Today’s a witching day for Tribune Co. After months of waiting the shareholders of the media giant will converge on Chicago to issue their votes of Yay or Nay on Sam Zell’s $8.4b leveraged buyout. As much as the deal should be a foregone conclusion, there’s enough uncertainty to make for a crazy day… even with shareholder approval almost assured.
Leading the charge of trouble is the company’s growing debt. Tribune already borrowed $7b to buy back shares as part of the deal. It is obligated to repay $1.5b of that within two years. The company will also borrow more than $4b more to buy out additional shares.
All said and done, after the close of the deal (if it closes), the company will owe in excess of $10b. That’s a lot to pay back, especially when cash flows and earnings are struggling (profit was off 59% in the July earnings announcement ).
In response to the risk, the company’s debt is already rated in Junk territory. (Bonds are rated in order of increasing risk of default. The scales begin at AAA and run to AA, A, BBB on downward to C. Below C debts are in default. Anything below triple B is considered high risk, or a junk bond). Monday, in a conservative move to compensate for further uncertainty, Standard and Poors reduced the company’s credit rating to B+ from BB-.
The debt and earnings issues, along with action from arbitrage traders who are speculating the deal will fall apart (or Zell will request a purchase price adjustment to compensate for the earnings shortfall), have pushed the company’s stock price down to about $27/a share. Normally, in a buyout, the share price and offer price converge as the deadline for the deal gets closer. Here it’s the opposite. $27 a share is well below the $34 offer price.
The price belies Wall Street’s concern about the deal. Will the company be able to service the debt, and will Zell continue to offer such a premium in light of the company’s decreasing financial condition? Will FCC waivers be granted for the TV properties? If Mr. Zell requests a lower price, or new terms, will the deal fail? How confident is he that he can turn around the company? Confident enough to stick with it?
It’s a far different kind of nail-biter to the uncertainty that surrounded Rupert Murdoch’s takeover of Dow Jones, but the acquisition of the Second City’s media icon may prove nearly as dramatic. In a few hours, things will be a little clearer, though likely, still far from crystal.