It’s Looking More and More That Tribune Could Go The Way of Knight-Ridder

Philip M. Stone July 17, 2006

In spending $2 billion to buy up some 75 million of its own shares the Tribune Company said it would pay off the junk debt load from reoccurring revenues, cost savings, and asset sales. But having just announced an absolutely horrid second quarter earnings report it’s becoming more questionable whether that is going to work.
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Tribune announced that its Q2 earning dived 62% to $85.7 million from $231.3 the year before.  But what was most noticeable was that not only are the newspaper properties still showing problems – circulation and advertising down, but that was expected -- but the television group also had a poor quarter  -- that was not expected -- and television was to be the cash cow, either via asset sales or reoccurring revenue, to pay back the debt load.

Tribune television revenue was down just 1%, from $324 million to $320 million, but its all-important cash flow was 10% less than a year before and its operating income was down 11% to $105 million.

Tribune also sold during the quarter two TV stations – in Albany and Atlanta – for a combined $90 million loss. That indicates that buyers know how desperate Tribune is at unloading certain properties and are playing hardball and Tribune is succumbing to that environment; it also is a sign that the local television business in general is suffering as advertising drops with the business as a whole under pressure as some TV advertising money finds its way instead to the Internet.

Adding to the TV woes, many Tribune stations were WB affiliates, but that network, and UPN, have folded their individual identities to form the new CW network of which the Tribune stations are lead affiliates when it starts up after the summer. But in the “lame duck” waiting time for WB to completely fade and CW to appear the ratings and advertising revenues at the stations have been hit hard. That timing could not have been worse but there are indications the CW network could do well – it is said to have bettered its upfront advertising forecasts – and therefore ratings and advertising could return in Q3 and Q4.

Whatever the case, the only bright spot in Tribune’s quarterly report was that online revenues grew 27% to $57 million. But that is too little to help the current crisis and the company’s biggest shareholder, the Chandler Trusts, still wants the TV assets sold off and a break-up of the newspaper empire.

And employees are already feeling the heat. The flagship Chicago Tribune announced the day after the Q2 results that it was laying off four per cent of staff – some 120 jobs. Forty of the jobs are already vacant and they will be eliminated, but it still means 80 more must go.

“Our revenue is down, and our costs are up, and we have to address that,” said publisher David Hiller in a staff memo.

The Tribune Company is looking for more than $200 in cost savings and some $500 million in asset sales to supplement the reoccurring revenue to pay off the debt. But if net income before the debt load payments is less than planned – and Q2 sends an ominous signal – then the employees and the asset sales are going to become an even larger proportion of the equation than first planned.

On the newspaper side the company reported a 5.3% decline in circulation sales and national advertising sales were down 7% mainly because of less spending by the auto, movie, technology, and resort sectors. The only bright advertising spot was real estate, but with the housing market now cooling that sector may not be so strong come Q3.

Also newsprint increases are taking their toll, up about 12% this year, which is why the Chicago Tribune and the Los Angeles Times, for instance, have dropped most of the stock tables, turning readers to their web sites instead.

And what do the Wall Street analysts think of all this? Some seem to think it could help the Chandlers, while others believe it has little effect. “I don’t think it moves the needle” in the Chandler fight, James Goss at Barrington Research Associates in Chicago told Crains Business. But Edward Antonio, at Benchmark Co., in New York told the same publication, “It can’t be very encouraging to have down earnings. Frankly, if Tribune continues to struggle on the bottom line they may lose support of shareholders. That may work in the favor of the Chandlers, but it’s still early in the game.”

With online revenue increasing – mostly from its classified advertising sites – Tribune would like to increase its rates for web advertising. The current industry assumption is that one print reader is worth somewhere between 50 – 100 web readers, and the industry as a whole, let alone Tribune, would like to bring those numbers closer together by raising web advertising rates.

Online is currently around 6% of the company’s revenue but it has a target of accounting for 12% of revenue within three years. But until it hits 25% of income it’s still going to be a sideline and the question is – will the Chandlers let Tribune wait that long? Probably not.

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Tribune Sells Time-Warner Stake - July 30, 2006

With a goal of selling some $500 million in assets to help pay down its junk bond loans, Tribune has sold 2.8 million shares it holds in media conglomerate Time-Warner for a net of $46 million – a profit of some $19 million.

As part of its $2 billion share buyback scheme, Tribune said it would pay down the loans through general revenues, cost cutting and asset sales. But it reported a poor second quarter in which the television business produced profits far less than expected, putting more pressure on costs cuts and asset sales. It sold two television stations for a combined $90 million loss.