In A Very Public Spat the LA Times Tells Its Corporate Owners In Chicago: “We’re Mad As Hell And We’re Not Going To Take This Any More!”

Philip M. Stone September 17, 2006

It’s no secret that the LA Times would be a much happier newspaper if it could revert back to local ownership – and there are investor groups ready in LA to take on just that – but corporate owner Tribune in Chicago is not about to let its 20% plus margin cash cow out of the barn that easy.

But now the folks in LA are playing hardball at a time when the Tribune is at its weakest. So when Tribune asked Los Angeles recently for more editorial cuts the Times’ editor, Dean Baquet, said Tribune had already had enough cuts and no more would be forthcoming. His publisher backed him up, and they even went public in their own newspaper, putting even more pressure on those “foreigners” from Chicago.

It all reminds one of that great 1976 movie Network where Peter Finch played a news anchor, quite out of his mind, who had just had enough of the way things were. In a great scene Finch addresses his nationwide audience and using the power of television tells viewers that they shouldn’t just sit in living rooms and let others control what is going on in our world without a murmur of complaint. No, it was time to take a stand and then he yells at them (and as you read this think in context of the LA-Chicago feud):

“All I know is that first, you’ve got to get mad. You’ve gotta say, ‘I’m a human being. My life has value!’ So I want you to get up now, I want you to get up out of your chairs, I want you to get up right now and go to the window, open it, and stick your head out and yell, ‘I’m mad as hell, and I’m not going to take this anymore!!’”

And that is basically what the folks in LA have done to the folks in Chicago. And they have chosen a very sensitive time at Tribune to do it.

By unlucky coincidence, ever since Tribune bought the LA Times in 2000 the share price at Tribune has doesn’t much (It was in the mid to high $30s then, and now it is $30.97) and that’s not exactly the type of growth that inspires Wall Street to support a public company.

That purchase saw the Chandlers, the founding family of the Times, become major Tribune shareholders via two partnerships. Those partnerships were set up in specific ways to avoid as much tax as possible, but it was not foreseen at the time that things would get so bad at Tribune that a complete restructuring might be necessary. And so what may have been tax-smart then could turn into a tax nightmare if the company as a whole restructured itself via, for instance, a spin-off of its television assets.

So to avoid that tax bill, and still trying to increase shareholder value, the Tribune board in May  -- when the shares had dropped to the mid $20s -- agreed to a $2 billion share buyback scheme that would put the company heavily into junk debt. It was a move very much opposed by the Chandlers but with only three members on the 11-member Tribune board they were outgunned.

The Chandler family did not participate in the share buyout that gobbled up around 15% of the outstanding shares, and they are now Tribune’s largest shareholder. Their public relationship since May has been acrimonious. But behind the scenes negotiations have been going on and there is talk that very soon the Chandlers and Tribune will sort out various valuations within the Chandler partnerships that could enable a restructuring without Tribune shareholders having to pay what was basically a Chandler tax bill.

Investors in Los Angeles, no doubt inspired on by the Chandlers, smelt blood in all of this and went public in their correspondence to Tribune that they’d be delighted to take the Times off its hands. Tribune said no.

There had been much unhappiness at the Times for a year or so  even since its then editor, the very respected John S. Carroll resigned  because of increased pressure to reduce the newsroom numbers by more than he had already done.  Baquet, his friend and close associate, then took over and from his statements at the time there seemed to be an understanding between Los Angeles and Chicago that the newsroom cuts were over.

But that was then. The share buyback promised around $300 million in further cost cuts over two years. The largest newspaper in the group would be expected to play its part.

The share buyback scheme appears at first glance not to have done much – the shares rose from the $20s when it was announced to near the $32.50 that Tribune paid, but since then although Wall Street has continued up Tribune’s stock still languishes, closing last week at $30.97. No bounce. Management said it could pay for the buyback via existing revenues, some $500 million in asset sales, and further cost cutting.

And so Tribune went back to the Los Angeles table recently and told Baquet he needed to come up with more newsroom savings. But Baquet told Scott C. Smith, the president of Tribune Publishing, that the paper had cut enough newsroom jobs and it was not going to cut any more. And publisher Jeffrey M. Johnson, who was a Chicago guy appointed by Tribune, backed him up.

The rebellion in the colonies is now on and very public.   Tribune is in a tricky spot – if it fires Baquet and Johnson for insubordination then Los Angeles as a community will stop supporting the Times. And with the newspaper operating at a margin of more than 20% and given Tribune’s financial situation, that is revenue it cannot mess with.

As a shot across Tribune’s bow, 20 Los Angeles civic leaders sent Tribune a letter last week expressing their concern at how further budget cuts would affect the quality at the Times. The letter urged Tribune to invest more in the Times rather than cut costs, but suggested as a way  out  --  perhaps Tribune might wish to consider “a different mode of ownership that would better serve Los Angeles.”

For all that, there will be no overhaul at Tribune for a while, yet. Even if the Chandlers and Tribune resolve the partnership problems, Tribune will still want to see how its television properties do this year. Sixteen of the company’s then 26 TV stations (now down to 23 through sales since June) are lead affiliates for the new CW television network debuting Wednesday. If the network does well then Tribune’s television division should do better; if the network fails to perform as hoped then television is prime spin-off fodder.

But in waiting Tribune may not get the best price – the New York Times Company , for instance, has already put its nine stations on the block saying publicly it wants the money to invest where it will do more good – publishing, particularly digital publishing.

As for Los Angeles going local its doubtful (but it also depends on how much money is put on the table) but there could well be a scenario where TV is spun off and then you have a Knight-Ridder scenario for the newspaper division. In other words, at some point in the not too distant future it could be that Tribune no longer exists.

The August numbers do not bode well for an upswing in the share price. Revenues were down 1.6% to $419 million compared to August, 2005. Publishing revenues were down 2.1%, with total adverting revenues down 2.3% to $229 million.

All of that helps explain why Tribune went back to the Los Angeles well. But it got a clear signal that well has gone dry, and that just puts further pressure on Tribune management to go the restructuring route that the Chandlers wanted in the first place.

Stay tuned.