Tribune Co.'s second-quarter earnings report on Thursday didn't provide much respite from what is turning out to be a long, hot summer for Dennis FitzSimons, the media company's embattled chairman and chief executive.
Tribune profit and revenue fell, advertising was tepid, newspaper circulation dropped 5 percent, and Wall Street greeted the report with a Bronx cheer.
By the end of the day, Tribune shares had tumbled 2.6 percent, to $31.50, and now sit 40 percent below their 2004 high of near $53.
Meanwhile, California's combative Chandler family this week emerged from the second phase of a controversial Tribune stock buyback plan as the company's largest and most disgruntled shareholding block, with 14.9 percent of the shares outstanding.
"Dennis is in an impossible situation," said Goldman Sachs analyst Peter Appert, noting the Chandlers and Wall Street are "breathing down his neck."
"He's doing yeomanlike work in managing expenses. But you can't cut costs fast enough to offset declining revenues," said Appert, whose firm has advised both the Tribune and the Chandlers.
While a Chandler representative said the family would have no comment on Tribune's results, one large Tribune shareholder said the family and company management have been actively approaching shareholders recently to gauge support for their competing agendas. As previously reported, the Chandlers also have spoken with private-equity firms about possibly participating in some sort of breakup of the company.
When the Chandlers openly opposed the Tribune's plan to borrow $2.5 billion to buy back company stock, the shareholder said, they found little support among other investors who were persuaded that a buyback would boost the stock price. But now that the buyback is over, and the stock has retreated a bit, investors are hungry for something else.
While management may want time to simply operate the company, the shareholder said, investors are likely to demand more aggressive action. Options may include a long-discussed tax-free spinoff of the television stations or some sort of spinoff of the Los Angeles Times to local investors, as several wealthy Angelenos have expressed interest. The shareholder said the Chicago Cubs baseball team also could attract a hefty price.
In order to avoid heavy taxes, however, most of these options would require successful negotiations to dissolve two controversial partnerships between the Chandlers and the Tribune that contain $3.5 billion worth of assets. So far, the family and the company have come to loggerheads over how to value the assets in the partnerships, particularly when it comes to a block of preferred stock once owned outright by the Chandlers.
Asked during a Thursday morning conference call with analysts whether he plans to open talks with the Chandlers to resolve management's dispute with the family, FitzSimons said there are no negotiations at the moment. But, he said, "We will look forward to moving constructively with the Chandlers." He wouldn't elaborate.
A troubled industry
While it remains unclear how either side will proceed, analysts said this week's flurry of lackluster earnings reports from newspaper companies like Tribune, Gannett Co. and McClatchy Co. suggests it will be difficult for FitzSimons to count on managing his way out of this crisis by providing better results.
Appert said the reports only fanned concerns that the industry is facing a structural transition that threatens to undermine results for many quarters to come.
As readers and advertisers flee traditional media, newspaper and local television companies are struggling to find relevant ways to chase them with Internet-based products that can provide a meaningful boost to results.
"Ultimately," said analyst Barry Lucas at Gabelli & Co., a unit of one of Tribune's largest shareholders, "all of these media companies, whether it's [Tribune] or McClatchy or New York Times or Media General, they've got to find a way to start to enhance top-line growth."
At Tribune, net earnings dropped 63 percent, to $85.7 million, or 28 cents a share, from $231.3 million, or 73 cents a share, a year earlier.
Those numbers included a $90 million charge associated with the sale of two television stations in Atlanta and Albany, N.Y., that the company unloaded as part of an ongoing effort to shed $500 million in non-core assets.
Excluding the writedown, earnings were 53 cents a share, versus earnings from continuing operations of 72 cents a share a year earlier. On average, analysts polled by Thomson Financial expected earnings of 55 cents a share on revenue of $1.45 billion.
Second-quarter revenue eased 1.4 percent, to $1.43 billion, as both the newspaper and broadcasting divisions lost ground.
FitzSimons in the conference call acknowledged the weak operating environment but emphasized that a previously announced restructuring plan was on track.
In addition to the TV station sales, Tribune successfully initiated a "Dutch auction" tender offer that allowed it to buy back more than 45 million shares of its common stock this month at a price of $32.50 apiece.
On Wednesday, Tribune completed the second phase of the plan by acquiring 10 million common shares from the McCormick Tribune Foundation and the Cantigny Foundation for $32.50 a share, a move that left the Chandlers as the company's largest shareholder.
The company also commenced phase three of the plan: an effort to buy back an additional 20 million shares in the open market over the next several months.
"With the successful completion of the tender offer, our leveraged recapitalization is on track," FitzSimons said in a statement. "We are moving aggressively with additional divestitures of non-core assets. Initiatives to improve operating results at our newspapers and television stations also will continue."
James Goss, an analyst at Chicago's Barrington Research Associates, noted that the sluggishness in print and broadcast ad revenue isn't likely to abate anytime soon. And while Tribune has made strides on the Internet with investments in properties like fast-growing Career Builder, it has a "long way to go," he said.
Tribune's Internet revenue grew 27 percent during the quarter yet remains a small portion of the company's total. FitzSimons' goal is to build that share to 12 percent to 15 percent by 2010, but even that may not provide a meaningful enough boost to overall results if traditional advertising keeps falling, analysts said.
Appert pointed out that even including the rocketing growth of Career Builder, the company's overall help-wanted advertising fell 3 percent during the quarter, weighed down by bigger declines in newspaper classifieds.
"My takeaway from this report is that the revenue environment is extraordinarily challenging and not improving," Appert said.
That means pressure will continue to build on FitzSimons to boost the stock in some other way. It also means the Chandlers breakup talk may gain more currency among investors looking for a better stock price.