Wow, was the Tribune Co. punked, or what? That was some lousy auction since none of the bidders offered to pay a premium to swallow the company whole. Broad/Burkle have put in a bid, and so have the Chandler family, who own 20% already. (Supposedly, a third bidder weighed in: a private equity firm just interested in the TV group.) But, first, here’s some behind-the-scenes info. If Los Angeles billionaire bidding pair, Eli Broad and Ron Burkle, are successful in their Trib bid, they now want to keep the TV group as well as the newspapers. (After all, Frank Biondi, the ex-Viacom and ex-Universal mogul, is advising them, and he knows the long-term value of those 23 stations, plus cable channel Superstation WGN, etc.) The pair already have sat down and had a heart-to-heart with the LAT‘s current publisher David Hiller. “The meeting went very well. They found him impressive,” a source told me. Meanwhile, the LAT editor whom Hiller fired, Dean Baquet, is indeed waiting to see who buys the paper. Yes, The New York Times wants him, which executive editor Bill Keller recently confirmed. But so, apparently, do Broad and Burkle who submitted their joint bid just a day after Baquet was forced out of his job and have been talking with him since. “Everybody liked him. There were lots of meetings,” the insider told me. Regarding David Geffen‘s $2 billion cash bid for the LA Times, the resulting tax consequences remain a seemingly insurmountable obstacle to his getting ownership anytime soon. An insider warned me: “No one’s selling the paper with such a big tax bill in the way.” By contrast, although the Broad/Burkle offer is disappointing in its structure, Tribune could avoid the tax issues that would arise from a sale of individual assets because, although the rich guys would become co-chairmen of Tribune Co., they’d keep current management. Regarding the duo, their advisers call them “Da Boys” and, by all accounts, they get along. “They’re pretty cordial when they’re together. No tensions get in the way,” one source explained. OK, now back to the deal.
First let me say that, in order to understand the Broad/Burkle bid for Tribune Co., string-puller of its puppet Los Angeles Times and owner of 11 leading daily newspapers and other assets, you need to be an MBA from Harvard Business School. (Sorry, but it’s my niece who’s there right now, not me.) With phrases like “stub equity” and “leveraged recapitalization” being used by my sources, I’ll try to put them into laymen’s terms so you have a clue what’s going on. Initially, Broad/Burkle felt comfortable only owning substantially all of Tribune Co.’s newspaper group, not the TV stations. But, hey, those stations can be a license to print money, if run right. So, after kicking it around with advisers, they convinced themselves to try to keep the stations and look at improving the cash flow of the TV group — then make a decision what to do with it (realizing that it’ll take several years out to fix). But keeping the TV group brings in the FCC and the need to secure its approval anytime TV stations change hands.
Here’s how it would go down. Broad/Burkle invest $500 million cash in Tribune Co. for what’s initially a 19.9% stake in the company and eventually 5 seats on the corporate board. But Da Boys also secured financing (proposals were circulated among five different banks) so the corporation could take on a substantial debt load –about $10.5 billion worth — on a new layer of equity. This is what’s known as a “leveraged recapitalization.” Woo-hoo, that chunk of change then allows the Tribune Co. to pay out an enormous dividend of $27 a share — 90% of the share price — to the existing stockholders immediately (something like 45 days). So then, after the dividend, the Tribune Co. stock will trade for around $7. This is what Wall Street calls a stub: it’s stock in a company that is over-leveraged as a result of recapitalization. (Stub equity is considered speculative and risky. On the other hand, stub stock’s advantage over junk bonds is that it has unlimited potential if the company turns things around.) So, figured altogether, the Broad/Burkle offer is worth $34 a share.
Until this point, FCC approval isn’t needed because Broad/Burkle’s stake in Tribune Co. is still under 20%. But the idea is for them to eventually take over the company, and now their stake rises to 33%+. That triggers the FCC to do its thing. So everything grinds to a halt for months and months. After that regulatory hurdle is cleared, Broad/Burkle have the luxury of time. I’m told they’ll probably make some small asset sales at the beginning. Then they’ll improve the broadcast and newspaper and Internet operations. As for how Broad/Burkle see the LA Times: “They think the paper runs very well as a business. Eli’s issue is the positioning of the paper,” my insider says.
The Chandler family’s offer came in late after my sources had gone home. According to the Wall Street Journal, it’s seen “as a last-ditch effort to rescue the value of its stake in the company. Under the proposal, which hadn’t been finalized, the Chandlers and private-equity partners would buy the newspapers, while Tribune would spin off its TV stations. The family’s advisers have received a commitment from one private-equity firm for half of the money needed for the deal, according to people familiar with the proposal, but are trying to find additional investors. The Chandlers envision holding 51% of the newspapers, while partners would hold the remainder.”
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