Post Reorg Equity: Tribune (TRBAA)

Every few months, I post a recent idea from the Distressed Debt Investors Club. Started a year or so after I launched the blog, the DDIC has grown to be an amazing community of buy and sell side analysts covering everything from distressed, special situation equities, cap structure arbs and outright shorts. For a list of ideas on the site you can go here: DDIC List of Ideas. Because of turnover (members are required to post an idea once every 6 months), we are always looking for talented analysts to join our community. A thorough investment idea is a requirement for admission. For those interested, you can apply here: http://distresseddebtinvestorsclub.com/home/apply/member

Post reorg equities often interest the special sit equity community of funds. And Tribune (TRBAA) is getting a lot of coverage from both distressed desks as well as on the run equity shops. Last week, a member of the DDIC wrote up his thesis on the stock. Enjoy!

Idea: TRBAA
Company Name: Tribune
Type: Post Reorg Equities

Synopsis
Tribune is a media conglomerate with TV stations, newspapers, and valuable interests in Food Network, CareerBuilder and Classified Ventures.

Fortunately, the majority of the value comes from the non-publishing assets (compared to 2007 when 70% of the core operating EBITDA was from publishing) - unfortunately, that's because the publishing business has shrunk rapidly.

I think Tribune is fairly valued here at around $49, although there is upside from:

• operational improvements
• asset sales
• could see some multiple expansion

Write-Up

Company Overview
Tribune is a media conglomerate with TV stations, newspapers, and valuable interests in Food Network, CareerBuilder and Classified Ventures.

Fortunately, the majority of the value comes from the non-publishing assets (compared to 2007 when 70% of the core operating EBITDA was from publishing) - unfortunately, that's because the publishing business has shrunk rapidly.


Catalysts
It’s been widely reported and expected that the company will look to sell newspaper assets (reportedly, Murdoch is interested particularly in the LA Times – acquiring some of Tribune’s newspapers could give him broader geographic reach and better content – although we’ve seen how bad USA Today has been so that may not be a great strategy).  They’re in the process of hiring bankers.

Supposedly Warren Buffet is interested in a few of them as well (particularly the small newspapers in smaller markets with limited TV competition – like Tribune’s paper in Allentown Pennsylvania).

Scripps network interactive (co-owner of Food network, travel channel,  HGTV) is very publicly interested in buying the 31% of Food network that Tribune owns (SNI owns the rest), and they'll likely try to reorganize around their broadcasting assets (which are mostly CW affiliated stations - which have poor ratings - and WGN).

GTCR is reportedly interested in some of Tribune equity stakes in their digital assets.

In the credit facility terms, there are carve-outs for asset sale proceeds from Publishing assets and businesses, real estate, and equity interests:  “in all cases will allow the Borrower to sell or spin-off (i) any Publishing assets or businesses (including Classified Ventures and CareerBuilder) and (ii) any real estate or real estate holding company, in each case subject to customary conditions for financings of this type “

In addition, they reportedly want to sell some of the broadcast assets as well.  TV station multiples have been surprisingly high lately for the past few years (high single digits EBITDA multiples) and the M&A has been pretty active.  LIN TV, Sinclair, EW Scripps, and Providence Equity have all been active.

WGN Radio has also been of interest for Hubbard Broadcasting – but that is a small piece of the business.

Oaktree and Angelo Gordon clearly want to cash out at some point.  Angelo Gordon was involved in the Freedom Communications bankruptcy.  Subsequent to exit, Freedom sold its TV stations and is selling the newspapers.

Unlike some others, I don't give the company value for its other equity investments and real estate.  The company has recently said that their real estate is probably worth the ~$540mm as listed in the Lazard valuation, but also said that it's hard to disentangle that value from the operations.   They have a few other small stakes that are probably worth $50-100mm.   Plus, the re-zoning and other issues for re purposing would be difficult

Capital Structure

$325mm cash
$0 Asset Backed revolver (undrawn, $300mm capacity)
$1.1bn term loan + $344mm in deferred tax payments (resulting from previous sales of the Cubs and Newsday)
101 shares (after some management/employee stock grants);  105.3mm shares (on a fully diluted basis)
Stock currently at $49
$4.95bn market cap
$6.16bn EV

Valuation

At $49, I think it’s fairly valued here:

• 7.25x my 2013 EV/total company consolidated EBITDA of $850mm (normalizing for the political ad spend)
• 7.6x 2013 EV / company defined EBITDA
• 6.3x 2013 EV / EBITDA after backing out Food Network
• 7.75% FCF yield to the equity

