When Chicago's Tribune Co. announced last month that it had agreed to pay the highest price ever for a single television station -- $510 million for KTLA-TV in Los Angeles -- it underscored the company's desire to expand aggressively into the unpredictable world of independent television.
Ironically, the company said it was willing to pay that price for a station that sold for $245 million in 1983 to be sure it won the bidding contest for the station because it wants to save money in the future.
Tribune Co. believes that adding the lucrative Los Angeles market to its chain of independents in New York, Chicago, Denver, Atlanta and New Orleans will increase its bargaining power so much that it can significantly reduce the cost of buying programming for its stations.
The company also is betting that it will be able to save money by producing successful programming that can be broadcast on its stations and sold to other independents around the country.
"I look at the Los Angeles transaction as Tribune's final critical step in making their independent network a national entity," said Dick Martin, an analyst with Woolcott Research. "Since programming is costly, the more you can spread the cost of producing programming over a greater number of owned independent stations, the more economic sense it makes. Beyond their own programming efforts, adding Los Angeles substantially strengthens their hand in buying outside programming."
Tribune Co.'s most successful programming purchase thus far has been the $20.5 million purchase of the Chicago Cubs baseball team in the fall of 1981. The Cubs have turned out to be a profitable and dependable source of programming, and advertising revenue, for the company's Chicago-based WGN-TV Superstation and its WGN radio station.
The Tribune Co. also has successfully produced and distributed the "At the Movies" film review, the Independent Network News and the "U.S. Farm Report" to more than 100 stations.
By purchasing KTLA, the Tribune Co. will gain access to additional programming facilities. KTLA's 10.5-acre complex in Hollywood, on the site of the original Paramount Studios, includes 10 buildings with broadcast facilities and eight sound stages. The Tribune Co.'s ambitious ongoing television production ventures include an attempt to produce two hours of daily programming for independents and a weekly prime-time drama, so the additional facilities will come in handy.
Tribune Co.'s television operations are not restricted to independent station broadcasting and production. The company's growing cable television division, with 15 systems in 10 states, includes Montgomery County and Alexandria Cablevision.
Wall Street analysts say that, despite the major investment in television, the Tribune Co.'s newspaper division, which accounted for more than 60 percent of the company's revenue last year, will determine whether the company is successful in the next few years.
Despite aggressive marketing by Rupert Murdoch's Chicago Sun-Times, the Tribune Co.'s flagship Chicago Tribune newspaper still takes in two-thirds of all newspaper advertisements in the Windy City. And analysts say that competition is likely to decrease in the Chicago market when Murdoch sells the Sun-Times within the next two years to meet Federal Communications Commission restrictions on ownership of media properties.
Murdoch, who recently agreed to acquire six independent television stations from Metromedia Inc. for about $2 billion, will be forced to divest The Chicago Sun-Times and The New York Post newspapers to comply with an FCC prohibition against ownership of a daily newspaper and television station in the same city.
The Tribune Co. is allowed to own television stations and newspapers in Chicago and New York because of a special "grandfather" provision. But Tribune Co. will be forced to sell The Los Angeles Daily News newspaper when it completes the purchase of KTLA.
Because of the FCC rules, Murdoch no longer will be a Tribune Co. newspaper competitor in a few years, but Tribune Co.'s independent stations in New York and Chicago will battle television stations Murdoch is buying from Metromedia.
Tribune Co. said it is winning the newspaper battle with Murdoch in New York, where the company's New York Daily News has been up against the Australian's New York Post. But Murdoch's aggressive marketing of the unprofitable New York Post has forced Tribune Co. to spend heavily to promote The Daily News, which was only marginally profitable last year.
The Tribune Co. is likely to benefit slightly from decreased competition for advertising dollars and a decreased need to offer special promotions when Murdoch either sells or closes The Post in about two years, analysts said.
The Daily News, which boasted circulation of nearly 2 million a decade ago, now sells about 1.4 million newspapers daily. When many young professionals left New York City in the 1970s to live in the suburbs, The Daily News lost readers. The Daily News recently moved its printing operations to several locations outside Manhattan, which will enable late editions of the newspaper with final sports scores to be distributed in suburban areas such as New York's Westchester County.
But the competitive New York market is not likely to yield significant newspaper profits for Tribune Co., especially because The Daily News also finds itself competing with Newsday, the Long Island newspaper that has launched a circulation drive in New York City, and several newer suburban newspapers.
"Our circulation has been trending up since last summer, and I think it is steady as she goes now," said Daily News Chairman and Publisher James Hoge. "We have gone from 32 to 34 percent of the newspaper advertising market. " . . . We have had to concentrate on moving the presses outside Manhattan and now we have to concentrate on improving the quality of the work that comes out of them. I think within a few years this will be a good contributor" to Tribune Co.
Tribune Co.'s most financially attractive newspaper properties are in Florida, where the company publishes the Fort Lauderdale News & Sun-Sentinel and The Orlando Sentinel. "The contributions those newspapers make to the profits of this company are way underestimated," according to one Tribune Co. official, who declined to say just how profitable they are.
Despite the attention focused on the company as a result of the KTLA acquisition, which will give Tribune Co. access to 18.6 percent of the nation's television households, top corporate executives declined to be interviewed for this story. A company spokesman said the top executives did not want to risk saying anything that might jeopardize FCC approval of the KTLA purchase.
One Tribune source explained the reluctance to discuss the acquisition in detail by saying "we're a real close-to-the-vest group here."
That "close-to-the-vest group" is headed by Tribune Co. President Stanton R. Cook and Executive Vice President John W. Madigan. Insiders say that Madigan, who joined Tribune Co. after serving as the company's investment banker while at Salomon Brothers, has assumed additional control over the company's operations recently, and is seem as the most likely successor to Cook.
Tribune Co. had revenue of $1.8 billion and net income of $103 million ($2.55 a share) in 1984 versus revenue of $1.6 billion and net income of $69.3 million ($1.89) in 1983. The company has said the acquisition of KTLA will result in "some dilution in earnings."
The KTLA deal will further depress Tribune Co.'s return on equity, which is one of the standard measures used to assess financial performance. Tribune Co.'s return on equity, which is the company's earnings divided by the amount of stock it has outstanding, is below the average of other major media companies, according to newspaper analyst John Morton.
On Friday, Standard & Poors Corp. commented on the KTLA deal by lowering Tribune Co.'s commercial paper rating to A1 from A1 Plus. S&P said:
"The planned acquisition of television station KTLA in Los Angeles for $510 million will cause debt leverage to rise to the mid-40-percent range when it is consummated compared to a conservative 23 percent at Dec. 31, 1984. Over the longer term, KTLA has the potential to enhance Tribune's independent TV system, which will reach nearly 20 percent of U.S. households.
" . . . However, the increased leverage combined with the continuing weak performance of the company's New York Daily News and newsprint production operations reflect reduced credit quality."