Wednesday, November 12, 2014

Engine Capital Delivers Letter to Tribune Publishing Company Board

SOURCE Engine Capital LP

                                                                                                                  November 12, 2014
Members of the Board of Directors
c/o Mr. Eddy W. Hartenstein, Chairman
Tribune Publishing Company
435 North Michigan Avenue
Chicago, IL 60611
Dear Board Members:
Engine Capital LP, together with its affiliates ("Engine"), owns more than 1.5% of Tribune Publishing Company ("Tribune", "TPUB" or the "Company"). Tribune represents a significant investment for Engine. We invested in Tribune because we believe that the Company is undervalued and that there are opportunities within the control of management and the Board to substantially increase shareholder value. We have decided to make our views public at this time so that you can hear feedback from other shareholders and the investment community on these important issues. 
A.     Sale of Non-Core Assets
Tribune owns a number of valuable non-core assets that would be more valuable in the hands of other strategic parties. While Tribune owns a number of non-core assets, we believe that most of the value of the Company's non-core assets is derived from the ownership of and the 33% ownership stake in As you know, assets in this space are extremely valuable, as evidenced by the recent sale of Move, Inc. to News Corp, as well as the recent takeover of Trulia Inc. by Zillow Inc.  We urge Tribune to market these non-core assets as soon as possible to take advantage of these high valuations. Also, given the "winner-take-all" nature of these online properties, we are concerned that over time, Tribune's properties may lose value if they become less relevant. Based on our research, as well as discussion with the management team, we believe that the Company could sell these non-core assets for at least $150 million. This would represent almost 40% of the current market capitalization of the Company. These proceeds could then be used to accelerate the Company's M&A strategy by providing more liquidity to buy additional publishing assets at 2x pro-forma EBITDA. Selling the non-core assets at a high valuation and using the proceeds to strengthen the core business through the acquisition of assets at an attractive valuation, we believe, could create substantial value for shareholders.
B.     Improving Communication with Investors
While we acknowledge that the Company has only been public for a limited time, we think that the Company could do a much better job of communicating the investment thesis of Tribune. For example, very few market participants are even aware of the existence of these valuable non-core assets, even though they represent a significant percentage of the Company's market capitalization. We also believe that there is confusion as to the actual EBITDA of the Company, which is compounded by the lack of analyst coverage. Pro-forma LTM EBITDA is around $175 million. If one takes into account the incremental EBITDA from the recent acquisitions, we arrive at a pro-forma LTM EBITDA around $190 million. The management team has made clear in its conversations with us that for the foreseeable future, Tribune can more than offset revenue decline with cost-cutting (while growing its digital business and pursuing value accretive acquisitions). In light of the recent negative stock price reaction following the Company's Q3 earnings release, we do not believe that the market appreciates this opportunity.  
We think it is an interesting exercise to contrast the valuation of TPUB with the valuation of Time Inc. in the context of the points we are raising. At TPUB's current valuation, and assuming that the non-core assets are worth $150 million, TPUB trades for less than 3x our pro-forma LTM EBITDA of $190 million, which is a meaningful discount to its peers. Time Inc., which is also a recently spun-off publishing entity facing similar revenue challenges, trades north of 6x EBITDA. We believe that the difference comes from Time's willingness to explore opportunities to monetize non-core assets, as well as its commitment to protect its margins through cost-cutting. Here are a few quotes from Time Inc.'s recent earnings release which illustrate this way of thinking: 
"We are also exploring opportunities to monetize noncore assets, including certain real estate holdings, and to selectively rationalize our portfolio of brands."
"But we are in the process of looking at everything we have and trying to figure out is there ways for us to make them more valuable than they are today. And if not, does selling them or enhancing them or investing them or partnering them with other people make them more valuable to our shareholders."
"While the business continues to face real secular print challenges, we are making progress against our plan, and as Joe said, we remain committed to protecting our operating margins and cash flows as we drive the transformation."
C.     Authorizing a Share Repurchase Program
Given the Company's valuation, we believe that the Board should authorize a share repurchase program. Based on our discussion with management, it is clear that management believes that the stock is undervalued and management does not want to accumulate cash on the balance sheet. Therefore, having the flexibility to buy shares at an attractive price should be part of the Board and management's arsenal to create long-term value for shareholders. We understand that the stock repurchase has to be weighed against the possibility of buying assets at attractive prices. We think that both options would represent a good use of capital.
In conclusion, we think that the Board and management have an opportunity to significantly increase shareholder value by exploring the sale of certain non-core assets, by better communicating the earnings power of the business and the Company's commitment to protect its earnings through cost-cutting during this transformation, and by instituting a share repurchase program. This would go a long way to close the value gap between the Company and its peers. We look forward to continuing our constructive dialogue with you in furtherance of shareholder value creation.
                                                                                                    Very truly yours,
                                                                                                    Arnaud Ajdler
                                                                                                    Managing Partner
                                                                                                    Engine Capital
About Engine Capital LPEngine Capital is a value-oriented special situations fund that invests both actively and passively in companies undergoing change.

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