Tribune: Strip and Flip Slips

The financial markets did not seem particularly excited about the prospects for the Tribune. Here is the story. It looks like most of its cash flow will have to go for interest.

Ng, Serena, Sarah Ellison and Dennis K. Berman. 2007. “Tribune Co.’s Climb to Going Private Gets Steeper.” Wall Street Journal (25 May): p. C 1.

“Tribune said it would take itself private in a two-stage $8.2 billion deal backed by real-estate magnate Sam Zell. The deal, financed almost entirely by debt, isn’t expected to close until late this year. To fund the tender offer that is the first stage of the buyout, and to refinance some existing debt, Tribune last week sold more than $7 billion in loans to debt investors. Even in today’s easy-money atmosphere, the company’s bankers had a tough time pushing the deal through. The bankers ended up forgoing roughly a third of about $120 million in fees to get the deal done, according to two individuals familiar with the matter.”

“Tribune ended up agreeing to pay higher interest rates than planned on most of the debt. It also agreed to pay down a chunk of the loans within two years, rather than the seven-year term it sought. The moves raise questions about the company’s ability to service its debt load while navigating the deteriorating newspaper business.”

“The transaction certainly struggled,” says Chris Donnelley, a vice president at Standard & Poor’s Leveraged Commentary & Data who tracked the debt sale closely. “The market was concerned about putting that much leverage on a company in an industry in a difficult outlook.”

“The struggle in selling the debt is unusual, because hospitable credit markets have supported a flood of debt issuance in recent years and pushed corporate-borrowing costs to near historical lows.”

“Even in today’s environment, where there’s a lot of liquidity in the debt markets, investors are taking a closer look at some situations,” says Dave Novosel, an analyst at debt-research firm Gimme Credit.”

“Tribune’s bankers must raise $4 billion more in loans and bonds later this year to help pay for the second stage of the buyout, which is expected to be completed around November. That fund raising could be a potentially difficult task if Tribune reports weaker numbers in the coming months.”

“Tribune, which last year generated cash flow of $1.3 billion, will initially have to meet annual interest costs of around $1 billion when the buyout is complete, though the interest burden would shrink if the company moves quickly to pay off debt as planned.”

“Tribune originally planned to issue the debt in seven-year loans that would pay an interest rate of 2.5 percentage points above the benchmark London interbank offered rate. Investors were reluctant because they were concerned about Tribune’s heavy post-buyout debt load of more than $12 billion, which dwarfed the $315 million equity Mr. Zell will contribute. Some were also skeptical about what they felt were aggressive revenue and growth projections the company provided at a meeting with potential investors in late April.”

“To sweeten the terms, Tribune converted some of the offering into a $1.5 billion short-term loan that would initially pay 2.5 percentage points above Libor and rise to 2.75 percentage points after Tribune goes private. It promised to repay $750 million of that loan in 18 months and the rest in two years.”

“The move was aimed at giving investors comfort the company is committed to cutting debt quickly. It could put Tribune in a challenging position if it needs to tap the debt markets again for funds two years from now, and the markets are less forgiving.”

“Tribune also agreed to pay a higher interest rate of three percentage points above Libor on the remaining $5.8 billion in seven-year loans. Most of the loans were sold at a discount to sweeten the deal further. Following the revamp, all the debt was sold, and the loans quickly traded higher.”

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