Sum of the parts:

• Publishing worth 4.5x 2013 EBITDA of $256mm = $1.152bn
• Broadcast worth 6.25x 2013 EBITDA of $420mm = $2.625bn
• Food Network worth 11x 2013 EBITDA of $536mm x 31.3% stake = $1.846bn
• Careerbuilder worth 8x 2013 EBITDA of $190mmx 23% stake = $467mm
• Classified Ventures worth 10x 2013 EBITDA of $98.6mm x 28% stake = $276mm
• Corporate overhead 6x  2013 -$40mm of EBITDA contribution = $240mm

= $6.127bn of value,  which gets you to about $49 / share

Using 5x on newspapers (inline with NYT), 7x for broadcast, and 12x for Foodnetwork, I get to $55.  That would be 7% FCF yield, and 7x the core Tribune EBITDA after backing out Foodnetwork.   So not unreasonable if you want to give them some higher multiples

If you want to give value to the real estate, that’s another $540mm in value/share, gets you to $60.3 / share

If you don’t include the pension (or deferred taxes), you’ve got another ~$4.8 in value so you can get to $65 / share

Tax Concern: Tax Leakage
But if they start selling everything, they’d better get some significantly higher valuations because there is no tax shield, no NOLs, and the tax basis for everything is fairly low (this happened because as a S-corp, the company doesn’t hold onto the NOL assets, the shareholders do supposedly).

So they’d have to get bids that are 25-30% higher in order to get incremental value from the sum-of-the-parts value I show above,  which is potentially doable for the Broadcast assets (given the recent M&A transaction comps there),  Careerbuilder, and Classified Ventures.  But probably tougher for the Publishing assets.

Or they could spin off the newsprint assets to help revalue the core broadcasting business higher.  I believe they should be allowed to do a tax free spin of the newsprint assets.


Taking a Step Back: Tribune History 
Tribune was bought out by Sam Zell in the ill fated LBO that was doomed from the start.  The company was pretty much insolvent from day 1 (fairly clear even without the benefit of hindsight).   Hence part of the distribution includes a litigation trust that will go after former Directors, the banks that put together the debt deals, and fraudulent convyance claims.

The company went through a lengthy 4 year bankruptcy (it took so long because of a hard nosed fight put up by Aurelius who fought for the bond classes and did quite well for themselves; and they made a big stink about fraudulent conveyance and litigating the architects of this LBO deal), and through that time the newspaper segment continued to shrink quickly, while publishing held up.  And its major equity investments did well overall.

But the core business, and the industry fundamentals, were not transformed much during the bankruptcy – if anything Tribune wasn’t run very well (certianly not very offensively) aside from cost cutting.  So there’s room for operational improvements, especially in the broadcast assets.

New Management
The new CEO is reportedly going to be Peter Liguori (formerly a top executive at Fox and Discovery – where he helped launch that Oprah Winfrey network) – he’s already on the board.  He helped build FX’s current presence.  He’s also an advisor to Carlyle at the moment.  So it shows that they’re more focused on the broadcasting side, as they should be.  There’s plenty of room for improvement at WGN and their TV station assets.

Reportedly, the plan from Oaktree is to liquidate as much as they can.   “They have a plan, I'm told. ”They’re going to liquidate as much as they can,” said this senior [Oaktree] insider.”

In particular, they want to sell the LA Times (which is the largest contributor to the newspaper division), reportedly for 4x

The new leadership will want several months to figure out what to sell and what to keep.

Tribune's Businesses - Broadcast, Publishing, Food Network, Careerbuilder, Classified Ventures, other

Broadcast Segment 
Tribune's broadcast segment is mostly TV stations tied to CW and Fox (which is bad considering how poor the ratings are for those 2 – way below NBC & CBS).   Although this new Arrow show supposedly has some signs of life - they have a long way to go.  But at least the stations are generally in great markets.

Tribune has been negligent in pushing for more retransmission fees.  In 2012, they started pushing for it a bit with DTV and CVC,  but there's a lot of room to go.

WGN America is distributed to over 76mm US homes.  It is the 35th highest rated cable channel (similar to ESPN2, BET and E1 Network).  WGN gets subscriber revenue and advertising revenue, and they have yet to push retransmissions fees as much as other cable channels have.   They have some locally produced programming (news) and broadcast Chicago's NBA, NHL, and MLB games (Cubs and White sox), but not NFL - subject to some limitations.   Aside from that, they usually re-run old TV shows.

