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October 25, 2014

The Newsonomics of the Tribune Detour

First published at Nieman Journalism Lab

Is it a detour of some kind? Is it a deke? Or is it a Koch-around?

The big question is why Tribune would go through the time, money, and bother to split the companies when it doesn’t want to be in the newspaper business and has would-be buyers waiting for company data.

As we speculate on that quandary, let’s look at what yesterday’s semi-surprise Tribune announcement — that it would split its broadcast and newspaper assets into two companies — will do. Let’s also look at how the newsonomics of the split further confirms the poverty of newspaper financials, a downward slope so severe that the sequestration of newspaper assets is becoming a near-universal strategy (“The Newsonomics of Tribune’s Metro Agony“).

First, expect that the papers will still be sold. They may go as a whole of individually, but they’ll go, and they may go before a spin-off is spun.

The plan further certifies that by this time next year the Tribune Company will be a polished jewel of a broadcast/video company. It will have completed its just-announced acquisition of Local TV stations, making it the largest independent local owner of top-25 broadcast stations in the United States.

This jewel of a property won’t have to absorb the nicks and dents associated with newspaper publishing. Broadcast TV may not be a hockey-stick growth business, but it is relatively stable, is growing modestly, and projects much more stable cash flow than print over the next three to five years (great Brian Stelter rundown on those economics). In other words, Tribune Company’s owners — Oaktree Capital Management, Angelo, Gordon & Co., and JPMorgan Chase & Co. — have set up their endgame well. That endgame could be either a sale of the new, restyled company or an IPO. Either way, the owners, having persevered through the tribulations and many trials of the Sam Zell era, will get their payday.

They’ve made the next new Tribune Company — as compared to the to-be-split-off Tribune Publishing Co., which would hold the newspaper assets only, with unknown assigned cash and debt — an ever better proposition by keeping the digital and real estate assets usually associated with the newspapers.

I’ve confirmed that Tribune Company intends to hold all the real estate under and around the staffs working from Chicago to Baltimore to Fort Lauderdale to L.A. That includes office buildings and production facilities. The value of newspaper-owned real estate varies widely — location, location, location — but over the last three years of newspaper sales, real estate value has often justified half of overall deal prices.

The hard asset of real estate has been a powerful motivator in deals as diverse as Warren Buffett’s for Media General properties (“The Newsonomics of Near-Term Numerology“) and Halifax Media Group’s for The New York Times Co.’s regional properties. It’s a financeable asset as well. The flipside of no real estate: Buyers will have a new cost to consider, leasing or buying their own space for large workforces and print production.

So Tribune keeps that value in the old company, and would-be newspaper buyers can now lower their appraisals of the papers. That’s one deduction in market value.

Tribune also keeps its 32 percent stake in online recruitment leader CareerBuilder and 28 percent of auto/apartment sites run by Classified Ventures. That’s not a surprise, but it’s a point that hasn’t been clear up to now. Those digital classified companies were structured by their newspaper consortium owners to create the greatest value for equity owners, like Tribune, and less for affiliate newspapers. Whoever buys the Los Angeles Times or the Chicago Tribune will probably be offered the opportunity to continue, at least temporarily, as an affiliate, but the value of affiliation is relatively small. So that’s another deduction in market value.

Today, as part of the splitting, long-term syndicate leader Tribune Media Services rebranded itself, becoming Tribune Content Agency. The low-cost, higher margin operation has been all about newspapers, but it, too, is staying with the broadcast-centric Tribune Company, and saying a big hello to content marketing. Meanwhile, those would-be profits that could have flowed to a buyer of newspaper assets now won’t. That’s a third deduction in market value. (Added clarification: Tribune Media Services was broken into two parts last fall, TMS Entertainment and TMS News & Features. It is TMS Entertainment (still named Tribune Media Services) which includes the lucrative TV listings and the movie showtimes business, that remains with the Tribune Company. TMS News &  Features has become Tribune Content Agency, and will continue to syndicate news and features, while also pursuing new content marketing opportunities. Tribune Content Agency will  become part of the to-be-split Tribune Publishing Company.)

