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Chandlers lost chance to increase stock value
It's hardly a model for other activist shareholders to follow.
Dissatisfied with the gradually sinking price of Tribune Co. shares, the Chandler family of California put the company in play, hoping an auction might boost the value of their major stake in the Chicago-based media giant.
Ten months later, Tribune stock has sunk close to where it was when the Chandlers started agitating for a corporate breakup. Instead of launching a bidding war, they kicked off a fire sale.
On Sunday, Tribune, which owns the Chicago Tribune and the Los Angeles Times as well as a host of TV stations, accepted an offer from Chicago real estate billionaire Sam Zell for $34 a share.
The Chandler Trusts on Tuesday agreed to support the $8.2 billion sale, a transaction that would leave the company in the hands of an employee stock option plan, or ESOP, and Zell.
The trusts, which control 20.1 percent of the company's stock, unanimously agreed to vote their 48.1 million shares in favor of the deal, according to a Sunday agreement, filed with the Securities and Exchange Commission on Tuesday.
They also agreed not to support any competing bids for the media conglomerate, or other proposals that could derail the deal, expected to close late this year. However, according to the filing, the Chandlers don't have to surrender their shares if the deal terms fall below $34 a share in cash—far below the $46-per-share price the Chandlers originally were targeting.
The deal shows that the family actively undermined its own efforts to boost the value of its Tribune investment and harmed its own reputation in the process, said experts in finance and journalism.
For one thing, the Chandlers picked the worst possible time in several decades to push for the sale of newspaper and TV assets.
Back in 2000, when Tribune acquired the Chandlers' controlling stake in Times Mirror Co. for $8 billion, national advertising in newspapers was growing at a robust 18 percent clip. The merger was a bet on media convergence—that big advertisers would want a one-stop shop where they could place print, broadcast and Internet ads across the country.
But by the time the family decided that Tribune's strategy was a bust and the company might be worth more in pieces, newspaper revenue and circulation were drifting downward with no sign of a short-term turnaround.
That made it more difficult and potentially risky for bidders to offer a firm price or figure how much debt they could take on to swing a deal.
"They overplayed their hand by putting it into play during a period when the fundamentals were deteriorating and the number of interested buyers wasn't great," said Eric McKissack, chief investment officer of Channing Capital Management in Chicago and a discontented Tribune shareholder. "In a more orderly sale, not a fire sale, there could have been more value realized over time."
The Chandlers also hurt themselves by getting into a brawl with Tribune management that ended up isolating their three representatives on the company's board, observers said.
In June, the Chandlers publicly aired their opposition to the company's plan to take on debt to fund a $2 billion stock buyback designed to boost Tribune's sagging share price.
Soon after, the family issued a scathing 11-page letter to Tribune management and filed it with the Securities and Exchange Commission, arguing that the company was a strategic failure and that management ought to be ousted. The attack prompted Tribune's independent directors to strike back with their own letter, accusing the family of putting its interests ahead of other shareholders.
Behind the scenes, the Chandlers were trying to find a way out of two complicated asset-swap partnerships with Tribune without having to pay a hefty tax bill.
"With the benefit of 20-20 hindsight, you have to say, 'Is that really the best way?' " said John Lavine, dean of the Medill School of Journalism at Northwestern University. "If you're going to have to work with Tribune management, brandishing a sword and threatening them is a strange way to say, 'Let's work this out together.' "
Tribune and the Chandlers eventually found a quiet way to unwind the partnerships, with the Chandlers indirectly paying the tax bill. But the public spat hurt Tribune's once-solid reputation on Wall Street.
When the Chandlers tried to prod the faltering auction process earlier this year, they only made the situation worse.
After making the case last summer that Tribune stock was worth at least $46, the family offered to buy the company for $31.70 a share in January. The move may have been intended to draw out other bidders or just to get a bargain, Wall Street analysts say, but the low-ball bid undercut the family's earlier contention about Tribune's worth and further lowered shareholder expectations.
Some investors who were speculating in the stock got out, adding further downward pressure on the price.
"We put one of our premier companies in our business on the block for nine months, and it turns out the person most interested is called 'The Grave Dancer,' " quipped Rick Edmonds, media business analyst at the Poynter Institute in Florida, referring to Zell's nickname.
"The fact that it didn't attract premium bids confirms what some other things have been showing us. Values aren't what they used to be."
Neither is the Chandler family's reputation.