Most investors believe that WGN America (the national feed) is worth more than regular TV stations,  but less than the top cable / content companies.  WGN mostly broadcasts reruns like Futurama, How I met your Mother, 30 Rock, Scrubs, and old movies etc.  And WGN-TV (local) produces a lot of news of course. 

There's definitely room for improvement in their TV stations and WGN.  So that could be potential upside, but for now they should definitley not trade richer than better positioned TV & cable companies.   Maybe they’ll try to get some more original content on it, which would be a plus
Basically, the company's CW stations are worse than average (poor ratings), but WGN is better than average,  so it averages out in my mind.  There is probably longer term upside, but not immediately.
Some have compared it to AMC, SNI, Discovery, and TBS,  but those all have significantly higher ratings than WGN.  In TBS' case, their ratings are surprising given that they (like WGN) don't have much original content - it's probably because they show Big Bang Theory so much followed by Conan.  And their ads are better.

Like most TV stations, Tribune broadcasting as fared reasonably well as advertisers still find TV an efffective and necesary advertising medium.  Advertising dollars to TV had actually grown (the only other mediums that have grows advertising share is outdoor and online/digital).

On the negative side, generally, Tribune broadcast doesn't have benefit much from political advertising (it's only 2-3% of revenues in on-cycle years).   This negative is due to Tribune's having more CW and FOX affiliates (most political advertising goes to ABC, CBS, and NBC) and its stations aren't in battleground states.    Tribune broadcasting makes about $30-55mm in political advertising in even numbered years.

In comparison, Gannet has experienced 27% revenue growth in 2012 (mostly due to Olympics and Political), in addition to 44% growth in EBITDA. 

2012 was an abnormally good year for Broadcasting with a 1 time copyright benefit and a political boost.  I think EBITDA comes back down to $370mm in 2013 (down from $425mm in 2012), which may prove to be a little optimistic.   I forecast costs to stay steady (except a slight bump in programming costs) and core revenues to stay about flat in 2013.

At a 6.25x EBITDA multiple (inline with other publicly traded stations like Sinclair, AHC, Gannet, etc.), I think this division is worth $2.425bn

Publishing (i.e. newspapers)
Generally Tribune's newspapers have outperformed other publicly traded newspapers over the last year.   And it looks on track to outperform the disclosure statement projections by quite a bit next year.

LTM 9/30/2012 revenues have only been down 1% YoY and EBITDA is actually up from $265mm in 2011 to $299mm.  Meanwhile Gannet's newspaper 2012 revenues were down 5.3% and EBITDA is down about 20% YoY.   For T ribune, advertising was down a lot as expected, but Tribune's commercial printing services (utilizing unused capacity) continued to do well (in October 2011, Tribune began printing and distributing the Chicago Sun-Times).  Also, selective price increases helped offset advertising revenue declines (both arguably will be more of a 1 time benefit).
 
The use of paywalls in the newspaper industry is starting to gain traction and has been going on mostly in the last year or 2, but I suspect it will provide a 1 time benefit and they will find their pricing power fairly weak on further price hikes.  Besides, it's the ad spending that has been the tougher headwind, which doesn't seem to be abating.

McCalthy's 2012 revenues are down about 5.1% and EBITDA is down about 12%
I project Publishing EBITDA to go to $256mm in 2013 down from $312mm in 2012 due mostly to continued declines in ROP advertising (down 9.5%), with everything else (costs and revenues) staying on the same trends as they have for the last few years.

Putting a 4.5x EBITDA multiple (higher than the 3-4x I'd normally use because there appears to be a sale process going on and there's interest), on $256mm of 2013 EBITDA, I get $1.52bn of value

Plus the company has done a very good job reducing publishing expenses as well in all areas: compensation, newsprint & ink, and other various items.

