Tribune newspapers worth $635 million, analyst says

With Tribune Publishing set to spin off from Tribune Co. on Aug. 4, analysts have begun weighing in as to what the stand-alone, publicly traded newspaper company may be worth.

In a report issued Thursday by CRT Capital Group, analyst Lance Vitanza pegged Tribune Publishing’s equity value at about $635 million, or less than 10% of Tribune Co.’s total valuation.

Despite “secular head winds” that have cut newspaper industry revenues in half since 2005, Vitanza sees potential upside for Tribune Publishing as its brings the Los Angeles Times, Chicago Tribune, Baltimore Sun and five other daily newspapers under one corporate umbrella, accelerating the transition from print to digital platforms.

“We believe the company is well-positioned, with strong brands in attractive markets, an exciting digital strategy and significant cost-cutting opportunities,” Vitanza said in the report.

Tribune Publishing plans to issue 25.4 million shares of common stock under the symbol TPUB. The stock is expected to start regular trading on the New York Stock Exchange on Aug. 5. Advance “when issued” trading has begun at CRT Capital, a Connecticut-based financial services firm.

Vitanza projected that TPUB could ultimately trade in the range of $22 to $28 per share, and placed an equity value of $553 million to $725 million on the company. Vitanza’s estimated $635 million valuation translates to $25 a share.

Tribune Publishing conducted a presentation for analysts Wednesday, according to sources. CRT published Vitanza’s report on the company the next day, among the first reports expected. A Tribune Publishing spokesman declined to comment.

Tribune Co. stakeholders as of July 28 will receive a tax-free distribution of shares in the new company, getting one-fourth of a share of TPUB for every share of Tribune Co. stock owned. Chicago-based Tribune Co. will continue to hold 1.5% of the outstanding shares of Tribune Publishing stock after the spinoff.

The new company will carry at least $350 million of debt, $275 million of which will be used to fund a cash dividend paid to Tribune Co. immediately before the spinoff.

While some experts have expressed concerns about Tribune Publishing’s debt burden, Vitanza called it a “conservative balance sheet” and projected a levered free cash flow of $63 million in 2014.

The newspaper company will begin operations “with a flexible balance sheet — a manageable amount of funded debt, plenty of cash and a sizable undrawn revolver,” the report said.

About 25% to 30% of Tribune Publishing’s projected cash flow will go to pay shareholders quarterly cash dividends at an annual rate of 70 cents per share, according to the report.

Through March, Tribune Publishing had 12-month operating revenues of $1.8 billion, with earnings before interest, taxes, depreciation and amortization, or EBITDA, of $230 million, according to financial statements.

Vitanza valued Tribune Publishing at five to six times an adjusted 2014 EBITDA of $172 million, which was lowered by added rent the publishing company will pay to Tribune Co. after the spinoff, as well as projected advertising declines of $66 million.

The report projects operating expenses to cut by $65 million this year, in part through “reduced compensation costs.” Tribune Publishing has reduced annual operating costs by $250 million since 2011, offsetting revenue declines, according to the report.

Tribune Co., which is being renamed Tribune Media, is retaining its higher-growth broadcasting and entertainment assets, as well as real estate holdings and equity investments. Privately held Tribune Co., which trades over the counter with the symbol TRBAA, closed at $87 per share Friday, giving the consolidated company a market cap of about $8.35 billion.

Joe Cornell, principal of Chicago-based Spin-Off Advisors LLC, thinks the parent Tribune Co. will be worth about the same after spinning off Tribune Publishing, with a higher multiple assigned to the broadcast earnings than the consolidated company.

Cornell also said the market may be undervaluing Tribune Publishing, and he placed a six-month target of $44.75 on TPUB, for an equity value of $1.14 billion.

“Either they’re discounting the value of the publishing side or they’re underestimating what’s left over with the parent,” Cornell said. “The spinoff should make it easier for the market to appreciate what the assets are worth.”