The Chicago media concern, which owns the Chicago Tribune, WGN-Ch. 9 and many other broadcasting and print entities, has seen its stock price decline by more than 40 percent over the past two years, as a result of company-specific problems as well as structural changes that are taking a toll on the publishing and broadcasting industries.
The strategy unveiled Tuesday, of borrowing heavily and selling assets to fund a share repurchase, appears to rule out those other options.
The king-size buyback shows "our confidence in the company and its future," said Chairman, President and Chief Executive Dennis FitzSimons.
The buyback plan is a laudable effort to improve Tribune's capital structure and create shareholder value, Paul Ginocchio, an analyst with Deutsche Bank, said in a note. "Unfortunately this does not change the significant structural headwinds that Tribune faces."
But nearly doubling its current debt of about $3 billion is not without risks, and debt-rating concerns promptly lowered their ratings on Tribune's obligations. Fitch noted that the leveraged buyback "represents a significant departure from Tribune's historically conservative financial policies," and said the new initiative "emphasizes the pressures that slower-growing traditional media companies are under to boost their stock prices."
Moody's Investors Service downgraded Tribune debt two notches, to Baa3--the last stop before non-investment grade, or "junk," status--and warned that if the company completes the buyback in full, "a non-investment-grade rating is likely."
Tribune officials confirmed that the company expects its debt ratings will fall to junk levels as a result of the buyback.
But the company emphasized that it considers its shares a bargain: The repurchase plan, FitzSimons said, underscores "our strong belief that Tribune's current share price doesn't adequately reflect the fundamental value and long-term earnings prospects of the company's businesses."
On its face, the move appears to be a bid to calm restless Tribune stockholders by returning some capital, and to provide a vehicle for those who want to exit the stock.
A major reduction in outstanding shares usually boosts a company's stock price, because the company's earnings are divided among fewer shares.
Tribune may also, however, be seeking to render itself less attractive to any potential suitor: The company's whopping post-buyback debt of nearly $6 billion will make it hard for leveraged-buyout companies to borrow against Tribune's assets.
"We feel strongly about being an independent company," FitzSimons said in an interview, adding that the buyback "was a move that our board of directors authorized that was in the interest of all shareholders."
Under the plan Tribune unveiled Tuesday, the company plans to raise "at least" $500 million to help pay down debt by selling off a grab bag of "non-core" assets, which may include certain television properties, real estate holdings or other investments.
Officials explicitly said the sales won't include the Chicago Cubs, and would include Tribune's 31 percent ownership stake in the Food Network cable operation only if the company got a better offer than it has to date. Because such assets were acquired at low prices, their sale would generate big tax liabilities that would sharply reduce proceeds.
Tribune, which has cut deeply into spending already, also said Tuesday that officials think they can squeeze an additional $200 million in annual savings out of operations over the next 24 months.
Tribune's plan calls for the company to repurchase up to 75 million of its shares. Of that, up to 53 million will be purchased from stockholders through a complex format known as a Dutch auction, at a price between $28 and $32.50.
Tribune also will buy 10 million shares from the company's biggest stockholder, the McCormick Tribune Foundation and Cantigny Foundation, which will keep the affiliated foundations' holdings unchanged at nearly 14 percent.
In a final step, Tribune said, the company will buy back about 12 million additional shares in the open market after the Dutch auction, which is set to expire June 26.
The company said that while it may borrow up to $3.4 billion, and will see its debt ratings cut significantly, officials still expect to be able to spend the amounts needed to pursue its ongoing corporate strategy. The company's 18-cent quarterly dividend will be unchanged.
In New York Stock Exchange trading, Tribune shares finished the day up $2.01, or 7.2 percent, at $29.90.
Steven N. Barlow, an analyst at Prudential Equity Group LLC, responded to the news by upgrading Tribune shares to an "overweight" rating, from "neutral weight."
As the Internet claims a growing share of many advertisers' ad budgets, Tribune and its rivals in the newspaper and broadcast-TV sectors have seen their profits come under increasing pressure.
Those pressures have dragged down the share price of most newspaper companies; investors are betting that the publishing industry's earnings, while still healthy, will never recover to their robust level of a few years ago.
Tribune is, in essence, betting that Wall Street is underestimating the company's future earning power. The timing is right, officials said, because in addition to what executives contend is an undervalued stock, borrowing rates are relatively low at present.
In addition to the industry troubles that have hurt the stocks of most newspaper publishers, Tribune has also suffered some home-grown travails. Many of them were born out of its $8 billion purchase in 2000 of Times Mirror Co., operator of the Los Angeles Times, Baltimore Sun, Newsday and other daily papers.
Among other things, Tribune inherited a long-running tax dispute between Times Mirror and the Internal Revenue Service; late last year the company lost the case and had to pay the government about $1 billion.
Even before the tax case formally turned into a financial millstone, however, Tribune had been obliged to take big charges against earnings because two former Times Mirror newspapers (Newsday and Hoy in New York) were discovered to have been cheating advertisers by inflating their circulation figures.
All those factors contributed to the long decline in Tribune's stock. But other newspaper companies, including New York Times Co. and Gannett Co., have also seen their shares drop as investors lost faith in the sector.
One company that saw its stock plunge, Knight Ridder Inc., was last year pressured by hedge fund Private Capital Management into putting its assets up for sale. That auction ended a few months ago, when Sacramento-based McClatchy Co. agreed to pay $4.5 billion to acquire Knight Ridder.
The buyout price, which was significantly lower than many optimists had been hoping for, put a damper on investors' enthusiasm for forced media-asset sales. Still, industry players are looking over their shoulders and continue to feel pressure to push their depressed stocks higher.
Tribune's move, with its daunting additional leverage, "smells of a poison pill" takeover defense, said Paul Hodgson, senior research associate with The Corporate Library, a corporate-governance group.
While the McCormick Tribune Foundation has tentatively agreed to sell a portion of its holdings, the Chandler family--which received a 12.2 percent Tribune stake as part of the Times-Mirror deal--is still considering whether to sell some of its shares in the buyback programs.
If the Chandlers opt to keep all of their 36.9 million shares, their ownership stake would increase to an indicated 16.2 percent, which would make them Tribune's largest holder.