Extra! Are Tribune's Parts Extra?

Media Giant Could Face PressureTo Divest Itself of Some Holdings;
Sell the Cubs? Keep the Networks?

By JOSEPH T. HALLINAN March 30, 2006

It is just days away from the start of a new baseball season, and Tribune Co. finds itself in a pickle: Should it sell the Chicago Cubs, its game-losing but money-making team? Or keep the Cubs and toss out something else?

With speculation mounting that Tribune could be the newspaper industry's next takeover play, the media company faces increasing pressure to do something.

Tribune's stock price has slumped to multiyear lows, Wall Street analysts have slapped the company with rare "sell" ratings, and the company's strategy of corralling advertisers by owning newspapers and television stations in the same markets seems to have flopped.

"Clearly, it has not worked," says John Miller, portfolio manager for Ariel Capital Management LLC. The Chicago-based money manager, with $19.4 billion in assets, has held Tribune stock for years and is one of the company's largest outside shareholders with 10.1 million shares, or about 3% of the company -- but it is growing impatient.

"We feel the stock is significantly undervalued and we would love nothing more than to see the company look to divest some of their properties," Mr. Miller says. For instance, he says, Tribune could sell its broadcast operations and take the company private.

Tribune appears disinclined, at least for now. "We're going to operate our way out of this," Tribune Chairman and Chief Executive Dennis J. FitzSimons says. "We're going to, I would say, stay the course, operate efficiently. But it's a different course, as it has been throughout the company's history."

Tribune's two primary businesses -- newspapers and TV stations -- are concentrated in big-city markets that have taken a pounding from competitors. Its TV stations, such as KTLA in Los Angeles, have lost viewers, and its newspapers, like the Los Angeles Times and Chicago Tribune, have lost readers and advertising, largely to the Internet. Nonetheless, Mr. FitzSimons says, "We still like the idea of being in major markets."

Selling the Cubs is tempting. While the club hasn't won a World Series since 1908, its legendary Wrigley Field home is packed for most games. Estimates put the team's value at around $500 million. Tribune bought the Cubs in 1981 for $21 million.

Other healthy investments include Tribune's 31% interest in the TV Food Network, a 24-hour television network focusing on food and entertaining, and a one-third stake in CareerBuilder, the online recruitment company. (CareerBuilder's other two stakeholders are Gannett Co. and Knight Ridder Inc., the nation's top two newspaper publishers, respectively, each also with a one-third stake.)

But the Cubs and the Food Network make money, and CareerBuilder is expected to do so soon. Mr. FitzSimons says he is reluctant to dump any of them, especially considering the probable tax bite a sale would entail.

"To sell at the bottom, when potential buyers aren't necessarily willing to pay a premium price that would make up for the tax hit, wouldn't be wise," he says.
Tribune's price/earnings ratio for this year is 14. That compares with a slightly richer multiple of 19 for the Dow Jones U.S. media-stocks index.

Tribune's dilemma comes at a precarious time for media companies. Earlier this month, the board of Knight Ridder, based in San Jose, Calif., agreed to sell the company to McClatchy Co. of Sacramento, Calif., under pressure from Knight Ridder's biggest investor, Private Capital Management LP. The Private Capital money-management firm, run by Bruce Sherman, is a unit of Legg Mason Inc.

Talk on Wall Street is that Tribune could soon face the same pressure. But Mr. FitzSimons says there are important differences between Tribune and Knight Ridder, including the ownership of big blocks of Tribune stock by presumably loyal insiders. The Robert R. McCormick Tribune Foundation, of which Mr. FitzSimons is chairman, holds 14%; and the Chandler Trusts hold 12%.

The Chandler Trusts acquired their stake in 2000, when Tribune bought Times Mirror Co., which was controlled by the Chandler family. The trusts exchanged their Times Mirror common stock for 36.3 million shares of Tribune common stock and got three seats on Tribune's 12-member board.

That merger, which occurred at the peak of the Internet-stock bubble, looks increasingly costly. Revenue has barely budged over the past five years and billions in market value have evaporated. Tribune paid $8.3 billion for Times Mirror in 2000, including the assumption of debt. Today, that is the market value of both companies combined.

In the newspaper business, which accounts for nearly three-fourths of Tribune's revenue, fourth-quarter advertising trends were worse than many analysts had expected, and 2006 appears to be off to a slow start, Deutsche Bank analyst Paul Ginocchio said in a March 16 note to investors. Deutsche Bank has a financial relationship with Tribune.

The future isn't much brighter. For the monthly period ending Feb. 26, Tribune's publishing revenue fell 2.4% over year-ago levels, to $314 million. Lehman Brothers Holdings Inc. analyst Craig Huber predicts Tribune's 2006 newspaper ad revenue will drop 2.7%, versus an industry average of 1.5%. Mr. Huber has an "underweight," or "sell," recommendation on Tribune's shares. Lehman has a financial relationship with the company.

Mr. FitzSimons says advertising appears to have picked up from its February levels.
Deutsche Bank's Mr. Ginocchio, who has a "sell" rating on Tribune, says that, for now, a sale of the company appears unlikely. In his note to investors, which was written as the stock was trading in the low-$30s, he said: "Tribune is not the next Knight Ridder, unless it's in the mid-$20s."

In 4 p.m. composite trading yesterday on the New York Stock Exchange, Tribune's shares were unchanged at $27.51.

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