Spinoff of Broadcast Unit Is Explored as First Step;
A Dispute Over Partnerships
By SARAH ELLISON and DENNIS K. BERMAN
June 8, 2006
The board of Tribune Co. since January has been seriously considering a restructuring that would include a spinoff of the company's broadcasting group and could pave the way for the eventual sale of the rest of the company, according to people familiar with the situation.
The Chandler family trusts, which are Tribune's second-largest shareholder and which nominated three of the board's 11 directors, have been involved in the discussions, and all parties appear to agree on exploring a broadcast spinoff, these people said. But the Chandlers disagree with Tribune's management over the timing and strategy of the move, which would entail months of complex and costly preparation.
In part, the Chandlers, who formerly ran the Los Angeles Times and became major Tribune shareholders with the 2000 sale of Times Mirror Co. to Tribune for $8.3 billion, are unhappy over the $2 billion stock-buyback program that Tribune announced last week. The three Chandler-nominated directors voted against the buyback, according to a company securities filing on Tuesday.
The discussions suggest Tribune is more seriously considering a breakup of the 160-year-old media conglomerate than previously had been known. Chicago-based Tribune controls a wide range of broadcast properties and newspapers, including 26 TV stations as well as the Chicago Tribune, the Los Angeles Times, Newsday of Long Island, N.Y., and other newspapers. The talks also suggest that a breakup would have the support of the Chandler Trusts, which control 12.2% of Tribune.
The board hasn't yet made a final decision on the spinoff and could end up keeping its current businesses intact, according to people familiar with the situation. Moreover, many steps remain before any spinoff or sale, and factors such as changes in the media business or a shift in the availability of financing could affect the ultimate decision.
A Tribune spokesman said the company wouldn't comment on discussions in the company's boardroom. Through the spokesman, Chief Executive Dennis FitzSimons declined to comment.
Tribune has been under pressure for its poorly performing stock price, at a time when many newspapers are seeing a decline in circulation and advertising and rising competition from the Internet. A move toward breaking up the company would come just months after another pressured newspaper company, Knight-Ridder Inc., agreed to be sold to McClatchy Co.
There is at least one major sticking point in any restructuring, said people familiar with the matter: how to unwind two complicated partnerships jointly owned by Tribune and the Chandlers that contain real estate, Tribune stock and other assets.
The two partnerships, known as TMCT I and TMCT II, were set up in the late 1990s in an effort to allow the Chandlers to diversify their holdings in Times Mirror in a tax-free manner. The Chandler family and Times Mirror each took a stake in the trusts; Tribune inherited Times Mirror's stake when it acquired the company.
The partnerships now own 51 million shares of common stock of Tribune as well as real-estate holdings including Times Mirror Square in California and various buildings, warehouses and printing plants in several states that are connected to Tribune newspapers.
Originally designed to last a long time, the partnerships are now seen by both sides as an impediment to Tribune's moving ahead with any major corporate restructuring. Because Tribune has a stake in the partnerships -- which in turn own Tribune stock -- there could be tax complications for Tribune in doing a restructuring while the partnerships still exist, said a person familiar with the situation.
But in talks starting last winter, the Chandlers and Tribune disagreed over the value of those partnerships, which date to the late 1990s. The buyback complicates the situation further, making the valuation discussions between the company and the family more difficult, according to a person familiar with the matter. The value of some of the assets in the partnerships fluctuates depending on Tribune's credit rating, which has plummeted since the buyback was announced.
Tribune's decision to push ahead with a stock buyback in May, before the partnership questions were resolved, aggravated the disagreement. The move boosted the company's share price 7% on the day it was announced and may calm shareholders as Tribune contemplates its long-term strategy. Many investors interpreted the buyback as an effort by Tribune to fend off unwanted bidders, in part by taking on so much unappealing debt.
Yesterday, following a Wall Street Journal article on the Chandlers' dissenting votes, Mr. FitzSimons sent a memo to Tribune employees defending the move. "It's important to note that eight of the 11 board members voted in favor of the tender offer as being in the best interests of all shareholders, many of whom are employees," he wrote. He also wrote that the board made the move "after considering a broad range of alternatives" and that it "allows the company to return value to shareholders who may be seeking some liquidity, while also allowing us to continue moving forward on our long-term strategy to grow revenue at our newspapers and television stations, expand our interactive businesses and divest noncore assets."
Shares of Tribune closed up 1%, or 31 cents, at $30.31 each, in 4 p.m. trading on the New York Stock Exchange.
Tribune has alluded to its strategic considerations before. In its tender offer last week, Tribune said it has "from time to time evaluated and is currently evaluating certain strategic alternatives relating to its television, radio broadcasting and entertainment businesses."
According to the offer, the alternatives may include "a sale or exchange of one or more of its television/radio stations or other broadcasting or entertainment properties; a merger, consolidation, joint venture or other business combination involving its broadcasting businesses and one or more third parties; a sale of equity or other interests in its broadcasting businesses to one or more third parties or a distribution to Tribune stockholders of shares of its broadcasting business."
But the disclosure of the Chandlers' dissent this week adds a new element to the discussion and could prove a catalyst for other shareholders to move more aggressively on a breakup or sale. Tribune has lost some investor confidence after years of market losses and circulation scandals. Its shares are trading near levels last seen in 1998, two years before the Times Mirror acquisition.
Whatever happens, a sale of part or all of Tribune would be a complicated matter. A possible spinoff of the broadcasting division might not happen until spring 2007, according to people familiar with the matter. Like the recent separation of conglomerate Viacom Inc. into two parts, such breakups require meticulous planning to sort out the capital structure, infrastructure and management of the various pieces.
Under one plan being contemplated, Tribune would shed the broadcasting unit -- which draws about 27% of its revenue -- via what is known as a "spin-merge" transaction. In such a deal, the parent company spins off and merges the business with another company, in a way that allows Tribune shareholders to hold at least half the new company's total equity. That would limit taxes on the whole transaction.
A set of midsize broadcasters would be the most likely partners for Tribune's station group. Private-equity firms also have been active buyers of TV stations. These buyers have been able to take advantage of highly generous financing markets to fund their purchases of late. Last year, the unit posted operating profit before taxes of $436 million.
Separating the broadcasting arm would make Tribune nearly a "pure" newspaper company that could draw interest from other suitors, especially since its papers are among the biggest and best-known in the nation. Other newspaper companies may not be among them, however. McClatchy is in the midst of digesting its purchase of Knight-Ridder. Gannett Co. would be another potential buyer, but so far it has shied away from making any big merger deals.
That could leave Tribune open to the advances of private-equity buyers, who are eager to put large sums of money to work. These firms, such as Texas Pacific Group and Thomas H. Lee Partners, waded unsuccessfully into the Knight-Ridder auction, but at the right price, they might be interested in Tribune.
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