Tribune’s CEO Reverses Course From Diverting Share Buy-back Funds to Buying Web Sites And Instead Mortgages The Company To The Hilt With A $2 Billion Buy-Back That Sees The Share Price Soar But Credit Ratings Plunge

And, like Knight-Ridder, it’s not as though Tribunehad not already done what it could to boost its share price. Last year alone it spent close to $400 million buying back 12.2 million shares and it also increased its quarterly dividend 50%. But still the shares sank to below $30 with analysts warning if it hit the mid 20s it could put the $8.5 billion capitalized company into unwelcome bid play.

In Q1, 2006, the company was continuing with the share buy-backs, having spent another $138 million for 4.6 million shares as part of this year’s budgeted buy-back spend of around $350 to $400 million. But still the shares stayed around $27 - $28. The market stayed unimpressed when FitzSimons told the annual shareholders meeting he wanted to divert some of the buy-back money to invest in web sites.

Two months later and a big U-turn on that diversion policy. To say that FitzSimons is now taking an uncharacteristic huge risk would be an understatement. He is basically telling investors that even though Tribune’s traditional media business has not performed well the past couple of years – and this year’s numbers are down over last year -- he feels confident that advertising will pick up so that the group can pay down the added debt from cash flow, additional cost savings, and asset sales, the latter particularly in the television arena.

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Just When It Looks Like Big Newspaper Investors Are Trying Anything To Get Out Of the Segment Without Losing Their Shirts, Up Comes Highfields Capital Management Buying A 5.2% Stake In McClatchy
Maybe newspapers aren’t such a bad buy after all? One big hedge fund with significant newspaper holdings has disclosed it has just taken a 5.2% position in McClatchy that is in the process of buying Knight-Ridder. And that same hedge fund, Highfields Capital Management (HCM) also has a $142 million (3.3% stake) stake in Knight-Ridder.

When Knight-Ridder’s Largest Shareholder Told the Company To Sell Itself, The Shares of Most Newspapers Companies Jumped In the Hope This Was the Start of Good Times Ahead. Actually It Was The Start of That Shareholder Dumping Some $2 Billion Worth of Shares Involving Nine Newspaper Groups
Last November, the largest shareholder in US newspaper shares shocked Wall Street by demanding that Knight-Ridder (K-R) put itself up for sale to enhance shareholder value. The next two largest shareholders joined in and the die was cast. Shares in K-R and most other publicly quoted companies rose strongly and immediately on the hope this was just the start of improving shareholder value for that market sector.

European Free Newspaper Market Share Ranges from 72% in Iceland to Just 6% in Austria, But Already Free Newspapers are Circulation Leaders In Spain and Switzerland With More Free Newspapers Coming
Iceland, a country with just under 300,000 population has a battle royal going on between free newspapers. Frettabladid, which has been around four years, leads with 99,000 mostly home delivered copies daily, and Bladid, a free mail-delivered tabloid that started in May this year, distributes 80,000. That means enough free newspapers are available to satisfy about 64% of Iceland’s total population.

Now That Knight-Ridder Is Officially For Sale, Two Questions Emerge: Who Would be Foolhardy Enough to Buy Newspapers These Days and Which Major Media Group Will Next Feel Shareholder Pressure To Sell Itself?
Knight-Ridder didn’t have much choice. With its three largest shareholders representing some 36% of the shares telling the company to explore ways of selling itself and threatening board changes if it didn’t, it hired Goldman Sachs to scout out the market.

Wall Street Says That Newspaper Industry Valuations Are Underperforming the Market. But Don’t Buy, It Says They’re Going Down Even More
Even though newspaper industry shares have underperformed the US markets by some 10%, looking like a buy bargain, Merrill Lynch has issued a report that says the shares basically have only one direction to travel and that’s down.

The credit rating agencies aren’t so sure. Even before the announcement Moody’s Investors Service had lowered Tribune’s debt a notch to the upper end of its lowest investment grade category. Just a few hours after Tribune’s buy-back announcement it lowered the debt again to the lowest end of that grade and warned it would probably go lower into the speculative/junk arena. Fitch also cut the ratings to its lowest investment grade (BBB-minus) with a negative outlook as did S&P.

A Fitch statement summed it up neatly, “The leveraged share buy-back represents a significant departure from Tribune’s historically conservative financial policies and emphasizes the pressures that slower-growing traditional media companies are under to boost their stock prices.”

Tribune now earns about 65% of its revenue from newspapers and close to 30% from broadcasting – and both are losing advertising revenues to the Internet. Web revenue grew strongly, however, particularly on the back of CareerBuilder.com (owned jointly with Gannett and Knight-Ridder). The group is currently the second-largest US newspaper publisher but will fall into third position when the McClatchy-Knight-Ridder deal is finalized in about a month’s time.

It seems like only yesterday that FitzSimons hit on the bright idea that with Q1 overall profit down 28% but the company’s web properties doing so well he wanted to divert some buy-back money into buying more web sites. The goal: within three years digital’s revenue would double from the current 6% (now $350 million) of total revenues to 12%.

But that wasn’t what Wall Street wanted to hear. Respected Merrill Lynch media analyst Lauren Rich Fine criticized at the time "a seeming reticence on the part of management to try to surface value through either asset sales or more material dividend or share repurchase proclamations."

Just the announcement by Moody’s Investors Service in March that it was putting Tribune on credit watch saw another respected Wall Street analyst, Paul Ginnocchio of Deutsche Bank who had been a Tribune supporter, jumping ship telling his clients to sell because he believed Tribune’s cash flow would only get worse during the year.