Considered one of the nation's great newspaper dynasties when it was led by L.A. Times Publisher Otis Chandler, Times Mirror was known for running well-staffed newsrooms with generous travel budgets and a commitment to high-quality journalism. Its papers, which included the Los Angeles Times, Newsday and The Baltimore Sun, emphasized investigative and foreign reporting, and won more than their share of journalism prizes. The Chandlers were compared to the Ochs-Sulzberger clan that controls The New York Times.
But in the fight with Tribune, the current generation of Chandlers seemed more interested in profit than public service, say some observers. "They come off as trying to maximize their position and arrange things so they don't have to pay taxes," Edmonds said. "To an outside observer, it doesn't seem like they care one way or another about journalism."
That the Chandlers started the battle over taxes allowed Tribune management to portray them as greedy and almost unpatriotic.
Reporters and columnists around the country took up the cudgel, laying out in detail how the Chandlers had pushed the envelope of the U.S. tax code as controlling shareholders in Times Mirror and had done a series of deals that benefited them more than the minority shareholders.
Said Barry Lucas, media analyst with Gabelli & Co.: "I have very little sympathy for the Chandlers. I have more sympathy for other shareholders who have suffered."
Lucas, who holds no Tribune shares personally, has a "buy" rating on the stock. A Gabelli affiliate, Gamco Investors Inc., likely owns shares of Tribune.
Despite their clout going in, the Chandlers certainly didn't achieve anything close to what they wanted.
The family failed to unseat Tribune Chief Executive Dennis FitzSimons and his management team. The internecine fight may actually have strengthened the hand of FitzSimons, some industry insiders said, because FitzSimons agreed to explore options for selling or breaking up the company.
Tribune will now borrow billions to take the company private, raising the likelihood of further cost-cutting in news-gathering operations. That was something the Chandlers expressly said they didn't want to happen, and, in fact, they argued that more cuts would diminish the quality of the company's newspapers.
A source close to the Chandlers conceded the unsatisfying conclusion. "Obviously, it's a disappointment after we went public with our unhappiness for it to be months and months later with a lower stock price and no strategy. I don't see anything changing in the company."
Where did the Chandlers miscalculate?
For one thing, they misread the result of the auction of Knight Ridder Inc., media analysts said.
Knight Ridder, the nation's second-largest newspaper chain measured by circulation, put itself on the auction block in early 2006 after its largest shareholder, a Florida hedge fund, threatened a proxy fight. Although six companies kicked the tires, newspaper publisher McClatchy Co. emerged as the only bidder.
McClatchy, owner of The Sacramento Bee, the Minneapolis Star-Tribune and other papers, offered $65 a share for the chain in cash and stock, although the value of its bid quickly dropped to $60.70 as McClatchy's stock price fell after the deal was announced.
Still, the sale was seen as positive because McClatchy, a well-run newspaper company, was upping its bet on the industry, anticipating that newspapers would figure out how to win more Internet ad revenue.
Further increasing the enthusiasm were the prices McClatchy secured for 12 newspapers that it sold off to help pay for the deal. In almost all cases, McClatchy was able to sell the papers for a higher cash-flow multiple than it had paid.
But in reality, Knight Ridder should have been a wake-up call for the Chandlers that 2006 wasn't a great time to unload mainstream media assets.
Knight Ridder fetched only a small premium over where the stock was trading before the McClatchy bid was announced. And the price being paid represented a multiple of about 10 times Knight Ridder's cash flow, foreshadowing the premium that Tribune would fetch in the proposed Zell deal.
Both deals are a considerable discount to the 13 multiple Lee Enterprises Inc. paid in 2005 for the Pulitzer family's newspapers.
Since doing the Knight Ridder deal, McClatchy has seen its stock price drop by more than 40 percent, to about $31 a share. Its market capitalization stands at an anemic $2.6 billion, less than it was before it acquired Knight Ridder.
A more recent sign of the times: McClatchy sold the Minneapolis Star-Tribune to a private-equity firm for $530 million in December, less than half of what it paid 10 years ago.
It's not much different than what happened when Tribune bought Times Mirror seven years ago. Tribune stock, trading in the low $50s in early 2000, quickly fell below $40 a share and eventually drifted down into the high $20s.
"I'm not sure there's going to be a positive outcome under any scenario in the short-term at Tribune Co.," said Poynter's Edmonds. "If there's good news for Tribune, it's going to be in the longer run."