What happens to Tribune after bankruptcy?

By Jack Shafer
June 11, 2012

Choking softly on the wad of debt “rescuer” Sam Zell fed it, Tribune Co checked into a Wilmington, Delaware, bankruptcy court at the end of 2008. Now newly slimmed, especially after the payment of $410 million in legal and other professional fees, the much diminished patient is about to be released and turned over to its new owners, a group of banks and hedge funds. How diminished? At the time Zell acquired control in 2007, Tribune Co’s newspapers, television stations, other media properties and Chicago Cubs baseball franchise were valued at $8.2 billion. Reporting from court filings, Chicago Tribune reporter Michael Oneal put Tribune Co’s current value at about $4.5 billion.

That’s not a haircut. That’s a beheading. Some of that loss in value represents the sale (for $845 million) of Tribune’s Chicago Cubs operation in 2009, but still.

What will the likely new owners (JPMorgan Chase; Angelo, Gordon & Co.; and Oaktree Capital Management) do with the reconstituted Tribune Co? According to Oneal, who has been monitoring the ailing company’s vitals since before its bankruptcy, Tribune isn’t so sick that it must sell off all its parts immediately. But hedge funds and banks aren’t the best managers of media properties, and when combined with today’s declining market for media properties, those hedge funds and banks might want to put out a for-sale sign as soon as possible. I’m sure that if you were interested in Tribune’s 23 TV stations, which are valued at $2.9 billion, they’d meet you for coffee.

But Tribune’s eight remaining dailies – the Los Angeles Times, Chicago Tribune, Baltimore Sun, Hartford Courant, Orlando Sentinel, Ft. Lauderdale Sun Sentinel, Allentown Morning Call, and Hampton Roads Daily Press – are another story. Given the collapse of newspaper properties, the hedgies and bankers might be willing to bring Irish coffee, pastries, and the pink slips for the papers to your home in hopes of doing a quickie deal. Evidence is mounting that newspaper properties – with the exception of the national dailies and some small-town franchises – now have expiration dates stamped on their sides. Every moment the new owners don’t sell the Los Angeles Times and the Chicago Tribune is a moment that the newspapers decline in value. If some of these newspapers don’t sell in the next five years, there might not be anything left for the owners to sell.

Oneal provides a couple of data points that illustrate the decaying value of Tribune’s newspapers. In December 2006, prior to Sam Zell’s takeover, David Geffen made a reported $2 billion cash offer for the Los Angeles Times alone, but company adviser Lazard Freres & Co recently valued the Tribune newspaper portfolio at about $623 million. That’s $27 million less than what Tribune got for Newsday when it sold the paper to Cablevision in 2008. (Cablevision took a write-down for half of that price in 2009.)

I’d be surprised if Tribune could command that price today. Consider the Philadelphia Inquirer and Daily News, which have a combined daily circulation of about 325,000. This pair of papers sold for $515 million in 2006, $139 million in 2010, and a couple of months ago for just $55 million. Every market is different, but imagine how the market will treat the Los Angeles Times, daily circulation about 616,000, and the Chicago Tribune, daily circulation about 414,000, when they reach the block. Unless the new owners possess brilliant plans for the renewal of the business, they’d be wise to note the trend of falling prices paid for newspapers, falling revenues, and falling circulation, and head for the exit before additional value, especially goodwill, melts away.

Melting goodwill isn’t the worst scenario. Negative goodwill is. In his 2004 book The Vanishing Newspaper: Saving Journalism in the Information Age, Philip Meyer explains that traditionally 20 percent of the value of a newspaper could be found in its physical assets like delivery trucks, printing presses, and computers, and 80 percent of it in goodwill, that is, the community’s regard for the paper and its willingness to place ads in it and subscribe. As the transaction value of newspapers has dropped, so too has that ratio, with some of the air going out of the price being the goodwill that the previous owners burned with their cost-cutting and other cheapenings of the product. Via email, Meyer tells me to be on the lookout for evidence of negative goodwill at newspapers: in other words, which newspaper will be sold for less than the value of its trucks, presses and computers.

