Next test for Tribune: debt load

Thanks to a regulatory nod from Washington on Friday, Tribune Co. soon should complete its transformation from a public company into one owned by employees and run by a billionaire investor with no newspaper experience but a maverick’s knack for exploiting overlooked opportunities.

The $8.2-billion buyout led by Chicago financier Sam Zell is expected to be completed as soon as two weeks from now. When the deal closes, Tribune will take on $4.2 billion in fresh loans from skittish bankers -- bringing its total debt to about $13 billion -- and Zell will take over as chairman.

The Chicago-based company, which owns the Los Angeles Times, the Chicago Tribune, KTLA-TV Channel 5, the Chicago Cubs baseball team and a coast-to-coast collection of newspapers and TV stations, has endured a severe advertising downturn and profound changes in the media landscape. Now, the privatization deal Tribune is undertaking requires a level of borrowing that will make it one of the most debt-challenged companies in the industry’s history.

Zell, 66, has offered few specifics on his plans. He has said he would pare down debt by selling the Cubs -- a luckless but popular team that could fetch as much as $1 billion -- but otherwise would keep the business largely intact. Some observers are expecting a shake-up of top management, but Zell has been silent on that as well.

Moody’s Investors Service on Thursday downgraded Tribune’s bonds a notch deeper into “junk” territory, saying the company’s ratio of cash flow to debt service will range from 1.0 to 1.2 through 2009. In other words, given the persistent decline of advertising revenue, Tribune over the next two years may have barely enough money to make its interest payments. The credit rating firm said it would drop the company another level when the deal closes to reflect the new loans.

“Tribune’s ability to service debt is clearly going to be a close call going forward,” independent newspaper analyst John Morton said Friday, adding, “I believe they can do it.”

As expected, the Federal Communications Commission formally approved the deal Friday, voting 3 to 2 -- Republicans over Democrats -- to give Tribune waivers of at least two years from rules prohibiting a company from owning a newspaper and a broadcast station in the same market. Tribune owns newspapers and TV stations in Los Angeles, New York, Chicago, South Florida and Hartford, Conn.

FCC Chairman Kevin J. Martin has proposed easing the so-called cross-ownership ban in the nation’s top 20 markets, which would cover Tribune in all but Hartford. But a vote won’t be taken until Dec. 18 at the earliest, and Tribune executives said they needed 20 business days to close the deal.

“We appreciate today’s action by the FCC, which allows our transaction to move forward,” Dennis J. FitzSimons, Tribune’s chairman and chief executive, said in a statement released after the vote. “We look forward to implementing the new ownership structure that will enable us to focus all of our energy and resources on Tribune’s future.”

Tribune shares closed Friday at $31.04, up 5 cents. The stock has gained 15% since news broke Wednesday of Martin’s plan to grant the waivers. It was the first time the stock had closed above $31 since early June, within a week of when the Chandler clan, who sold Times Mirror Co. to Tribune in 2000, got rid of the last 20 million or so of its shares at $31.19 apiece.

The FCC was regarded as the No. 1 obstacle to closing, but the requirement that Tribune obtain a “solvency opinion” from its bankers has become less of a slam-dunk in recent months as ad revenue and profit margins have weakened. Still, analysts expect the company to clear the cash-flow-to-debt and other financial tests spelled out in its loan agreements.

The process that set Tribune on this risky path began 18 months ago, when California’s Chandler family, which had been associated with The Times for 120 years, went public with gripes about the lackluster stock performance. The Chandlers, who owned about 20% of Tribune after the merger, criticized management and agitated for a sale or breakup.

The Chandlers’ complaints were hardly unique. Only months earlier, shareholder pressure had led venerable Knight Ridder Inc. to sell out to McClatchy Co. in a $6.5-billion deal that resulted in the breakup of what was the No. 2 newspaper chain after Gannett Co. This year, Dow Jones & Co., parent of the Wall Street Journal, sold itself to Rupert Murdoch’s News Co. after difficult bargaining that exposed divisions within Dow Jones’ controlling Bancroft family.

New York Times Co. and Washington Post Co., two of the big remaining family-controlled newspaper publishers, are determined to stay independent but struggle with the same issues as Tribune: long-term declines in circulation and the rise of the Internet as a powerful competitor for both advertising dollars and the attention of readers.

The Chandlers triggered a drawn-out auction process that ended with Tribune’s agreement in April to accept the Zell offer, a complex deal under which ownership will shift to an employee stock ownership plan, or ESOP.

Although the auction attracted some tire-kicking, there were no firm offers from groups that initially were seen as the most likely bidders -- other media companies and cash-flush private-equity firms. Such California boldface names as David Geffen, Eli Broad and Ron Burkle expressed interest in owning The Times but either did not enter formal bids or were passed over in favor of Zell.

Under federal laws intended to encourage employee ownership, the ESOP structure will leave Tribune essentially exempt from federal income taxes. That’s fortunate, experts said, because otherwise the company probably would be unable to cover its interest payments.

“We see lower cash flow ahead, not greater, which makes coverage [of interest payments] extremely thin,” said Dave Novosel, a bond analyst with Gimme Credit Research in Chicago.

Tribune’s cash flow shrank to $1.32 billion last year from $1.41 billion in 2005. Bear, Stearns & Co. analyst Alexia S. Quadrani estimated that the company would post cash flow of $1.17 billion this year and only $1.13 billion in 2008, despite the TV advertising benefits of a presidential election and the Olympics.

When the deal is complete, annual interest payments will approach $1 billion, leaving Tribune with very little cushion.

In its vote Friday, the FCC denied Tribune’s request for indefinite waivers from the cross-ownership rule but granted it at least two years of grace in all five markets. The FCC also approved a permanent waiver for Chicago, which had been grandfathered when the cross-ownership ban was enacted in 1975.

That protection would have disappeared upon the company’s sale, and under Martin’s proposal, Tribune would have been required to sell its radio station or TV station there.

The FCC’s two Democrats, Michael J. Copps and Jonathan S. Adelstein, who oppose media consolidation, voted against the waivers. Adelstein called them “ill-advised and backbreaking legal gymnastics.” And Copps specifically criticized the permanent waiver for Chicago, which he said was unprecedented.

But Commissioner Robert M. McDowell, a Republican, said the waivers allowed Tribune to better compete “against a growing chorus of new media voices.”

“Approving this transaction allows the new owners to breathe new life into Tribune’s newspapers and broadcast properties,” he said.

thomas.mulligan@latimes.com

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Times staff writer Jim Puzzanghera contributed to this report.