Tribune to Split in Two, Create Opportunities

Tribune to Split in Two, Create Opportunities

The owner of the Los Angeles Times, and recent bankruptcy court emergent, Tribune has made some interesting moves since its downfall in 2008, when the company drowned under the weight of its $13 billion debt load -- a parting gift from a leveraged buyout a year earlier. This week, the story got even more interesting, as management announced that the company would split its profitable operations (TV), and its less appealing businesses (papers), into two separate entities. While more details need to emerge before we can determine whether the company is a worthwhile investment, this unloved company could present an interesting opportunity to sophisticated investors.

Unsurprisingly, Tribune faced difficult decisions regarding its once-great newspaper empire. The company owns the Los Angeles Times, the Chicago Tribune, The Baltimore Sun, and plenty of others, but has struggled to keep them afloat in an age of immense industry disruption. The decision to spin off the papers into their own entity is not uncommon for media conglomerates. News Corp. is in the midst of separating into 21st Century Fox (film/TV) and News Corp. (the papers), and Time Warner is spinning off its publishing unit, Time. Depending on the pricing of these spinoffs and the structure of the offering, these could be some compelling special situations in and of themselves; however, most would agree that publishing companies are not in demand at the moment.

Tribune's television operations, though, are a different story. The company recently bought 19 local television stations for $2.73 billion, making it the largest commercial TV-station owner in the country. Even though publishing is the undesirable business, it accounted for more than 60% of the company's revenues in 2012, leaving an interesting growth runway for the soon-to-be pure-play TV business.

Better shape
Tribune's management made the right moves while in bankruptcy -- the company was able to pay off billions upon billions in debt, and now sits on just $1 billion, as of March 2013. The company has more than $550 million in cash (about $6.40 per share), and, with its 19 additional top-rated local TV stations, will be generating substantial amounts of cash flow.

Management guided that Tribune (pre-spinoff) and the new stations will generate $1.1 billion in EBITDA. With the $4 billion in debt financing employed to help pay for the acquisition, the firm's enterprise value will be in the neighborhood of $9.5 billion, implying an EV/EBITDA of 8.64 times. For comparison, News Corp. is trading at 11.5 times EBITDA -- admittedly a rich valuation.

All in all, Tribune's significant potential for free cash flow generation and business segregation may provide a compelling opportunity for value-oriented investors.

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