribune's chief executive, declined to comment.
He plans to hold a conference call with lenders on April 17.
So far, Zell has shared few of his plans to turn around the
business. He portrays himself as a roll-up-the-sleeves change
agent, using profanity and humor to boost morale.
One YouTube video of Zell swearing at an Orlando Sentinel
photographer has cemented his reputation for tough, blunt talk.
That may not be enough.
Analysts say Newsday could fetch up to $600 million, while
the Cubs and related properties could fetch $1 billion.
According to data from Reuters Loan Pricing Corp, Tribune
needs to repay at least $1.6 billion of its loan facilities in
2008 and 2009.
But Gimme Credit's Novosel has slightly higher numbers
after factoring in amortization payments.
Novosel estimates that Tribune has to make $1 billion in
debt and amortization payments in 2008, and has another $850
million in debt and amortization payments that will mature in
Tribune also faces nearly $2 billion in combined interest
expenses for 2008 and 2009, he said.
That could be covered by anticipated free cash flow, unless
the newspaper industry sinks further amid the weak U.S. economy
and the recession in advertising spending.
So far, the outlook is grim. Goldman Sachs analyst Peter
Appert said he expected first quarter newspaper ad revenue to
decline by 10 percent. "Managements will find it nearly
impossible to fully offset this level of revenue decline with
cost cutting," he said.
The declines in the industry and the company, unforeseen by
the deal's architects last year, have narrowed what analysts
have said is Zell's already slim margin of error.
Tribune's previous management, who negotiated the deal, had
overestimated 2007's anticipated cash flow by about 20 percent,
according to a source familiar with Tribune's finances before
it went private. "They were very aggressive," the source said.
In February, Tribune's own Baltimore Sun reported that Zell
told Sun employees that an unexpected 16 to 18 percent decline
in Tribune's newspaper revenue -- worse than the projected 2 to
3 percent fall -- could force it to sell more assets.
Tribune has an existing bank facility that could cover $260
million of $1 billion debt obligations this year, said Fitch
analyst Mike Simonton.
But Novosel said that was a stop-gap measure. "Tribune
could tap credit lines, but this could impair cash needed for
operations, so it is only a temporary solution," he said.
Tribune's lackluster results at the beginning of the year
prompted Standard & Poor's to lower its corporate credit rating
on March 17 to "B-" from "B" with a negative outlook.
Weak operating trends at Tribune could depress newspaper ad
revenue by 10 percent and overall EBITDA in the mid-teens
percentage range in 2008, S&P said.
"To date we have not seen them or anyone turn the corner so
to speak," Fitch's Simonton said. "There is no real evidence
from even the best cost cutters in the industry, they
(publishers) can offset these revenue declines."
If ad revenues keep falling, Tribune could drift perilously
close to violating covenants on its senior secured debt. These
require the ratio of the company's debt to the trailing four
quarters of EBITDA (earnings before interest, tax, depreciation
and amortization) to not exceed 9 to 1.
Fitch estimated the company was at 8 to 1 at the end of
2007. By the first quarter of 2009, that covenant tightens to
8.75 to 1, "further pressuring flexibility around the
covenants," Fitch said of Tribune on March 24.
As recently as February, Zell said the company expected to
meet those conditions.
As for what Tribune could sell, its 31 percent stake in the
Food Network is a candidate, but it is a bad time to go to
market. Hot cable networks generally sell for 14 times cash
flow valuation, according to SNL Kagan analyst Derek Baine, but
the current market commands a multiple of 11 to 12 times.
Thus, Tribune's stake in the Food Network would yield $775
million to $1 billion based on estimates from Goldman Sachs and
Tribune also owns a stable of local television stations and
well known, but financially strapped newspapers like the LA
Times and Chicago Tribune, as well as stakes in companies
including jobs network Careerbuilder.com.
Zell wouldn't talk about Tribune at the real estate
conference on Thursday. But he did acknowledge the state of the
business, joking to the audience that going from property to
newspapers was like "going from leprosy to cancer."
(Editing by Tiffany Wu and Ted Kerr)