Saturday, June 10, 2006

For Tribune, A Breakup Offers No Guarantees

Some Investors Bet TV Spinoff Could Boost Shares 40% or More;
Viacom Split Provides a Caution

Since Tribune Co. unveiled plans for a $2 billion stock buyback last week, the newspaper-and-television concern's stock price has jumped 13% to $31.58. But investors believe a more radical restructuring such as the spinoff of Tribune's TV stations could lift the stock another 42%.

The hope of such a share-price jump is likely what's driving Tribune's board to weigh a TV spinoff, as reported yesterday in The Wall Street Journal. The discussions involve the Chandler family trusts, Tribune's second-biggest shareholder. But recent media-company restructurings have shown there is no guarantee a breakup will produce a higher stock price.

Witness Viacom Inc., which at the start of this year divided its broadcast-TV and radio assets from its cable channels and movie studio, in hopes of generating higher returns for investors. Six months after the breakup, shares of CBS Corp., the TV-and-radio unit, are little changed, while shares of Viacom, which was billed as a "high-growth" company in the runup to the separation, have dipped 15%.

"We like the idea of having businesses track more as pure plays, but there are current examples out there, including Viacom, where investors continue to price shares below the private market value," says Bill Nygren, portfolio manager at Chicago-based Oakmark Funds. He doesn't own Tribune shares.

Still, some shareholders in Tribune are optimistic a breakup would produce higher returns -- mainly because separating the parts would make it easier for buyers to snap up Tribune's TV stations and possibly its newspapers. Analysts at Ariel Capital, one of Tribune's biggest shareholders, figure that Tribune shares would be worth $44 to $46 a share in a breakup involving a subsequent sale of the parts. Tribune is offering to buy back shares in a tender priced between $28 and $32.50.

"Recent M&A transactions have shown that buyers still place a high value on quality media properties such as those owned by Tribune," said Charles Bobrinskoy, vice chairman of Ariel, which owned 10.3 million shares, or 3.4% of Tribune, as of March 31.

If the stock continues its recent rise and moves above $32.50 by the end of the tender period on June 26, Tribune could feel pressure to increase the price of the offer. There's no guarantee Tribune would do so, however, because the price is up largely because of the tender offer -- although the report of a potential spinoff also buoyed the shares.

A TV spinoff, separating Tribune's TV stations from its newspapers, would mark a retreat from the strategy behind Tribune's acquisition of Times Mirror in 2000. That deal was designed to create a local-media conglomerate with a stable of TV stations complementing one of the nation's finest collections of newspaper titles. But the strategy is now widely perceived as a failure, and the Chandler family trusts, which control three Tribune board seats and 12% of the company's shares, have grown impatient with the failure of Tribune to deliver on the promise of that deal, according to people familiar with the company's thinking.

Most investors evaluating Tribune feel that any broadcast spinoff would eventually be followed by a sale of the company's newspapers, which include the Chicago Tribune, Newsday and the Los Angeles Times. And as McClatchy Co. has found in recent months, as it has struck deals to sell 12 newspapers it is acquiring through the purchase of Knight Ridder Inc., there are plenty of investors interested in acquiring newspapers -- despite the industry's much-publicized problems. Certain Tribune newspapers such as the Los Angeles Times already have attracted interest from such well-heeled investors as entertainment mogul David Geffen. California supermarket investor Ron Burkle had expressed an interest in buying the Philadelphia Inquirer during its recent auction, raising the possibility he could be a contender for the Los Angeles Times if it was on the market. Mr. Burkle couldn't immediately be reached for comment.

To be sure, there's no guarantee Tribune will go ahead with a TV spinoff -- and if it did, it likely wouldn't occur for some time. Not only is the company in the midst of a buyback, it and the Chandler trusts have to unwind two complicated partnerships that hold Tribune shares, real estate and other assets before any spinoff can occur.

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