|Shares Out. (in M):||105||P/E||0.0x||0.0x|
|Market Cap (in $M):||5,985||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||775||EBIT||0||0|
|TEV (in $M):||6,760||TEV/EBIT||0.0x||0.0x|
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Tribune emerged from bankruptcy earlier this year with a clean balance sheet ($775MM net debt) and 105MM FD shares outstanding. The shares are trading OTC and are unlikely to be listed in the immediate future, though the 3 largest post-BK holders can demand listing/registration starting in Q2 next year. The 3 large holders post-BK are Oaktree, JP Morgan and Angelo Gordon, all of whom became owners by buying the distressed debt and having it converted to equity (together they own over 40% of the equity.)
There are 4 major components of value at Tribune: publishing, real estate, equity investments, and broadcasting. Taking them in order:
The publishing division owns 8 newspapers: The LA Times, Chicago Tribune, Orlando Sentinel, Baltimore Sun, South Florida Sun-Sentinel, Hartford Courant, Morning Call and Daily Press. This division also houses some small internet properties that are not worth much. The company has publicly announced that the publishing division is for sale. The Koch Brothers are interested in the division, and this has caused quite a bit of uproar in the newspaper world, b/c you know, the Koch Brothers are evil (lots of articles being written like this: http://www.huffingtonpost.com/2013/04/27/koch-brothers-media-tribune_n_3164875.html) Apparently it is okay for Buffett to own/buy newspapers, but not the Kochs.
But let’s assume someone buys them (News Corp, Buffett, Eli Broad have all been rumored suitors), what are they worth? Financial data is somewhat dated b/c of the bankruptcy. In 2010, the publishing division did $2B in revenues and $313MM in EBITDA. Order of magnitude, NYT & MNI EBITDA are down about 35% from the 2009-10 to 2012-13 timeframe (you have to look at 2 year blended results b/c of political advertising.) So let’s call it $200MM in 2013-14 EBITDA for Tribune’s papers to use round numbers. NYT, WPO, MNI, GCI, etc. all trade for about 5x EBITDA. So let’s say in a worst case scenario TRBAA’s newspapers are worth 4x EBITDA and in a best case scenario with a small change in control premium 6x EBITDA. That gives us a valuation of $800MM to $1.2B.
Real estate is next b/c most of the buildings they own house publishing operations (though they also own some of their broadcasting locations.) Cusham & Wakefield evaluated these in H1 2009 as part of the bankruptcy process and said they were worth about $525MM, using a ~9.5% cap rate. You may recall that commercial real estate prices were a tad depressed in early 2009. Let’s say that cap rate is 6% today today and the real estate is worth $830MM.
Equity investments include a 31% stake in The Food Network (remainder owned by Scripps), a 31% interest in Career Builder (GCI, MNI, MSFT), a 28% interest in Classified Ventures (mostly cars.com and apartments.com) and some other smaller stuff that is inconsequential. The Food Network is the biggest component of value here. It does about $550MM a year in EBITDA, and cable networks like DISCA, AMCX, etc. trade for 10-14x EBITDA. Applying those multiples x TRBAA’s interest yields a value of $1.7B to $2.4B. Using similar math/logic on CareerBuilder and Classified Ventures yields values of about $300MM for each of them. So the total value of these investments is about $2.3B to $3.0B. After the company disposes of the newspapers, these equity stakes should be next on the auction block. One would imagine that SNI would be very willing to own the entire Food Network, while it is somewhat less clear that there is an obvious buyer for the other assets. The other thing to note is that a sale of these equity stakes would likely trigger some level of capital gains taxes, though historically TRBAA has been creative in avoiding/deferring taxes when they sold Newsday in 2008 and the Chicago Cubs in 2009, but I am dinging them for $300MM in taxes in my SOTP below.
The broadcasting division is where you finally get to the spice of this story. Broadcasting consists of 23 local TV stations plus “Superstation” WGN (similar to TBS.) Understanding why this is interesting requires some background on what is going on in the local broadcast market. I would highly encourage you to read the existing message threads on FSCI, SBGI and NXST for more background on this (and mojoris or others who know more about this than I do, please chime in) but here goes:
In the last few years, local broadcasters realized they were literally giving the cable companies the right to show their channels for free. They looked around and said “Comcast/TWC/CHTR/etc. are paying $7/sub for ESPN and 50c a sub for channels no one even watches, why don’t they pay us for our local channel?” These are called retransmission or “re-trans” fees. Nexstar and Sinclair Broadcasting were the pioneers in doing this and they were quite aggressive about it. Because they had a) scale and b) channels that customers really cared about (i.e. the local CBS, ABC or NBC affiliate), the cable companies caved and agreed to pay them. They also got the cable companies to agree that any stations they bought going forward were automatically paid whatever rate NXST/SBGI had negotiated (vs. the lower rate or even zero rate the acquired station was currently receiving.) This kicked off the round of consolidation in the local broadcasting market that is underway today. Acquirers can pay high multiples (from 8-12x) of the target company’s EBITDA, but b/c said EBITDA immediately goes up upon re-adjusting the rates, the multiples can be quite reasonable (5-6x) for the acquirer.
