Score one for the advocates of the ‘end of newspapers’ meme, then: the Tribune Company – publisher of of the Chigago Tribunes and the LA Times, and owner of the Chicago Cubs and Wrigley Field – has filed for Chapter 11 bankruptcy protection.
Neither the Chicago Cubs franchise nor Wrigley Field is part of the Chapter 11 filing.
The Tribune Company was last year taken private by Sam Zell in an $8.3bn deal, into which Zell invested $315m.
Unfortunately for the Tribune, as the FT’s media editor Andrew Edgecliff-Johnson wrote on Sunday – when a bankruptcy filing appeared imminent – the deal “quickly ran into trouble as credit markets tightened and the slide in US newspapers’ revenues gathered pace.”
In an effort to reduce debt and meet obligations for large interest payments, Mr Zell agreed the $632m sale of Newsday, Tribune’s Long Island title, to Cablevision’s controlling Dolan family in May.
He has made deep cuts to editorial staff across the group’s titles, losing some senior editors and managers as a result.
Covenants on the loans extended by Citigroup, Bank of America, JP Morgan Chase and Merrill Lynch dictate that Tribune’s debt should not rise above nine times its earnings before interest, tax, depreciation and amortisation.
Those have been tested by the speed at which advertising revenues have fallen away, limiting the group’s options in a market where few investors have shown appetite for buying newspaper assets.
Even the ratings agencies saw this coming:
In October, Fitch warned that default was “a real possibility”, saying: “The margin of safety to endure these threats in a cyclical downturn has largely been exhausted.
Zell cited a heavy debt load ($12.9bn worth), the credit crisis and the floundering economy as catalysts for the filing.
But you could argue that Zell should have seen this coming. After all, the US newspaper industry is in terminal decline – total revenues have fallen every quarter since Q3 2006.
According to data from the Newspaper Association of America, total print and online newspaper advertising revenues fell nearly 18 per cent – or almost $2bn – to $8.92bn in the third quarter compared with the same period last year. Indeed, total newspaper revenues have fallen every quarter since Q3 2006.
Still, hindsight is a helluva thing.
This is from an FT story written in August last year, after Tribune’s shareholders voted overwhelmingly in favour of the deal:
The approval comes after investors had grown nervous that the highly leveraged deal could come apart or be renegotiated due to the sharp downturn in the newspaper industry and the upheaval in credit markets.
And here’s another FT story from this summer, written almost exactly one year after the fateful shareholder vote:
Sam Zell, chief executive of Tribune, warned yesterday that the company’s advertising troubles showed no signs of abating this summer following the 15 per cent fall the company reported for the second quarter.
“I can tell you, it hasn’t gotten any better in July and August,” Mr Zell said, noting that businesses had been “cutting back their spending in the summertime months even more than normal” in order to stockpile cash.
Nonetheless, Mr Zell sought to reassure investors that Tribune, which he helped to take private in an $8.2bn buy-out last year, had substantial liquidity to meet debt payments both this year and next.
Not so much, apparently.
As for who might be left holding the bag, the Tribune’s filing lists Merrill, Deutsche and JP Morgan. The latter also syndicated some of its share of the debt to KKR Financial, Highland Capital Management and Davidson Kempner Capital Management.
There’s also Barclays, an existing lender-turned-good-samaritan. According to the New York Times, Barclays has “agreed to provide a letter of credit facility and to maintain an existing financing facility, both of which are likely meant to keep the company operating through the bankruptcy process.”
The deal from hell and the unequivocal failure of the newspaper business model – Portfolio interview with Sam Zell