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 With results flagging and debt covenants looming, the Tribune chief needs to sell assets. Why is this man smiling?
Sam Zell has kept an upbeat outlook about old media through some trying conditions.
The sometimes caustic auction for Tribune Co. did not deter the local tycoon from an $8.2 billion privatization of the Chicago publisher and broadcaster. Zell did not waiver during the 204-day review of his deal at the Federal Communications Commission, nor when credit market turmoil threatened to unravel his financing before the December close of what he has affectionately called the "transaction from hell." After a preview of first-quarter results that were weak even by the reduced standards for newspapers and broadcasting, it's clear that Zell's highly leveraged optimism faces even more challenges. Maturities loom this year and next, and Tribune's leverage multiples are creeping toward limits established in its debt covenants. The pressure caused Tribune to consider entreaties for Newsday, alongside the planned sale of the Cubs baseball team and hallowed Chicago icon Wrigley Field. Before Zell and his right-hand man, legendary broadcasting executive Randy Michaels, can deliver the newspaper of the future, they must handle Tribune's burdened present. Moody's Investors Service put Tribune on review for a possible downgrade in April, following a dispiriting conference call. Zell said to expect double-digit declines in first-quarter print-ad revenue, "significantly worse than we expected." Along with the decline in ad revenue, Moody's cited the company's slow progress in asset sales that might alleviate leverage concerns. Tribune's debt covenants limit the guaranteed debt in its new bank facility and new bridge loan to 9 times Ebitda. During the April conference call, Barclays Capital analyst Hale Holden asked about the company's leverage vis-à-vis its financial covenants. Though guaranteed debt stood at about 8 times Ebitda at the close of 2007, its total debt-to-Ebitda is solidly in double digits. Holden suggested that with advertising declines, Tribune's debt could be "awful close" to the 9 times Ebitda prescribed in its loan agreements within a quarter or two. Zell, the self-made real estate titan who always has a brash and decisive rejoinder at hand, said, "I think that the answer is you are going to have to wait and see what those numbers are." He said he does not "think it is fair" to apply factors from the first quarter too rigidly to ensuing periods. You wouldn't sense Tribune's predicament from the tenor of its recent public statements. On April Fool's Day, Zell spoofed his ego and his ambitions to remake the company when he changed the name on the company's home page to ZellCoMediaEnterprises Inc. and included a manic debt clock. Tribune has all but gloated at luring executives away from Clear Channel Communications Inc., which Michaels had a hand in building. When the company announced the hire of Marc Chase as president of Tribune Interactive, it used a press release allegedly authored by "Hugh Jass -- A Reputable Media Source." The statement announced "another freaking Clear Channel Communications executive on the payroll." A bogus resumé included such posts as "Vocabulary Advisorist for George W. Bush" and "President of Buying Crap" for eBay Inc. Within two weeks, the company issued a release proclaiming, "Tribune Announces Executive Appointments and, Amazingly, Only One Is Connected to Clear Channel Communications!" This may be whistling in the dark, or Zell and Michaels may see things in the twilight of media transformation that are difficult for others to perceive. Michaels says Tribune aims to build the newspaper of 2010 by the fall of 2008. He established a vanguard of Tribune's six smallest papers, the so-called Tribune Six, or the T6. The company increased commissions at T6 papers to entice salespeople to make that extra "call at four o'clock." It also introduced "spadias," or half-page covers that wrap around the front and back of the paper and that are more common in Europe. Since January, the T6 have seen a $4.5 million increase in revenue. Like many of its peers, Tribune's papers could use an update. The company has about $1 billion in Tribune debt coming due this year, however, with more to come in 2009. "They have cash needs to meet these maturities," says John Puchalla of Moody's. The Cubs auction has proceeded more slowly than expected. Sales of Newsday to Rupert Murdoch or anyone else and stakes in Television Food Network GP and CareerBuilder LLC would provide fast cash, even if they weren't in the original plan. It may be time for Zell to make that extra 4 o'clock call. -- Chris Nolter See the full issue of the 4.28 Deal newsweekly See TheDeal.com story: Newsday sale: Challenge for FCC? See Dealwatch: Tribune Categories Deal Video
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