June 16, 2006
By Lorene Yue
Chicago bond research firm believes break-up valuations too high
(Crain’s) — Gimme Credit, a Chicago corporate bond research agency, is questioning the financial research that Chandler family members are using in their recommendations to revive the Tribune Co.’s sagging stock price.
Months of behind–the–scenes negotiations between the Chandlers and Tribune management over how to boost shareholder value broke into the open last week when the media company’s second largest shareholder said it would not participate in a proposed $2 billion share buyback announced last month.
Tensions rose this week after the Chandler family sent a scathing letter to the Tribune’s board outlining its reasons against the repurchase plan, criticizing the failure of the company’s strategy and urging, among other things, that the company’s broadcasting and newspaper assets be separated or the company be sold off.
The analysis cited in the letter, which was filed with the Securities and Exchange Commission, relied on Wall Street reports that said the company would be worth significantly more than it is currently valued if it were broken up and sold off.
“The letter included independent valuation analyses that showed Tribune could be worth more than $12.4 billion based on a 10.4 EBITDA multiple versus the 7.0 multiple at which it is currently trading,” Dave Novosel of Chicago-based Gimme Credit, wrote in a Friday report. “A 50% jump in valuation seems extremely unlikely in our opinion. The Chandler Trusts also cite projections for EBITDA to decline at a rate of 1.3% rate over the next five years, which we find extremely pessimistic.
“We are skeptical that a split would unlock significant value,” wrote Mr. Novosel. “Recent media splits, including Viacom, have not uncorked value.”
Representatives from the Tribune and the Chandler’s were not available for comment.
The so-called break–up value of the Chicago company is estimated to be in the low– to mid–$40 a share range, according to several Wall Street analysts. Tribune shareholder Ariel Capital Management, which owns about 5% of company, puts the break–value between $44 to $46 a share.
That’s significantly above Friday’s closing price of $31.92. The stock is up about 14% since the Tribune said it planned to buy back about 25% of its outstanding float in an effort to boost its stock price.
The Tribune is offering to buy back its shares at between $28 and $32.50.
While the stock briefly breached the $32.50 limit Thursday to close at $32.51, it fell back Friday. Unless the company boosts the upper end of the buyback range, which the company has so far refused to do, the company may have difficulty finding takers.
“I’ll be surprised if they get one-quarter of the 50 million-plus shares [they want to buyback],” said Jon Najarian, co-founder of financial Web site Inside Options.
Mr. Najarian called the break-up estimates “wildly optimistic. I think a fair value estimate north of $45 a share is a pipedream.” Mr. Najarian and other market analysts expect the stock to hold around $30 a share until the June 26 expiration date of the buyback plan —unless there are more developments from the Chandler or Tribune management front.
Gimme Credit’s Mr. Novosel aksi recommends that investors avoid Tribune’s credit products “given the meaningful increase in event risk.”
The Chandler family, through two trusts, acquired roughly 12% of the Tribune when the company bought the Chandler—owned Times Mirror Company in 2000. It also has three seats on the Tribune’s board of 11.