Tribune board’s difficult choice

An offer for Tribune Co. by two Los Angeles billionaires would not require significant cuts at the company’s newspapers, contrary to initial criticism of the debt-heavy proposal, people close to the transaction said Thursday.

The bid by Eli Broad and Ron Burkle was one of two competing bids that emerged Wednesday for the Chicago-based company, just hours before a bidding deadline. The second offer came from the Chandler family, which controlled The Times for more than a century before selling its parent firm, Times Mirror Co., to Tribune in 2000.

Neither of the bids values the company at more than the stock market currently does.

But in an atmosphere of declining numbers of newspaper readers and broadcast-TV viewers -- and the resulting reductions in advertising sales -- the offers represented at least a modest improvement over the status quo.

Wall Street, perhaps anticipating sweetened offers, responded Thursday with a mild rally in Tribune stock, which closed at $30.90, up 56 cents.

Tribune’s board of directors is expected to meet Saturday at the company’s Chicago headquarters to consider the bids. The board could reject both and choose another path. Among the options is a third offer submitted this week by an unidentified private equity company for Tribune’s broadcast assets alone.

At the heart of the board’s quandary is the lackluster response to the auction, which was set in motion last summer when the Chandler family, now Tribune’s largest shareholder, went public with criticism of Chairman and Chief Executive Dennis J. FitzSimons and his management team.

“They are in a real box trying to figure this out,” said one Chicago businessman, who knows many of the board members. “None of the directors are having a good time. And Dennis is not having a good time.”

But Broad and Burkle flew to Chicago on Tuesday to pitch their deal and assure FitzSimons and his team that they would be retained and that the headquarters would remain in Chicago. Broad and Burkle also reached out to former Times Editor Dean Baquet, although they stopped short of offering a job, people familiar with the discussions said. Baquet resigned in November after refusing to make mandated personnel cuts.

The buyout proposal by Broad and Burkle would keep intact the company’s portfolio of newspapers, broadcasting properties, Internet services and the Chicago Cubs baseball team but would sharply increase Tribune’s debt load.

The Chandler bid would liquidate the company by spinning off the broadcast unit and selling the newspapers.

Tribune’s board could also propose its own plan to increase value for shareholders.

Broad and Burkle intend to join Tribune as unpaid non-executive co-chairmen, roles that would give them a strong voice in company strategy. Although they lack experience in media, they are selling themselves to Tribune’s board as highly successful entrepreneurs -- Broad in home building and insurance and Burkle in supermarkets.

Burkle also has close relationships with Yahoo Inc. (on whose board he sits), Google Inc. and Microsoft Corp. -- companies that have emerged as rivals to, and potential partners with, traditional media outlets.

Another person familiar with the Broad and Burkle proposal said it presented big risks.

“It’s possible they grow business particularly on the Internet. But if newspapers continue to fall off in revenue or the television doesn’t get any traction, then you can get into trouble,” said this person, who asked not to be named because the plan was confidential. “There are twice as many downside scenarios as upside scenarios here.”

The Broad and Burkle proposal would pay existing shareholders an immediate cash dividend of $27 a share -- close to the per-share value that some analysts place on the company’s stock. Shareholders, however, would retain their shares in the company after the dividend was paid. The shares would then be worth about $7 apiece, Broad and Burkle told Tribune advisors in a letter reviewed by The Times. Within four years, those shares could be worth close to $12, according to the letter.

Broad and Burkle would finance the payout with $500 million of their own money and with borrowings that would raise Tribune’s long-term debt to $10.7 billion from their current level of about $3.5 billion.

Wall Street analysts critical of the offer focused Thursday on its high leverage, doubting Tribune’s ability to keep up with debt service in a difficult industry climate.

Others expressed skepticism at the billionaires’ assurance that they could avoid layoffs or other cutbacks at The Times and other operating units, despite a highly leveraged balance sheet.

“My own concern is still whether resources are going to be put into the paper,” said George Kieffer, a politically active Los Angeles attorney. That much debt, Kieffer said, could “necessitate the same kinds of financial constraints on the paper” that raised concerns about Tribune’s management of The Times last year.

But people familiar with the offer said Broad and Burkle believed that the company would generate ample cash flow to cover interest payments. The bidders do not “see a need for any other sharp cuts” in payroll or other expenses, one of these people said, adding that even with the higher debt the company would not face pressure for immediate divestitures. This person pointed out that some private equity firms that had considered bidding on Tribune envisioned even greater debt.

Under the proposal, Broad Investment Co. and Burkle’s Yucaipa Cos. would control six of 16 seats on a reconfigured Tribune board. Upon shareholder approval, the pair would own 34% of the company. They would also obtain warrants that could later let them gain a majority stake.

One Tribune investor said the $27 dividend made the bid attractive, noting that it reduces investors’ risk while allowing them to participate in any turnaround Broad and Burkle might be able to effect in the business. “We like that proposal a lot,” he said.

While Broad and Burkle plan to keep Tribune intact, the Chandlers propose a liquidation.

Under their offer, the Chandlers would pay shareholders $19.30 a share in cash for the newspaper assets, which the family would then dispose of in private transactions. Tribune’s other properties, including its broadcast group, would be spun off to the non-Chandler shareholders. The Chandlers valued the broadcast group at $12.40 a share, making the offer worth $31.70 a share, or a 4.5% premium to Wednesday’s closing price, the family said in a filing Thursday with the Securities and Exchange Commission. The offer values Tribune at $7.6 billion, compared with a $8.16-billion valuation by Broad and Burkle.

Under their plan, the Chandlers would end up owning 51% of the newspaper division, and their partners, two unnamed investors, would own the rest. The proposal creates a mechanism for the famously tax-averse family to dispose of the newspaper properties tax-free, eliminating one of the obstructions to earlier deals. Once they secured ownership of the papers, they would use a complicated method to spin them off one by one or in clusters into new corporate entities.

Such a mechanism could allow an acquisition of The Times by music mogul David Geffen, who previously made a $2-billion offer to Tribune for the newspaper. Geffen has indicated to associates that he would be amenable to buying The Times under such an arrangement.

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thomas.mulligan@latimes.com

michael.hiltzik@latimes.com

james.rainey@latimes.com

Times staff writer Christopher Reynolds contributed to this report.