Tribune awaits bids as sector’s woes mount

Reports of declining revenues, shrinking circulation and further layoffs have spread new gloom over the newspaper industry in recent days and cast a pall over bidding for Tribune Co., which is expected to receive initial offers for the entire company from prospective buyers by today.

The Chicago-based media company, which owns newspapers including the Los Angeles Times and the Chicago Tribune, as well as two dozen TV stations, probably will draw several nonbinding proposals from a number of investment firms, according to several people following the process.

But in a mark of tepid enthusiasm, the offers are expected to come in only slightly above Thursday’s closing price of $33.79, near a one-year high of $34.28 for the stock, which has been buoyed by speculation about a deal.

Industry observers expressed skepticism that the investment firms would follow through with formal bids. A lack of interest in acquiring the entire company could force Tribune to consider offers for particular assets such as the Chicago Cubs.

“This is not a great time to sell newspaper properties,” said veteran industry analyst John Morton. “Still, these are substantial cash cows, even if the trends are down. Then the question becomes -- what are you willing to pay for them?”

One sign of the shrinking value of newspapers: Tribune’s current stock market value is about $8.1 billion, roughly what the company paid in 2000 for Times Mirror Co., which owned The Times and other newspapers such as Newsday and the Baltimore Sun.

Tribune announced a month ago that it would consider a breakup or outright sale in response to demands for increased value from the company’s biggest shareholder, the California-based Chandler family. The company has said it hopes to conclude an examination of alternatives by the year’s end.

But Tribune and other newspaper companies have been shaken by an onslaught of bad news from onetime industry powers. The Philadelphia Inquirer and its sister paper, the Philadelphia Daily News, reported such a severe drop in ad sales that cash flow could be reduced this year to $50 million, half of what it was two years ago. Faring even worse, New York Times Co.’s Boston Globe will probably lose money this year. Another round of circulation reports due Monday are expected to show further declines for the industry, with daily circulation falling about 2.5% and Sunday off about 3%, with large metropolitan dailies such as The Times expected to suffer some of the biggest drop-offs.

“I just think there is a sort of malaise over newspapers right now. That is the biggest concern,” said an executive at the Blackstone Group, a large private equity firm that is not expected to bid. Among the firms considering a bid today are Carlyle Group, whose media holdings include a South Korean cable company and the parent of the Hollywood Reporter.

Madison Dearborn Partners, a Chicago-based firm that includes former Tribune Chief Executive John W. Madigan, is considering a joint bid with Providence Equity Partners and New York-based Apollo Management. Texas Pacific Group and Thomas H. Lee Partners form another interested group, and Bain Capital is said to be considering a solo offer.

Media companies have been in the background, although Gannett Inc., the nation’s biggest newspaper operator, could still emerge as a suitor. A dearth of bidders from the industry could result in a less than robust price because they can more readily cut costs and justify paying more than investment firms.

“A decision to send a nonbinding letter of interest right now, with an indication of value, is an easy one,” said an executive with one of the investment firms, who did not want to be named because he was not authorized to speak about the deal. “That way, you get to see a management presentation by Tribune and decide whether to go ahead.”

One newspaper executive predicted that Tribune, fearing that rejecting all bids would trigger a precipitous drop in its stock, would accept a modest premium over its current market price. Others said that would not happen because independent directors overseeing the process could quickly turn to a second round and take offers for individual assets. Among Tribune’s most prized properties: the Cubs and stakes in the Food Network and online job search site CareerBuilder.

Another possibility is that Tribune executives will seek partners of their own in a bid to take the bulk of the company private -- perhaps spinning off television stations in the process.

“At the end of the day, I still believe they go private,” said one newspaper executive, who is close to Tribune management. “I think there is more likely a chance that one of the private equity firms, like Madison Dearborn, goes ahead if they are involved with management.”

Many who follow the industry compared Tribune’s situation to that of Knight Ridder Inc. when it went on the block this year. Then the second-largest newspaper chain by circulation, the San Jose-based company was sold in March to McClatchy Co. of Sacramento at a modest 7% premium over the company’s share price. The selling price was 25% above where the stock was trading when disgruntled shareholders put it in play in late 2005.

Many private equity firms had looked at Knight Ridder, but only one consortium put forth a bid, and it was too low to win. McClatchy’s stock has sunk 18% since it acquired Knight Ridder.

“If you didn’t like Knight Ridder, what makes you think Tribune would be any better?” asked a major newspaper operator who asked not to be named. “Knight Ridder had diversified markets all over the country, with small- and medium-sized newspapers that weren’t getting hit as hard as the major metros Tribune relies on, and [Knight Ridder] was not encumbered by a group of independent TV stations that are getting hammered.”

The Chandler family, holders of about 19% of Tribune’s stock, threw the company’s future into question in June with a sharply worded letter that questioned management’s strategy, including a $2-billion stock buyback. The family cited analysts who calculated the company’s value at $42 to $46 a share. The family could demand an auction of individual assets to get closer to that target, industry observers said. A family spokesman declined to comment Thursday.

Analyst Morton said some optimism was in order. Though newspaper profit margins have fallen from an average of 22% four years ago, they are, at 18% in the first half of 2006, “still healthy, by almost any standard.”

Advocates for the industry note that the businesses not only throw off large amounts of cash but also reach larger audiences than ever when their print and Internet audiences are combined. The problem has been that Web advertising, while growing rapidly, still accounts for only about 5% of overall revenues in the industry.

“Is this going to be a long-term situation and always negative for newspapers? It could be. But more likely, it’s not and will turn,” Morton said.

Scott N. Flanders, chief executive of privately held Freedom Communications Inc., parent of the Orange County Register, said “it would make sense for Tribune’s papers to be taken private during the transition from print to the digital world. Blackstone and Providence Equity bought a stake in Freedom in 2003.

Private equity firms generally prefer flabby companies. But Tribune is considered a strong cost cutter and has trimmed 2,500 jobs at The Times.

“You wonder why a lot of private equity didn’t show up for the Knight Ridder deal?” he asked. “The answer is that you worry about an exit [sale]. In other words, can you put enough lipstick on the pig to sell it?”

james.rainey@latimes.com

thomas.mulligan@latimes.com