Tribune owns 11 leading daily newspapers including the Chicago Tribune and the Los Angeles Times, 26 television stations, national cable station WGN, part ownership of the Food Network, and Chicago’s WGN-AM radio that broadcasts the games of its Chicago Cubs baseball team, plus various web sites.

FitzSimons was between a rock and a hard place. Investors want the share price up but to fund higher dividends and share buy-backs at a time the traditional media revenues were falling meant borrowing heavily. And Moody’s, for instance, made clear it has little faith in the newspaper business these days – growing online revenue was not enough to make up for print’s losses. It had already stuck the knife in last week downgrading the company’s long-term credit rating to "Baa1" from "A3" -- the downgrading affecting about $4 billion of the company's debt and making it more expensive to borrow.

Tribune forecast the new share buy-back scheme probably would make its credit ratings worse -- and the credit rating agencies confirmed that within hours. – and warned of future downgrades. Who would have thought at the beginning of the year that Tribune’s credit rating might sink to junk? For now the credit agencies put Tribune debt at the bottom of the investment grade quality saying basically the loan investments currently seem ok but could turn unreliable over the long term. Anything lower, as the downgrade warning implies, and it gets into below investment grade, speculation, and junk.

Be that as it may, investors certainly liked the plan. Tribune’s shares had closed before the Memorial Day weekend at $27.89 – down about 23% over the past 12 months -- but finished Tuesday, the day of the announcement, up a whopping 7.2% to $29.90 on a day the Dow sank 1.63%. Yet again more proof that about the only thing that gets a newspaper company’s share price up is either a sale (Knight-Ridder), a massive share buy-back (Tribune), or diversifying out of the newspaper business (DMGT in the UK)!

All eyes will now be on the New York Times Company to see what it does to try and increase shareholder value. There’s a reason why Merrill’s Lauren Rich Fine calls the newspaper industry “a stinker”.

The Tribune buy-back is in three parts. Under a so-called Dutch Auction, Tribune will buy up to 53 million shares for a price somewhere between $28 a share and $32,50 a share. In addition to those 53 million shares the company will buy up to 10 million shares from its largest shareholder, the McCormick Tribune Foundation and the Cantigny Foundation, affiliated groups that own 13.6% of the company’s shares.

(The McCormick family founded the Chicago Tribune and Colonel Robert Rutherford McCormick who died in 1955 was such a character as to make Orson Welles’ Citizen Kane – based on William Randolph Hearst -- look like a sissy, but that’s another story! Walk around Chicago and you’ll see the McCormick name pop up in various places whether its part of a hotel name, or the convention center, or …)

Tribune will also buy 12 million shares on the open market. And in doing all of this the company says it will maintain its dividend level and will also fund additional investments. Debt payment will come from cash flow and the sale of $500 million of assets – mainly television including possibly its share of the Food Network cable channel -- but the company reiterates the Chicago Cubs baseball team is not for sale.

Share buy-backs are often called “the gift that keeps on giving”, because less shares on the market means higher earnings per shares for those left. And that should translate into a higher share price. It’s why Rupert Murdoch announced recently that News Corp was doubling its share buy-back program from $3 billion to $6 billion because he considers the shares to be under-valued.

FitzSimons made it clear where he was now coming from. “These stock repurchases demonstrate our confidence in the company and its future and represent a very meaningful step in our commitment to enhance value for shareholders. They also reflect our strong belief that Tribune’s current share price does not adequately reflect the fundamental value and long-term earnings prospects of the company’s businesses.”

And as the employees could well expect when their company takes on such debt and needs to pay it off mostly from cash flow, there will be an additional $200 million in additional cost savings from existing operations planned for the next two years. Resources will be redeployed particularly to interactive businesses.

As a final note, remember how Merrill’s Lauren Rich Fine had unkind things to say about management’s previous plan to divert funds away from share buy-backs and into buying web sites. Well it just so happens that Merrill Lynch Capital Corporation and Citigroup Global Markets Inc are the lead financial advisers for the buy-back with Merrill Lynch Co., and Citigroup serving as Co-Dealer Managers.

Will the Tribune Share Buyback Actually Occur? - June 19, 2006

Ever since the Tribune Company bought Times-Mirror for some $8 billion, it seems it has had little but trouble from those newspaper properties – circulation scandals at Newsday, falling revenues at the Los Angeles Times, and a recent $1 billion tax liability that Tribune assumes even though it is for something that occurred before the sale in 2000. And now there is one more problem: the (Los Angeles) Chandler family trusts –Tribune’s second largest shareholder – opposes management’s plan to buy 25% of the company’s shares and instead wants the company either broken up or sold outright

And that has caused a huge public rift. The Chandlers hold three seats on the board of directors which is not near enough to stop management’s current plan, but they are being vocal in their opposition, and have filed declarations with the Securities and Exchange Commission that they think spending $2 billion to buy back shares is shareholder folly.

According to the Chandlers the company is worth at least $35 a share and some analysts put the figure $10 higher, but no one will want to buy it if the share buyback scheme goes through with the resulting huge debt that the buyer must absorb.

Management says it is going ahead with the buyback but it might have a problem. The maximum the company will pay is $32.50 a share under the so-called Dutch auction and the price now has edged up to $32.01. If it goes past the $32.50 figure by June 26, the planned ending date for the buyback, then the sale is basically moot with shareholders believing they can make more money by breaking up the company or selling it outright as the Chandlers suggest.