Sam Zell’s $8.2 billion purchase of the troubled Tribune Co. is going to put more pressure to perform than ever on the company’s 23 TV stations.
While the TV stations represent only one-quarter of the company’s total revenue, they turn in healthier cash flows than Tribune’s 11 newspapers. And their profit margins range in the low- to mid- 30% range, while the papers hover around 20%. The company is going to depend on those cash flows to handle the huge amount of debt—between $12 billion and $13 billion, up from $5 billion in existing debt—Tribune is taking on to complete this deal.
“They don’t have a large margin of error when they take on that much leverage,” says James Goss, senior investment analyst with Chicago-based Barrington Research. “But their cash flows and revenue base, which people presume are just falling off the cliff, are really not. They’ve just leveled off.”
Pressure to improve efficiencies at the stations, and thus throw off more cash, may result in layoffs, for which employees at Tribune’s Los Angeles Times have been bracing for months now. Tribune executives say they do not expect widespread cutbacks, but that’s going to depend on TV-station performance in coming months.
Tribune’s 20,000 employees will be heavily invested in bettering the company’s fortunes because they are paying for most of the deal through an Employee Stock Ownership Plan (ESOP). The ESOP offers Tribune hefty tax benefits but puts employees at risk of losing their investment should the company buckle under the heavy debt load. On the flip side, if Zell performs the same kind of financial magic with Tribune that he has managed at other companies, employees stand to benefit.
Should Tribune struggle, analysts expect Zell to sell some properties, although that would not be the real estate tycoon’s preference, says Goss.
In some markets, the company might not have a choice. Tribune has waivers from the FCC to continue owning and operating TV stations and newspapers in five markets: WPIX and Newsday in New York; WGN and the Chicago Tribune; KTLA and the Los Angeles Times; WTIC and the Hartford Courant in Hartford, Conn.; and WSFL and the South Florida Sun-Sentinel in Miami-Ft. Lauderdale. FCC rules dictate that Tribune’s waivers will not transfer to a new owner, but Zell and Tribune’s board intend to seek at least temporary relief.
In June 2003, the FCC approved television/newspaper crossownership in a local market, but the U.S. Third Circuit Court of Appeals remanded the new media ownership rules back to the FCC. That proceeding is still unwinding at the commission, leaving Tribune’s fate in those five markets uncertain.
FCC inclined to Waivers?
Analysts believe that the FCC is inclined to grant waivers to Tribune. “It’s an anachronism to be worried about different voices [in local markets] with all the voices right now,” says Goss. “If you want to express yourself, you just start a blog. Some of the issues that used to be issues aren’t any more.”
Others aren’t so sure. Andrew Jay Schwartzman, president and CEO of Washington-based public-interest law firm Media Access Project, says, “A sale to Zell will have to surmount fierce opposition to obtain approval.”
The sale also means that The CW, the joint venture of Warner Bros. and Viacom that replaced The WB and UPN before it, needs to increase its ratings and quick. The merger combined WB’s and UPN’s best programming, but the combination isn’t yet resulting in improved ratings.
The CW is the country’s fifth-rated English-language broadcast network. Tribune had a 22% investment in The WB; it has no investment in The CW but is the network’s largest affiliate partner.
“They are betting that The CW will do better than The WB before it, and a big chunk of their success is how The CW does,” says Larry Patrick, president of Patrick Communications, a station brokerage.
Right now, that’s not looking like a great bet.
Industry critics say Tribune needs improvement in management, particularly its news operations, which could attract more political advertising. While Tribune’s top three stations—WPIX, KTLA and WGN—have robust news operations, their younger audiences and smaller ratings don’t pull in the political advertising of their Big Three rivals.
One advantage the new Tribune will have under Zell is that it won’t be subject to the quarterly scrutiny of Wall Street.
“You can take a much longer-term view of a competitive situation when you are a private company,” says Mark Fratrik, vice president of BIA Financial Networks.
Without ultimately having to file quarterly reports and conduct conference calls, Zell and his management team can focus on improving Tribune’s businesses without being forced to deal with Wall Street’s demands for rapid growth.
“It’s a trade-off,” says Schwartzman. “On one hand, there’s a loss of transparency that’s very disconcerting. On the other hand, private equity is likely to be more patient and less concerned about quarterly reporting and more willing to invest and hold for the long term.”