Friday, December 12, 2008

Zell's Tribune: The Canary in a Scary Mine

Zells Tribune: The Canary in a Scary Mine

When I wrote a column of predictions last week, I expected some of my guesses for 2009 would never happen. Leave it to Tribune's Sam Zell, though, to make one of them wrong by filing Chapter 11 while the calendar still reads 2008.

Zell's $8.2 billion deal, which went from "we did it" to "we're bankrupt" in less than a year, illustrates the folly of buying declining businesses with billions of dollars of borrowed money. That seems an obvious and fatuous statement now, but apparently it didn't occur to Zell. (A Tribune spokesman did not respond to several calls and e-mails.) The Tribune deal left a company that generates revenue mainly from newspapers with around nine times more debt than annual cash flow, or at least what had been its annual cash flow, since that figure is declining by the month. It was extreme enough to warrant "whoas" even from media executives accustomed to doing deals involving lots of debt. Things being what they are, those executives are now too busy going fetal under their desks and licking their wounds to be playing "I told you so."

For the foreseeable future, Tribune will remain intact (apart from selling the Cubs baseball franchise). Perversely enough, it helps that there's apparently no one willing to offer knockout prices for key assets, and that those assets are declining in value so quickly no one is sure what many of them are worth. If the businesses and deal markets were robust, lenders would be salivating at the thought of breaking up the company. The sheer complexity of the bankruptcy—an $8.2 billion deal requires a lot of lenders—argues for a short-term status quo as well.

Beyond that, at this point it's hard to discern what, exactly, Tribune will be once it makes its way through the excruciatingly slow digestive process known as bankruptcy. (Its Chicago Tribune reported the company has six months to craft a plan the court accepts.) But set Tribune aside for the moment. We're entering a new phase for the oldest form of mass media and the American newspaper company, one we can call the Great Capitulation. Senior executives at different major newspaper companies tell me they expect a fresh round of mergers in 2009. But this time, they say, they won't be driven by companies eyeing one another for growth. They will be driven by big bankers seeking to ensure that the money they've lent, or at least a decent portion of it, is repaid. "You're going to see a big wave of consolidation," predicts one executive, "that will be forced on the industry." Said another, only partly in jest: "We're going to end up with one big, giant merger, facilitated in bank negotiations."

Considered in this context, Tribune's filing is but the loudest note sounded in this dirge so far. Since a restructuring will allow him to pare down debt, Zell could avoid the consolidation other companies may face. A paradox, that, though employees and former employees may choose a stronger characterization. It's likely they've lost the equity they contributed, without their consent, to Zell's deal, given how he essentially purchased Tribune with an employee stock-ownership plan he created. And those who took buyouts or were laid off now join Tribune's long line of unsecured creditors.

The collapse of the American newspaper is well-documented, but Zell's other big problem is how fast ad dollars are disappearing from local TV stations, which contributed about 21% of Tribune's revenues in 2007. Despite election- and Olympic-related spending, Tribune's TV revenues dropped 8% in the third quarter. Robert Coen, a senior vice-president at ad firm Magna who's known for his ad forecasts, just predicted that local TV ad revenues will be down 9% this year and an additional 7% next year. In case you were wondering, Coen expects newspaper ad revenue to post another double-digit decline in '09. Little relief, then, looms. Zell uses the term "perfect storm" to describe what hit his company. But many saw clouds massing on the horizon long before his deal closed. Why didn't he?

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