Sam Zell fought for and won the Tribune acquisition with a whopping $8.2 billion dollar deal. But now, a day ahead of Tribune's quarterly earnings report it looks like Zell might have gotten a bad deal--less than he bargained for, if we're talking revenue. Now he has about a month in which he can still back out of the deal, which would send this buyout target back into bidding chaos. And then there's the issue of whether shareholders will approve the takeover at the upcoming August 21 shareholder meeting.
The business is looking weaker than ever--weaker than Zell thought when he pushed to snag the company. Tribune's May revenue fell 11% to $406 million as revenue from its publishing division slid 10 percent to $292 million and sales from the broadcast and entertainment group fell 13% to $114 million. The whole industry is sufferening--McClatchy and Gannett also sufferining declines. May advertising at the New York Times dropped 8.5%. But it's not exactly a source of confidence for Zell that no matter how bad the rest of the industry is doing, Tribune is doing even worse. The Los Angeles Times, a keystone of the company, is suffering double digit drops in revenue and cash flow. Zell wanted the company for its cash flow--so if the cash flow is dropping, will Zell still want it?
The worse the company does, the worse the debt burden for the employee stock ownership plan that Zell's using to structure the deal. Even if the deal wins approval from shareholders and the government it must borrow $4.2 billion (in addition to the $7 billion it's already borrowed to buy back shares for the first step of the transaction). And think about the premium! The spread between the transaction price of $34 per share and the current stock price just continues to widen--it's less than $28 and continues to drop before my eyes! Even the Oracle of Omaha (Warren Buffett) is warning against the dangers of counting on press--in Berkshire Hathaway's latest report cautioning "press lords".
We'll see if the earnings disappoint already-lowered expectations. But if the stock continues to fall, I think the chances of the deal going through (especially considering its hefty $8.2 billion price tag) are less and less likely. Zell's initial intention were to create efficiencies and take advantage of the cash flow. But is the business doing well enough to justify that? I'm skeptical. We'll see what the earnings are tomorrow.
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