Zell's Big Plans for Tribune

The billionaire real estate mogul has won the bidding for the struggling media company. Now, he needs to figure out how to solve its problems

by Joseph Weber

By taking the beleaguered Tribune Company (TRB) out of Wall Street's gun sights with his $8.2 billion deal to buy the Chicago-based newspaper and TV giant, real estate billionaire Sam Zell solves some big problems for the outfit's managers. But he's taking on a host of others.

On the plus side, the feisty Zell's $34-a-share buyout plan, accepted on Apr. 2 by the media company's board, placates the Chandler family, the former Los Angeles Times owners and Tribune board members who put Tribune into play in a nasty public dispute with management in June of last year. It also removes the company from the pressure public investors have brought to bear, as they've seen their shares plunge from nearly $61 a share in the fall of 1999 to a low near $27 last spring.

But as part of Zell's bid, Tribune will have to take on a truly staggering amount of debt—possibly as much as $13 billion, an enormous sum for a company that turned $1 billion operating profit in 2006. With that heavy burden, Zell, a newcomer to TV and newspaper ownership, will have to wrestle with the knotty problems that have beset veteran executives operating big city properties.

The Bigger They Are

Circulation figures have been sliding at such properties as the flagship Chicago Tribune, the Los Angeles Times, and Newsday, as the Internet steals younger readers. Advertising in the papers has been spilling onto the Internet where sites like Craigslist, Google (GOOG), and Yahoo! (YHOO) offer potent alternatives to newspaper classifieds. And mainstay advertisers like department stores have shrunk their purchases in print as they've consolidated.

Tribune has been slammed particularly hard by the industry-wide headwinds. Besides being the nation's second-largest newspaper publisher by revenue, and no. 3 in total circulation, its 11 metropolitan dailies are concentrated in the more challenging big markets. It built itself into this national media powerhouse in 2000, when it bought Times Mirror mere months before the Internet bust hit.

The company eked out an increase in operating revenues last year of just 0.1%, to $5.5 billion, while operating profit slipped 3.7%, to $1.1 billion. Tribune was able to post an 11.1% gain in net income, at $594 million, only because of increases in income from its investments.

TV Troubles

The publishing operations are a particular albatross, despite the fact that Tribune has 8 million readers each weekday and 11 million on Sundays in markets that include New York, Los Angeles, Chicago, Baltimore, and South Florida. Operating revenues in publishing declined 0.1% last year, to under $4.1 billion, and operating profits there slipped 1.4% to $749.2 million. That slope is steepening. Publishing revenues in February fell 5.1%.

The broadcasting operations—which include 23 stations nationwide and superstation WGN—have provided no help to the bottom line. Most of Tribune's TV stations, 14 of them, are in the struggling CW network, home of teen-oriented fare such as Smallville, Gilmore Girls, and Beauty and the Geek. Operating revenues in the segment rose just 0.8% to $1.4 billion, while operating profits slipped 6.1% to $391.5 million.

Just how Zell plans to restore growth in the face of such bleeding is unclear. Other would-be newspaper magnates have resorted to slash-and-burn tactics, slicing costs by cutting staff aggressively in a bid to keep profits up. Indeed, Tribune itself has made such belt-tightening efforts at the Los Angeles Times, leading to several high-profile editorial resignations and complaints of a culture clash between the globally minded Times and the more locally focused Chicago Tribune.