Tribune Bids Make Old Offer Look Sweet

One of the basic principles of investing is that timing matters. Today's example involves Tribune Co., the big newspaper and TV outfit that put itself up for sale last year after agitation by its biggest shareholder, the Chandler family.

Seven months ago, Tribune paid $32.50 a share to buy back about 20 percent of its stock. The Chandlers complained that the price was much too low, and cited analysts' estimates that Tribune's breakup value was more than $40 a share. The Chandlers didn't sell a share.

Oops. The Chandlers are now offering to buy the whole company for what they say would produce $31.70 a share for stockholders, but that I suspect would be much less by the time the deal is completed. In a filing with the Securities and Exchange Commission, the Chandlers say, in effect, that shareholders should be grateful for $31.70. Why? Because, they say, Tribune stock would be fetching only about $27 a share if the company weren't up for sale.

Then there's another offer for Tribune, which is also less than overwhelming and seems to involve a built-in profit for the bidders, billionaires Eli Broad (of KB Homes and SunAmerica) and Ron Burkle (supermarkets and the Yucaipa leveraged-buyout firm). They would invest $500 million in a deal that they value at $34 a share to existing holders, but that would subject Tribune to substantial financial risk by more than doubling its existing debt load.

If I owned Tribune stock, which I don't, and you offered me a choice of $32.50 in cash or either of these two offers, I'd grab the money like a shot. But that was then, and this is now.

I think the real reason the Chandlers didn't participate in the buyback is as much the way it was structured as its supposedly inadequate price.

First, selling would have required the famously taxophobic family to pay capital gains taxes. Second, fully participating in the buyback would have reduced the Chandlers' stock holdings to the point where the family would have lost its guaranteed seats on Tribune's board.

The family's bid for the company involves splitting Tribune into a TV company, which Tribune's existing holders other than the Chandlers would own; and a newspaper company. The Chandlers would own 51 percent of the newspaper company, which for hideously complex reasons would make the deal tax-free to them; partners not yet identified would own the rest.

After all the papers are shuffled, Tribune's non-Chandler shareholders would get $19.30 in cash for each share they own, and would also get stock in the new TV company. The Chandlers say the TV company shares would have a market value of $12.40 per Tribune share -- but I think that's a highly optimistic valuation. I don't see Tribune's board, scheduled to meet on Saturday, rushing to approve this offer.

Now to the Eli Broad-Ron Burkle bid, which I've heard about but haven't seen because it hasn't yet been publicly disclosed.

The B&B-boys' deal would give small shareholders a chance to run with the big leveraged-buyout dogs. Tribune would borrow about $11 billion to pay $27 a share in cash to holders, with the rest going to refinance existing debt of the company, which would still have publicly traded stock.

Now, watch this. Broad and Burkle estimate that the stock of what we'll call New Tribune would fetch $7 a share in the market. Hence their value of $34 -- the $27 in cash plus the stock. But what would Broad and Burkle pay for their piece of the company? By my math, a lot less than $7.

Here's why. Tribune has about 240 million shares outstanding and Broad and Burkle would own about a third of New Tribune. That means they'd be buying about 120 million New Tribune shares. They're putting up the aforementioned $500 million. Thus, they're paying about $4 for stock they say would sell at $7.

I'm not saying there's anything illegal or immoral (or fattening) about either the Chandler or Burkle-Broad offers. The B&B bid is more exciting for shareholders because it features a nice hunk of cash and offers them a piece of a LBO. But given the debt load New Tribune would carry and the discounted price that Burkle and Broad are offering for their stake, I don't see Tribune's board rushing to approve this deal, either.

Where does this leave us? It sure beats me. But that old $32.50, which the Chandlers and some other shareholders disdained, is looking better with each passing day.

Sloan is Newsweek's Wall Street editor. His e-mail address issloan@panix.com.