Equity Investments (Food Network, Careerbuilder, Classified Ventures)

Food Network + Cooking Channel

We all know what Food Network is.  It's been very successful and currently gets $0.19 affiliate fee / sub - so it has some upside there.   Scripps has been very public for the last few years about wanting to buy Tribune's stake and own all of Food Network. Food Network's demographics (middle aged women) are highly sought after by advertisers.  Food Network's ratings have been a little weak recently - causing some weakness in SNI stock -  but according to management that was partly due to the election, calendar, timing of sports, etc.  They saw something similar in the 2010 political year.
On 1/8/2013, SNI reiterated their belief that the ratings weakness is not structural and something similar happened in late 2010 (when women watched more sports), and more people watching “the Voice”.   Food network has 99.1mm subscribers

Food Network is likely to do $850mm of revenues and $504mm of EBITDA in 2012 (assuming a 59% EBITDA margin) - which is approximately where consensus is at.  SNI reports revenues for each of their cable networks, but doesn't break down segment EBITDA or EBIT.  Cooking Channel should do about $84mm of revenues and $23.9mm of EBITDA (much lower margins of 28.5% as it is a newer network).

When Scripps bought a 65% controlling interest in Travel Channel in 11/2009, they paid $975mm or 10-12x Travel Channel 2010 EBITDA (without synergies) or about 10x with synergies (they didn't provide the financials at the time of the transaction so this is an educated guess).  At the time, SNI traded at around 9.5-10x forward EBITDA.   It was also implied a value of about $10 / sub for Travel Channel - which was slightly cheap/in-line at the time. But also, at the time Travel Channel had a lot more upside from increasing affiliate fee growth as it was only getting 6 cents / sub. 

Scripps has said that they'd only buy the rest of the Food Network stake if it's accretive (it seems on both an EPS and EV/EBITDA basis),  hence implying that they wouldn't want to pay more than their current multiple of around 10x EBITDA (of course depending on how they want to finance it).  Sell siders I’ve spoken to expect SNI to want to bid at 10x EBITDA, while they expect Tribune to look for 12x.

The best comparables are AMC, Scripps, and Discovery.  Hence I think a takeout at 11x 2012 EBITDA is fairly reasonable - but probably not more (given how much they paid for Travel channel and Food being arguably more mature) - hence valuing Food Network + Cooking Channel at $5.8bn total (11x 2013 EBITDA of $536.2mm),  or $1.82bn for Tribune's stake.   Could be tough to see them bidding much higher. Food Network is currently under going a bit of a ratings slump, which management attributes to election issues and timing.  This could potentially lower the valuation, but it seems that the longer-term story for Food Network is still quite positive. Tribune's tax basis is likely very low - estimated to be $133.7mm + $52.8mm (from the Cooking Channel contribution)

Assuming a sale and tax leakage,  you could get to $1.47bn of net proceeds.

As a side note, the Travel Channel Cox / Scripps deal was structured similar to Tribune's Newsday and Cubs deals.  From Scripps 11/5/2009 press release: "As proposed, the transaction is structured as a leveraged joint venture between Scripps Networks Interactive and Cox Communications. Cox will contribute the Travel Channel, valued at $975 million, and Scripps Networks Interactive will contribute$181 million in cash to a newly created partnership. The partnership, in turn, will take on $878 million in third-party debt that will be guaranteed by Scripps and indemnified by Cox, with the proceeds to be distributed to Cox."

Careerbuilder Details
CareerBuilder is the No. 1 employment web site in the U.S. with rapidly expanding international operations.   It's a bit hard to get any concrete numbers about Careerbuilder, and GCI is generally pretty tightlipped about it.   Tribune ownes 32% of Careerbuilder, with Gannett owning 53% and McClathy owning 15%.

Gannet has noted that Careerbuilder is approximately 82% of their digital segment revenues.  And generally Careerbuilder drives that segment's financial results.  So the digital segment at GCI is a good proxy, which generated approximately 23% EBITDA margins. 

GCI expects Careerbuilder to continue growing revenues in the low teens area, with fairly steady margins (as they continue to grow the business) over the next few years.  Of course Monster Worldwide (MWW) is the most similar business,  but they've been underperforming by a lot. With revenues down low teens for most of 2012, and EBITDA down 23%.  Hence why it's trading at 5x EBITDA, and exploring strategic alternatives. Careerbuilder on the other hand has been doing very well and taking share.  It should probably trade more similar to Dice and other employment firms that are doing well - i.e. more like 7-9x forward EBITDA.  At about $169mm of EBITDA for 2012 at 8x EBITDA, it's worth $1.35bn. McCalthy owns 15% of it and carries it at an implied $1.51bn valuation

If Careerbuilder grows revenues another 12% in 2012 and keeps margins about the same (which management seems to think is the case), then at 8x Careerbuilder is worth $1.5bn.  There is no debt at Careerbuilder.


