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NEW YORK (Reuters) - Tribune Co has reached agreement in principle to sell Newsday to Rupert Murdoch's News Corp for about $580 million in what would be a joint venture, according to a source familiar with the matter.
Another person briefed on the matter said the two parties are "very close" to a deal.
Under the terms of the alliance, Tribune's Newsday would be part of a joint venture with News Corp's money-losing New York Post, allowing the two publications to combine back office operations, the person said.
Still, Post tabloid newspaper rival the New York Daily News remains interested in Newsday. The paper's owner, Mortimer Zuckerman, plans to submit a new, formal bid by the end of the week for Newsday, the daily newspaper on Long Island, New York, a source close to the discussions said Tuesday.
The source declined to say if Zuckerman's bid is higher than News Corp's or how it differs from a previous bid.
Under News Corp's plan, it would own most of the company, with Tribune keeping a very small stake. Additionally, Tribune could receive anywhere between $500 million and $600 million in cash, the source said.
Details of ownership are still being ironed out and there is still a small chance the deal could fall through, the person said.
Both sources spoke on condition of anonymity because the talks are confidential.
Selling the paper based on Long Island, adjacent to New York City, would be key to Tribune Chief Executive and Chicago real estate magnate Sam Zell's plans to help slash debt at the company.
Zell took Tribune private in an $8.2 billion leveraged buyout that restructured the publisher as an employee-owned company, saddling it with more than $10 billion in debt.
The Wall Street Journal said the deal is expected to wipe out as much as $50 million in annual losses that News Corp now incurs on the Post, with the combined Newsday-Post operation earning roughly $50 million.
Newspaper analyst John Morton said Newsday "makes more than enough money to cover the Post's losses." The company had a cash flow of about $80 million in 2007, according to a source with knowledge of the discussions.
"The combined operation would be profitable," Morton said. "There would be some administrative and production cost savings but the real goal would be to combine the advertising appeal and sell that jointly for advertisers that want both Long Island and New York City coverage."
Analysts said a combined operation would also place News Corp's New York Post in a much stronger position against Daily News.
Pali Research analyst Richard Greenfield expressed concern about the timing of the purchase.
"Leveraging the investment in the New York Post certainly is logical," Greenfield said. "But expanding in the newspaper business at a time like this -- as investors, we would prefer to see News Corp not do that right now."
Newspapers have been struggling with declining ad revenue and waning readership as more advertisers and readers move to digital media and get their news and place their ads online.
Newspapers have also taken a hit amid the weak U.S. economy and a recession in total advertising spending.
"Investors view News Corp as the higher-growth media company," said UBS analyst Michael Morris. "And acquiring more newspapers at a time like this is contradictory to that thesis."
Morton, however, said the purchase comes at a good time. "If anyone does want to buy a newspaper, this is the time to do it. Five years ago, Newsday would probably have been worth more than $1 billion. Prices are low now. It's not a good time to sell, but it's certainly a good time to buy."
For Tribune, the sale comes at a time when the company is at risk of defaulting on its debt in 18 months if the newspaper business deteriorates further and it fails to unload assets.
Regulatory issues could slow the sale, particularly media ownership issues that could restrict the number of properties that Murdoch could own in the New York Area.
The U.S. government restricts the number of papers that media companies own in certain markets where they also own television stations. In the New York City area, Murdoch also owns The Wall Street Journal and Fox affiliate WNYW-TV, in addition to the New York Post.
Additional reporting by Kenneth Li; Editing by Brian Moss/Andre Grenon