Discussion in 'Stocks' started by bsivia, Sep 14, 2007.

  1. bsivia


    The Tribune Company (NYSE: TRB)

    Tribune has operating businesses in publishing, interactive and broadcasting. In publishing, Tribune’s leading daily newspapers include the Los Angeles Times, Chicago Tribune, Newsday, Baltimore Sun, South Florida Sun-Sentinel, Orlando Sentinel and Hartford Courant. The company’s broadcasting group operates 23 television stations, Superstation WGN on national cable, Chicago’s WGN-AM and the Chicago Cubs baseball team. On 2nd April, 2007 Tribune Co. agreed to be taken private by a Leveraged ESOP transaction with Mr. Samual Zell for $34/share.

    Upon completion of the transaction, the company will be privately held, with an Employee Stock Ownership Plan (ESOP) holding all of Tribune’s outstanding common stock and Mr. Sam Zell holding a subordinated note and a warrant entitling him to acquire 40 percent of Tribune’s common stock. Zell will join the Tribune board upon completion of his initial investment and will become chairman when the merger closes. The first stage of the transaction was a cash tender offer that has been completed with 126 million shares tendered at $34 per share. The tender offer was funded by incremental borrowings and a $250 million investment from Sam Zell. The second stage is a merger expected to close in the fourth quarter of 2007 in which the remaining publicly-held shares will receive $34 per share. The $250 million will be paid back to Mr. Zell prior to the completion of the merger, and he will invest $315 million, including $225 million in subordinated note and a 15 year warrant for $90 million after the completion of the merger. The warrant will entitle Mr. Zell to purchase upto 40% of the company and will have an initial aggregate price of $500 million.

    Currently the stock is trading for around $27/share on concerns that the deal might not close due to (1) financing (which has been secured from the various investment banks, who are entitled to provide financing) (2) meeting financial ratio requirements (which they will do with the sale of the Cubs ($600 million to $1 billion) and Comcast Sports net Chicago (3) duress (which Mr. Zell was aware of before he got into the agreement, given his history with distressed situations) (4) regulators(which should not be a problem considering DJ and Newscorp etc.). If the deal does not close, I expect the stock to settle in the $22-$24 range based on conservative dcf, and the prior/other offers for the firm. I assign a 20% probability that the deal might not close.

    There is also concern that Mr. Zell will renegotiate the deal to get a lower price. The company had multiple parties interested including the likes of (1) Mr. Eli Broad, who structured his deal very similar to that of Mr. Zell for $34/share (2) there was a party interested in buying the Broadcasting and Entertainment (B&E) division for $4.8 billion (3) there was also interest in doing a leverage recapitalization with a special dividend of $15-20/share and the spin off of the B&E division. Given the interest in the company, I take this as an effective ‘support’ for the deal as per Mr. Buffets Shareholder letter of 1988. If Mr. Zell tries to negotiate a lower price, he will invite litigation and some other investor might be able to come in give shareholders a better deal. I expect the stock to be renegotiated at around $29-$32, based on the interest in the company as indicated in the history of the deal in the proxy. I assign a 5% probability that the deal might be negotiated lower.

    It is my opinion that the deal will go through at the price of $34/share. Mr. Zell will participate in the downside if the deal does not close as he has $250 million invested prior to the closing. After the closing most of his $315 million investment will be in a promissory note and a warrant, whereby he will participate fully in the upside, but is limited in the downside. Given the incentive to Mr. Zell and his experience, the interest in the deal with a similar structure by other parties, and the assets of the Tribune Company, I place the probability of the transaction closing at 75%.

    Expected value calculation:
    The deal will not close: 0.20*$(27.50-22) = 1.1
    The deal will be renegotiated lower: 0.05*$(29-27.50) = 0.075
    The deal will close: 0.75*$34 = 4.875

    With the stock trading at $27.50, it represents a 23.6% return on invested capital. If the deal is not closed by 1st January 2008, a 8% ticking fee will be levied thereafter until 31st May, 2007.

    Disclosure: I am long TRB stock

    If you dont have anything to say bout the stock, critic the report, it would be nice if i could get some feedback