The Tribune’s Daunting Challenge

Publishing-asset spinoff will be a difficult sell to investors

   
The Tribune’s Daunting Challenge

If there ever were a company starting off life with two strikes against it, the Tribune Co.’s publishing business — which is being spun off by the Chicago-based media company — would have to be it.

The Tribune is dropping the newspaper business like a hot potato because the wannabe Charles Foster Kanes who said they wanted to buy the company’s papers weren’t actually willing to pay all that much for them. This elite group included the Koch Brothers, billionaires bent on creating a media empire; Warren Buffett, who apparently was interested in Tribune’s Allentown Morning Call; and Rupert Murdoch, who has wanted to buy the Los Angeles Times for years.

Their reluctance is easy to understand.

Papers such as the Times, Chicago Tribune and Orlando Sentinel are profitable after emerging from a wrenching bankruptcy, but they are hardly minting money. During the first quarter, the business earned $46.4 million in operating profit on revenue of $465.9 million, which is a decline of 3.2% on a year-over-year basis.

Bankruptcy filings pegged the value of the Tribune business at $623 million last year; significantly less than the $923 million it was worth in 2011. Anyone trying to determine its current value might as well tape a paper to a target with a random number written on it and try to hit it with a dart while blindfolded. It would be just as accurate.

CEO Peter Liguori hasn’t named a CEO for the new business, or really even said much of anything other than this:

“Pursuing the separation of our publishing and broadcasting businesses will also allow us to maintain flexibility as we continue considering all our strategic alternatives for maximizing shareholder value.”

So I guess he is saying that anything is for sale at the right price.

An even bigger mystery for Liguori to solve is who would want to buy this stock. Unless he is willing to pay a gigantic dividend such as Gannett (GCI), which offers a 3% yield, it’s hard to imagine investors showing much interest.

Though comparisons are being made to the just-completed News Corp (NWSA) break-up, there is a key difference. Rupert Murdoch is giving the new News Corp, the name his publishing assets are operating under, a nice parting gift: $2.6 billion in cash. Tribune can’t afford to be nearly as generous. The Wall Street Journal also attracts national advertisers that usually bypass local papers such as Tribune’s.

For the company’s journalists, that’s a problem.

Tribune’s papers are already a shadow of their former selves. Earlier this year, media analyst Ken Doctor noted that the Los Angeles Times had a newsroom staff of about 550, less than half of the 1,300 it employed during the late 1990s. The numbers at the Chicago Tribune (430 vs. 703) and the Baltimore Sun (140 vs. 400) are just as depressing.

Although quality journalism isn’t necessarily expensive, the cost pressures on the Tribune papers will be enormous since they won’t have other more profitable businesses like television stations propping them up. The best-case scenario for newspapers is that gains in circulation will slightly offset declines in advertising.

In other words, things will be less bad.

The economies of scale aren’t all that compelling for newspaper chains such as Tribune. Papers joined forces in the past to save on newsprint costs, but papers have shrunk themselves in recent years — so much so that industry data shows that demand has fallen by about 12%. Newspaper chains were able to attract national advertisers in past years, but local papers have largely lost this business to Internet sites. They do save money by operating a single Washington bureau and pooling resources on major stories such as the Super Bowl.

Though News Corp could easily afford to buy Tribune outright, as could Buffett, I doubt that will happen.

Murdoch has plenty to do with his existing assets, including Dow Jones, the publisher of the WSJ, which he is trying to fashion into the next in a long line of “Bloomberg killers.” And the money-losing New York Post reportedly might be transformed into the next BuzzFeed.

As for Buffett, he has spent more than $200 million on community papers in smaller cities that don’t have much competition. Tribune’s papers have loads of rivals.

At least Murdoch has an idea of what he wants to do with News Corp. Tribune is sadly content to remain in a holding pattern, which is kind of sad.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. Follow him on Twitter at @jdberr.


Article printed from InvestorPlace Media, http://investorplace.com/2013/07/the-tribunes-daunting-challenge/.

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