The Chicago media concern, which owns the Chicago Tribune, WGN-Ch. 9 and many other broadcasting and print entities, has seen its stock price decline by more than 40 percent over the past two years, as a result of company-specific problems as well as structural changes that are taking a toll on the publishing and broadcasting industries.
Chicago Cubs baseball team, divesting its broadcast-TV segment, or even borrowing money to return to private ownership.
The strategy unveiled Tuesday, of borrowing heavily and selling assets to fund a share repurchase, appears to rule out those other options.
The king-size buyback shows "our confidence in the company and its future," said Chairman, President and Chief Executive Dennis FitzSimons.
The buyback plan is a laudable effort to improve Tribune's capital structure and create shareholder value, Paul Ginocchio, an analyst with Deutsche Bank, said in a note. "Unfortunately this does not change the significant structural headwinds that Tribune faces."
But nearly doubling its current debt of about $3 billion is not without risks, and debt-rating concerns promptly lowered their ratings on Tribune's obligations. Fitch noted that the leveraged buyback "represents a significant departure from Tribune's historically conservative financial policies," and said the new initiative "emphasizes the pressures that slower-growing traditional media companies are under to boost their stock prices."
Moody's Investors Service downgraded Tribune debt two notches, to Baa3--the last stop before non-investment grade, or "junk," status--and warned that if the company completes the buyback in full, "a non-investment-grade rating is likely."
Tribune officials confirmed that the company expects its debt ratings will fall to junk levels as a result of the buyback.
But the company emphasized that it considers its shares a bargain: The repurchase plan, FitzSimons said, underscores "our strong belief that Tribune's current share price doesn't adequately reflect the fundamental value and long-term earnings prospects of the company's businesses."
On its face, the move appears to be a bid to calm restless Tribune stockholders by returning some capital, and to provide a vehicle for those who want to exit the stock.
A major reduction in outstanding shares usually boosts a company's stock price, because the company's earnings are divided among fewer shares.
Tribune may also, however, be seeking to render itself less attractive to any potential suitor: The company's whopping post-buyback debt of nearly $6 billion will make it hard for leveraged-buyout companies to borrow against Tribune's assets.
"We feel strongly about being an independent company," FitzSimons said in an interview, adding that the buyback "was a move that our board of directors authorized that was in the interest of all shareholders."
Under the plan Tribune unveiled Tuesday, the company plans to raise "at least" $500 million to help pay down debt by selling off a grab bag of "non-core" assets, which may include certain television properties, real estate holdings or other investments.
Officials explicitly said the sales won't include the Chicago Cubs, and would include Tribune's 31 percent ownership stake in the Food Network cable operation only if the company got a better offer than it has to date. Because such assets were acquired at low prices, their sale would generate big tax liabilities that would sharply reduce proceeds.
Tribune, which has cut deeply into spending already, also said Tuesday that officials think they can squeeze an additional $200 million in annual savings out of operations over the next 24 months.
Tribune's plan calls for the company to repurchase up to 75 million of its shares. Of that, up to 53 million will be purchased from stockholders through a complex format known as a Dutch auction, at a price between $28 and $32.50.
Tribune also will buy 10 million shares from the company's biggest stockholder, the McCormick Tribune Foundation and Cantigny Foundation, which will keep the affiliated foundations' holdings unchanged at nearly 14 percent.