Buckling Under Boldface Debt
Tribune Faces Painful Choices After Takeover

By Frank Ahrens
Washington Post Staff Writer
Friday, June 27, 2008

Media giant Tribune Co. has found itself trying to wage a war on two fronts. And the struggle is starting to take its toll.

Even the healthiest U.S. newspaper companies are battling declining circulation and advertising revenue. The same is true at Tribune's nine daily English-language newspapers, which include the Chicago Tribune, the Los Angeles Times and the Baltimore Sun.

But as part of Tribune's going-private transition under new chief executive Sam Zell, the company amassed $13 billion in debt, a financial pressure that is beginning to press down hard across the company as it scrambles to meet loan obligations with shrinking cash flow. Advertising revenue across all Tribune papers was down 15 percent in the first quarter of this year from the comparable period a year earlier, and analysts predict a continued drop through the rest of this year across all U.S. papers.

Few analysts are raising the "default" specter just yet. Bond experts say Tribune looks like it will make it until mid-2009, "but after that is when things get tough," said analyst David Novosel of Chicago's Gimme Credit, an independent bond-research agency.

In just the past few days:

· Zell told staffers at the Chicago Tribune and L.A. Times that they may get pushed out of their office buildings. The "iconic" buildings, as Zell called them in a Wednesday memo to employees, are being "under-utilized," and Tribune is hiring real estate firms to assess their value. "When we started this adventure together . . . I made a point of saying we would challenge traditional thinking, that there would be no sacred cows," Zell wrote.

· Zell told analysts in a call earlier this month that the cash-strapped company will be able to meet its debt obligations for this year, partially because of the pending $650 million sale of its Newsday newspaper to Cablevision Systems. Tribune is on the hook for about $1 billion per year in loan payments. In the call, Zell said he expects bids on Tribune's Chicago Cubs and Wrigley Field in the next few weeks, the sale of which could bring as much as $1 billion.

· Tribune company reporters were surprised to hear during the same call that company Chief Operating Officer Randy Michaels and other brass have been calculating how many pages of news each Tribune reporter produces annually as a way of measuring productivity and value to the company. Investigative and other long-form writers who may produce just a handful of articles per year -- meant to have high impact -- are worried about their jobs.

"You can eliminate a fair number of people while eliminating not very much content," said Michaels, a radio veteran with no prior newspaper experience whom Zell brought in to run the company. "And so all I would say is, if you work hard and you're producing a lot of output for us, everything is great."

Michaels said that reporters at Tribune's Baltimore Sun and Hartford Courant out-produce their colleagues at the L.A. Times by six-to-one.

But three weeks after Michaels said that, the Sun said it would have to cut 100 positions by early August through buyouts and layoffs and implement a light-speed newspaper redesign by then.

And the 243-year-old Courant said it will cut 57 of its 232 newsroom positions and cull 25 percent of the pages from the paper each week.

Tribune officials declined to comment for this article. Calls to the Sun went unreturned.

Unlike in the past, Tribune managers are now asking, "What kind of newspaper can you afford to put out?" said a source close to the company who spoke on the condition of anonymity in order to speak freely.

In many ways, the Tribune board brought this crisis on the company management and employees. The formerly public company was forced onto the auction block by a dissident group of shareholders last year. Directors representing the Chandler family, which built the L.A. Times and was brought into the Tribune fold by a 2000 merger of the two companies, had been unhappy with Tribune's share price, as half of the family fortune was tied up in flat-lined Tribune stock.

The Chandler directors expected that a sale of the company would raise the price of their stock. But they pushed the property onto the market at a bad time, and the only viable buyer to step forward was Zell, a feisty commercial real estate billionaire who crafted the deal to go private under employee ownership.

Result: The Chandlers exited with their $1.6 billion stake, and Tribune was left trying to figure out how to pay off $13 billion in debt with shrinking cash flows.

Tribune has a big loan payment due in June 2009, Novosel said, which it should be able to make -- as long as the company keeps selling assets, something Zell said he didn't plan on doing when he took over Tribune.

Early estimates of the value of the 83-year-old neo-Gothic Tribune Tower and the sprawling Times Mirror Square complex vary, but Novosel doubts either will command the price tag of the Cubs and Wrigley. In comparison, New York real estate experts value the New York Times Co.'s new midtown Manhattan office at more than $1 billion, though it sits in the most expensive U.S. real estate market and it is 50 percent larger than the Tribune Tower.

Selling assets "is a near-term solution, not a long-term solution, but that's okay," Novosel said. "All [Zell] has to do is buy himself more and more time. Presumably, he has a plan in place to drive more cash flow, but it's hard to figure out what he has in mind."

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