It might not be long. Those physical assets aren’t worth as much as they once were. As circulation has fallen, American newspapers have been outsourcing their printing jobs to other newspapers or shops, with the San Francisco Chronicle, Montreal’s Le Presse, the Toronto Globe and Mail, Chicago Sun-Times, New Haven Register, Topeka Capital-Journal, Annapolis Capital, Washington Times, Indianapolis Star, and many others. As circulation continues to fall and more papers cut back to three-days-a-week publishing schedules from seven, it might not be long before the remaining value in some of these presses will be as scrap.

The luckiest newspapers will have real estate to buoy their selling price. Last year, McClatchy sold its 14-acre Miami Herald site to a developer for $236 million – much more than anybody would pay for just the newspaper. The Tribune papers are not so blessed with real estate holdings. In 2008, when Zell was in charge of Tribune, he talked about putting the downtown offices of the Los Angeles Times and the Chicago Tribune up for sale, but he garnered little or no interest.

A variety of equations have been evoked over the ages to predict the acquisition price of newspapers, as John Morton explained in the April-May issue of American Journalism Review. Back in the good old days before the Internet started to strangle newspapers, steady cash flows and the expectation of increasing values made it easy for buyers to borrow huge sums from banks for big deals. When credit was loose and profits were high, a newspaper could sell for “one-and-a-half to two times its annual revenue (or 13 to 15 times its annual cash profit), or $1,000 to $1,500″ per average daily circulation, Morton wrote.

But no more. Industry veteran Alan D. Mutter, who blogs as Newsosaur, wrote earlier this year that eroding profits make it harder and harder for owners to manage the debt that most added before ad sales declined. He estimates the value of today’s newspapers at about $300 per average daily circulation, which would put the Los Angeles Times in $185 million territory and the Chicago Tribune in the $125 million range.

Market uncertainty often partners with panic. The evaporating value of dailies has everybody spooked. Why buy the Los Angeles Times today for $185 million when you can buy it for $110 million next summer? But the papers will go on the block quickly, because the banks and hedge funds  don’t know how to run them and don’t want to learn.

Warren Buffett’s deal last month notwithstanding, I expect the Tribune papers to go to “non-traditional owners” (Morton’s phrase), because experienced newspaper owners already have more trouble than they can manage. Look for buyers like the Babbitt who bought the San Diego daily for about $110 million last year, or a consortium of business- and political-heavyweights who just bought the Philly papers. Today, greeting-card magnate Aaron Kushner and a group of former publishing executives purchased the Orange County Register and six other titles for an undisclosed price. Kushner, a non-traditional owner who previously tried to buy the Portland Press Herald and made noises about buying the Boston Globe, made such optimistic noises about his deal that he must know something about the newspaper future I don’t. Or maybe they see additional places to cut goodwill and remaining assets that nobody has spotted. Then again, investment firms may not be the kiss of death. Angelo, Gordon, one of the Tribune investors, has made business progress with Minneapolis newspaper the Star Tribune.

I wish good luck to all of these new owners and the eventual owners of the Tribune papers, but it comes with a warning. Just because running newspapers is a lot of fun doesn’t mean they’re toys. You break them, you bought them.

******

The $1,000 per average daily circulation rule-of-thumb applied to Warren Buffett’s Omaha World-Herald deal last year, Morton noted in his piece. Can anybody explain this outlier aside from it being Buffett’s hometown newspaper and solidly profitable? Send hints to Shafer.Reuters@gmail.com. My Twitter feed is ecumenical. Sign up for email notifications of new Shafer columns (and other occasional announcements). Subscribe to this RSS feed for new Shafer columns.

PHOTO: Sam Zell, Tribune Co chairman and CEO, speaks at the 2009 Milken Institute Global Conference in Beverly Hills, California in this Apr. 27, 2009 file photograph. REUTERS/Fred Prouser/Files

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Thanks for nuthin’, Sam.

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