Classified Ventures
Tribune owns 28% of Classified Ventures LLC, a company that offers classified websites such as the auto website Cars.com and the rental website Apartments.com.   It was started in 1997 and sells ads through 150 newspapers.  Cars.com is the largest source of revenues for it.   They compete with AutoTrader, which has done better than Cars.com (25% of AutoTrader is owned by Providence Equity Partners)


MNI owns 26%, GCI owns 24%, Washington Post owns 16%, and AH Belo owns 6%.

I forecast approximately $98mm of EBITDA for 2013.  Using an 10x EBITDA multiple (higher than classified ventures given how it's been able to grow through the recession), it's worth $986mm,  and so Tribune's 28% stake is worth $276mm.

Classified Ventures earnings have been growing rapidly at 28% in 2010 and 27.6% in 2011 (adjusting for goodwill impairment).

McClatchy books Classified Ventures at a lower $321mm total valuation (not sure why they're so low to be honest - but I think it's partly because of some impairments that other internet properties that Classfied Ventures owns).   Lazard came up with $697-$830mm 2 years ago for the total value.  

Classified Ventures has received interest from private equity firms in the past few years.  But the crowded ownership makes it hard for anything to get done there.  The owners just seem content to take dividends from it.  There is no debt at Classified Ventures.

Further Tax Detail
Tribune has guided people to a 41% tax rate (they will exit with little tax benefits,  in fact they have tax liabilities from the sale of the Cubs and the Newsday newspaper ($153mm and $211mm respectively) to be paid out $27mm a year through 2017 and the rest in 2018). 

Because Tribune was an S-Corp before it filed, the income and losses were passed through to shareholders, so the NOLs were not the property of the company.  The S-Corp & ESOP structure created by Zell during the bankruptcy was pretty ingenious and would have been a great tax dodge / shelter if it actually worked.  S corps are limited to 100 shareholders, so he had the ESOP own the thing (which can be counted as a single shareholder)

The 95% Cubs stake was sold at $845mm in October 2009 (they retain a 5% stake).  It was sold in a leveraged partnership.  I've seen some old research reports estimate that the Cub's tax base is $50-100mm.   The tax liability is $211mm,  implying a 28% tax rate on the gain.  After present valuing the future tax payments, it's an effective 22% tax rate

Newsday was sold in July 2008 to Cablevision for $650mm (Rupert Murdoch and Zuckerman bid $580mm as well) - and it's pretty public that Murdoch wants to bid for other Tribune newspapers.  The $164mm tax liability is a 27% tax on the gain; after present valuing the payments it's an effective 21% tax rate.   Supposedly, at the time Newsday was losing money,  but others thought they could turn it around.

Given their inability to avoid taxes in these sales and the low tax bases in all their holdings, I think there will be plenty of tax leakage in other asset sales - perhaps on the order of 21-22% which is similar to what their previous sales were,  potentially 3-5% higher given recent tax law changes. 

The PV of the future tax payments (from Newsday and the Cubs) is about $344mm - which I add to the debt balance.  However, I don't add all the guaranteed debt of Tribune's various partnerships given that it seems pretty unlikely that they'll have to pony up (for that to happen, CVC and Newsday would have to file, or the Cubs would have to file and lenders would have to lose money).

Tax guru, Robert Willens, believes that a tax free spin-off of Tribune's newspaper assets is achievable, which would be a positive of course - although there would be some disynergies.  He also notes that the tax deferrals from the Newsday and Cubs sales could be changed. 
More tax details below.

Technicals

• The stock trades OTC right now
• The stock won't be listed in the near term, but will be listed within a year (the company must register within a year).  I believe that the large holders are not eager to list the stock.  Usually post-reorg names experience some forced selling when they list on an exchange as some funds are not allowed to hold bankrupt names when they exit or when they list.
• Share Details
• Tribune distributed ~100mm shares
• 79.2 Class A shares
• 4.3mm Class B shares
• 16.6mm warrants with a $0.001 strike price and a 20yr maturity (so basically the same as stock).  
• 22% is owned by Oaktree Capital, 9% by Angelo Gordon, and 9% by JPM < given the ownership concentration, can be pretty confidant someone is working in your favor.  Oaktree will appoint 2 members to the board, Angelo Gordon 1, JPM 1, and Plan proponents 2.  The CEO will appoint the 7th and final member of the board.

The different classes were used to satisfy FCC regulations around asset ownership limitations (in particular ownership concentrations and foreign ownership restrictions).