Tribune, in its split announcement, took all the reliably profitable parts of the enterprise. It left for the spun-off newspaper company the assets that will lose another five to 10 percent of their print advertising this year, and will likely continue to show overall revenue decline.

We can figure that whatever the papers were collectively worth Tuesday, they’re worth maybe two-thirds of that today.

So why might have Tribune taken this course?

Take your pick of three scenarios I’ve heard or read in the last 24 hours:

  • It’s a deke. It says to would-be buyers: We’ll just keep these companies, run separately, if we don’t get a high enough bid. The fake would be intended to get bidders to bid up.
  • It’s a tax dodge. A spinoff may yield tax benefits. First, the split itself is tax-free. Further, sources familiar with information-industry spinoffs tell me that many spinoff-intending companies take six to eight months to obtain a “private letter ruling” from the IRS “giving them comfort” that their particular proposed spinoff meets the highly detailed tax-free rules under Section 355 of the Tax Code. Such tax savings can, I’m told, play a key role as companies compare the value that can be obtained through spinoff with that of direct asset sale. One analyst believes tax savings of $150 million (on a $800 million sales price) may justify the split.
  • It’s a Koch-around. The unexpected, and real, interest of Charles and David Koch in buying all the Tribune papers has set off a public and labor furor (“The Newsonomics of the Kochs Rising and Uprising“). While the AFL-CIO itself has mounted a quite public protest, two of Tribune’s owners — Oaktree and Angelo Gordon — are particularly vulnerable to pressure from their large labor pension fund investors. With the Kochs easily able to outbid anyone — even Rupert — to a rumored tune of as much as $1 billion if they want the newspapers, this theory holds that Tribune just can’t sell the newspapers to them. At least, it can’t sell them right now. If a spinoff actually happens nine to 12 months from now, the owners’ Koch problem doesn’t go away; the owners will simply take similar new ownership stakes in both companies. What the announced split and apparent move not to put the papers on the market does is kick the Koch can down the road.

Maybe something will change, given that extra time. In the meantime, the new Tribune has publicly and internally charted the path it wants to pursue.

As one savvy insider told me: “The process for putting the papers on the market and for preparing for a split of the two companies is essentially the same.”

Put that understanding together with the Koch theory and Tribune’s move makes a certain sense.

Tribune has had a lot on its shiny new plate. New CEO. New board. Negotiating the major Local TV purchase. Figuring out which assets it wanted to keep and which to sell. It still faces decisions, on what to do with its newspaper obligations and on how to best resolve its stakes in the digital classifieds businesses when the papers are finally sold. Add all that together, and mix in the explosiveness of the Koch question to Tribune owners’ core business, and you can see how Tribune may have arrived at this alternative.

Let’s remember its overall goal: make sure the newspaper assets don’t muddy the big broadcast play, and set the clock to do that. Chart the path. Buy some time. Hope for the best.

It’s clear that Tribune gets its TV/video/digital enterprise, the kind of company clearly envisioned when it appointed its post-bankruptcy board and hired TV exec Peter Liguori at the beginning of the year.

Its decision to separate its newspaper assets parallels the industry’s. As of June 28, the new News Corp took over the newspaper assets of the old News Corp., which became Twenty-First Century Fox, a global TV/entertainment behemoth. Media General dispatched its newspaper assets, selling all but one to Warren Buffett’s Berkshire Hathaway Media and the Tampa Tribune, separately, for a song. Belo split itself into two, newspaper and broadcast five years ago, and just sold those broadcast stations to Gannett. Gannett, now mainly a broadcast company in terms of its street valuation, remains a hybrid; who knows when it could re-work its own structure.

What’s clearer and clearer: Metro newspaper companies are finding they are no longer creatures of the market. Public markets value them lowly, given their seven-year revenue decline and uncertain prospects. This Tribune move seconds that notion — and soon we’ll see what The New York Times can fetch from a Boston Globe sale.

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