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Tribune may exit at a good time, but with tax baggage

by Chris Nolter | Published May 18, 2012 at 4:58 PM

With Warren Buffett's latest bet on newspapers, via a $142 million purchase of publications from Media General Inc., and Freedom Communications Inc.'s sale of papers to Versa Capital Management LLC, a seemingly moribund sector is suddenly astir with dealmaking activity.

The transactions, announced Thursday, follow the sale of the Philadelphia Inquirer and the Daily News earlier this year to a group of local investors for $55 million.

These moves are positive omens for Tribune Co. and the creditors that stand to take over the Chicago media company.

Tribune's reorganization plan will get a hearing on June 7, and the company could finally end its long-running bankruptcy. Oaktree Capital Management LP; Angelo, Gordon & Co.; and J.P. Morgan Chase & Co. would be its largest holders.

The company owns the Los Angeles Times, Chicago Tribune and a portfolio of other dailies. The company also holds 23 TV stations in New York, Los Angeles, Chicago and other markets.

The television market has already shown some M&A life. At the least, a healthy climate for media deals would present options for the reorganized company and its new owners.

While the market may present an opportunity, however, Sam Zell's tax maneuvering during Tribune's 2007 leveraged buyout complicates the outlook. Robert Willens, who runs New York tax consultancy Robert Willens LLC, said Tribune would face a difficult tax bill on sales or other gains.

During the LBO, Tribune converted from a C corporation to an S corporation, a tax-light structure in which income or losses are passed through to shareholders. "There would be this unusual confluence of events where the company had experienced tremendous losses, but those losses are not the property of the company, they are property of the shareholders," Willens said.

An S corporation must have fewer than 100 shareholders, and Zell structured his LBO through an Employee Stock Ownership Plan. An ESOP can be treated as a single shareholder -- whereas the hedge funds and other financial vehicles that will own Tribune after Chapter 11 can not.

A company exiting bankruptcy protection can often preserve net operating losses that it can apply against future tax bills from divestitures or business profits. Tribune wouldn't have the losses, Willens noted, because of its prior status as an S corporation.

Tribune also will not have any tax basis on its assets, meaning that it could not shield profits from sales. The tax-efficient status of deferred gains from Newsday, the Long Island daily, and the Chicago Cubs baseball team might also be imperiled.

Tribune has been in bankruptcy protection since December 2008.

A year ago, at a hearing for a prior reorganization plan, CEO Eddy Hartenstein told the court that Tribune needed to get out of bankruptcy protection so that it could react to opportunities in the fast-moving media business. He told Reuters that Tribune had looked at Freedom's Orange County Register, which competes with the Los Angeles Times.

Los Angeles may be a ripe market. In addition to the Los Angeles Times and the Orange County Register, MediaNews Group Inc. prints the Los Angeles Daily News and several other papers in the area. Outsell Inc. consultant Ken Doctor said the market isn't supporting the combined cost structures of the three companies. By the end of 2013, he predicted, only two of the three companies will remain in Los Angeles.

Prominent local philanthropist Eli Broad recently reiterated his interest in buying the Los Angeles Times while publicizing his new book.

According to Tribune's monthly operating reports to the bankruptcy court, the paper had $537 million in revenue over the year ending March 25, excluding a sliver of international revenue. Operating profit came to $55 million. Backing out depreciation and amortization suggests Ebitda of nearly $70 million.

Sources suggested that Buffett's purchase of the Media General papers came at 4 to 5 times Ebitda. At those levels, the Los Angeles Times would be worth $300 million or more.

At the level of Ebitda implied by Tribune's operating reports, Doctor suggested the value would fall between $200 million and $400 million.

The Times is a high-end property with "trophy value," Doctor said. However, big metros are losing ads and have less certainty of future profitability, he added, pointing to the Washington Post Co.'s flagship paper as an example. When ad revenue declines, profitability depends on cuts. "And that's problematic," he said.

Of course, the tax issues stemming from the LBO are also problematic. If Tribune does sell some of its marquee assets, its new owners would likely have to share a chunk of their returns with the Internal Revenue Service.

"It would have been one of the greatest tax dodges in history," Willens said of the LBO-era Tribune.

"Now, because of the bankruptcy," he said, "it is going to be one of the worst tax scenarios you could imagine."

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Tribune may exit at a good time, but with tax baggage

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