This brings us to the TRBAA stations. Will they sell them or use them as a platform to take part in the industry consolidation? They certainly could sell them, but they are not worth the high end of the multiple range (call it the 10-12x range) that others have gotten b/c of their network affiliations. 13 of their 23 channels are CW Network affiliates (this would be channel 11 in NYC.) 7 are Fox affiliates, 1 is ABC and they have no CBS or NBC. Why does this matter? Imagine you are going to a cable or satellite company and demanding more money for your channel. Do you have more leverage if you are the local CBS affiliate or the local CW affiliate? Obviously, the former – Time Warner is not going to pay as much for the rights to channel 11 in NYC as they are for channel 2. So if they sell those 23 stations they are probably worth 8-10x EBITDA of about $275MM or $2.2B to $2.75B. If they keep them, the comps trade for about 7x-8x EBITDA, and again TRBAA deserves a little discount to that b/c of the CW affiliation, so I am using 7x to say they are worth about $1.925B. One hint as to what TRBAA may plan to do – the CEO they brought in to run the company, Peter Liguori, is a broadcast guy (formerly ran FX Networks for Fox and was COO of DISCA.) This does not seem like a guy brought in to sell the broadcast division.
The final piece of the broadcasting division is Superstation WGN. This channel has been pretty poorly run and only did $120MM EBITDA in 2012. Assuming a network like multiple of 12x EBITDA, it would be worth about $1.4B in its current format. The key question is “can they re-vitalize/turn around WGN?” I believe this was the crux of the pitch at Ira Sohn last week, though I did not see that presentation. TBS and WGN are very similar channels (both show syndicated TV shows, movies and sports – Braves for TBS, Cubs for WGN.) Industry reports indicate that TBS has 5x the audience and 7x the cash flow vs. WGN. TBS gets ~56c per sub/per month from cable/satellite companies while WGN gets ~19c. If you assume WGN can reach just half as large an audience as TBS and get up to 30c/sub, EBITDA can go to $275MM and WGN is worth $3.3B. Again, the guy they brought in as CEO formerly ran F/X and DISCA and is thought to be a credible guy to fix WGN. I liken this stiatuon to LSTZA a few years ago where you had a creative guy running the channel (Albrecht/Ligouri) while a finance guy is chairman of the board and controls the purse strings (Maffei of Liberty/Karsch of Oaktree.)
Adding up all the above gets a range of value of $51-$90 per share:
|Less: Net Debt||$(775)||$(775)|
|Less: Pension Obligations||$(500)||$(500)|
|Less: Tax Obligations||$(300)||$(300)|
Obviously the numbers work well, but the high end of the valuation range is not going to be realized over night. This is going to be a process of selling some assets and fixing others. It is also important to note that of the $36 difference between the high case the low case, $4 is provided by selling the newspapers for a high price (may or may not happen), $7 is from the high case in the equity investments, $8 is from using a “sale case” for the broadcasting stations (which they may not sell), and $18 hinges on them fixing WGN (won’t happen overnight.) So I think you run the risk that the publishing sale drags on and/or gets the lower end of the valuation range, they are slow to monetize the real estate, they are neither buyer nor seller of broadcasting assets and WGN is slow to turn around. And in that case TRBAA is a dead money, thin trader with not much downside but certainly nothing exciting going on, either.
On the flip side, what could get the stock moving? A headline of the sale of the publishing assets at anything other than a terrible price, a large sale or sale/leaseback of the real estate, selling the broadcasting stations at a frothy multiple or announcing they are actually buying stations and becoming a consolidator (NXST and SBGI go up just when there is a rumor that they are looking at a deal), or improvement in subscriber or advertising metrics at WGN (which is a pretty low hurdle to jump.) There is also the possibility of significant dividends and/or share buybacks as publishing, real estate and equity interests are sold. Oaktree, JPM and Angelo Gordon control the BOD and have publicly said they are focused on realizing value and returning it to the shareholders (who used to be the debt holders.)
Net-net, I think the SOTP means the downside risk is perhaps 10% below the current stock price, while there is an interesting, catalyst rich path to realizing quite a bit of value.
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