NEW YORK, March 27 (Reuters) - Tribune Co.'s TRB.N spreads are likely to widen further if Chicago real estate magnate Sam Zell's offer to buy the company is successful.
Zell is offering to buy Tribune for $33 a share, the Los Angeles Times reported on its Web site on Friday, citing a source familiar with the matter. For details, see [nN23422108].
A special committee of directors that is reviewing options for Tribune received details of the proposal on Wednesday, the Times reported. The Wall Street Journal reported on Monday that Zell was the leading contender to buy the company.
However, “Tribune’s stock is down on the day, nowhere near the advertised price from Zell,” said Gimme Credit analyst Dave Novosel. “On the other hand if you look at the credit derivative market they are almost implying that something bad is going to happen, as if this is going to go through because this will add a lot of debt.”
Tribune’s stock closed at $31.10 on Tuesday. The cost to insure Tribune’s debt with credit default swaps has risen by around 30 basis points on reports of the Zell offer to about 193 basis points, or $193,000 per year for five years to insure $10 million in debt.
The Zell offer only increases the leverage of the company, “but it really doesn’t do anything to address the problems of the company or the valuation of the company,” Novosel said.
“Doing this really doesn’t solve the basic problems of the company, which is declining revenue trends and margin pressure, because of difficulties in the industry,” he said. “At this point, my sense would be there’s room (for spreads) to go wider.”
Tribune, which publishes the Los Angeles Times and the Chicago Tribune and owns the Chicago Cubs and about two dozen television stations, has been evaluating several offers for all or parts of the company. Analysts have said a resolution may be possible by early next week.
Zell has indicated he has no plans to break apart Tribune, and there have been no indications about whether the Chandler Trust, which owns a 20 percent equity stake in the company, and the McCormick Foundation, which owns a 13 percent equity stake, will participate with Zell, Barclays Capital analyst Hale Holden said in a report on Tuesday.
However, “assuming no asset sales and both the Chandler Trust and McCormick Foundation sell their stake, we estimate pro forma leverage slightly greater than 10 times, which we do not view as a realistic capital structure for a structurally declining business,” Holden said.
A more realistic scenario would be a sale of the Cubs and Tribune’s 31 percent stake in the Food Network, in addition to rolling over the McCormick Trust’s equity stake and potentially their proceeds from the dividend, estimated at $548 million, into the LBO financing, the bank said. A sale of the cubs is valued between $450 million and $500 million and the company’s stake in the Food Network is valued around $700 million to $750 million.
This would lead to pro forma leverage of 7.8 times to 8 times, which would likely push swap spreads wider to between 275 and 300 basis points.
“Even leveraged at 8 times, we think Tribune could trade relatively poorly given uncertainty regarding the long-term outlook for major market newspapers, recent weakness in rating performance of Tribunes’ CW (television network) affiliates, and multiple contractions at public peers,” Barclays’ Holden said
The most plausible alternative structure appears to be a “self-help” option, which could include less leverage and a smaller dividend than what Zell is proposing, as well as the spin-off of Tribune’s television group, he wrote.
“While the auction has been both difficult to predict and longer than expected to date, we think the upside to buying protection at current levels if the Zell bid prevails outweighs the 30 basis points of downside if the board chooses the self-help option,” Holden said.
((Reporting by Karen Brettell; Editing by Dan Grebler; Reuters Messaging: email@example.com; e-mail: firstname.lastname@example.org; Tel 646-223-6274)) Keywords: MARKETS CREDIT/
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