Sam Zell-backed Tribune files bankruptcy

The Chicago-based media company, acquired last year by real estate investor Sam Zell in an $8bn LBO, has collapsed under a $13bn debt load. Meanwhile, Avista Capital-backed Star Tribune, a major Minnesota newspaper, is cutting costs to stave off bankruptcy as it struggles with its debt load.

Tribune Company, the publisher of the Chicago Tribune and the Los Angeles Times, has filed for bankruptcy under a $13 billion debt load.

The company, which was acquired by billionaire real estate investor Sam Zell in December 2007 in an $8 billion deal, has been working feverishly with its lenders to negotiate new terms on its debt.

Tribune has about $13 billion of debt and just $7.6 billion of assets, according to a bankruptcy filing. Some of its biggest lenders are JPMorgan Chase, Deutsche Bank and KKR Financial, which lent the company $240 million, the filing said. 

Tribune has been struggling with declining advertising revenues and circulation numbers as readers and

Sam Zell

advertisers shift online. The problems are endemic in the newspaper industry and have been compounded by fixed costs for salaries, printing, raw materials and delivery infrastructure.

Fixed costs and declining ad revenues, combined with the obligation to pay off huge amounts of debt, have especially hurt Tribune, as well as Star Tribune, the largest daily newspaper in the Minneapolis, Minnesota area, according to Morningstar analyst Tom Corbett.

The debt load creates an acute sense of urgency they might not [have] if they weren't so leveraged.

Tom Corbett

“If they didn’t have this debt, they’d be in a much better position to weather the downturn,” Corbett said. “The debt load creates an acute sense of urgency they might not [have] if they weren’t so leveraged.”

The two companies were acquired at a time when the outlook for the newspaper industry was negative, but not as bleak as it became this year, according to Emile Courtney, a credit analyst with S&P.

“It was clear at the time [the Tribune buyout] was announced there was a secular shift, but no one anticipated the pace of acceleration those declines would take at the end of 2007 and the beginning of 2008,” Courtney said. “It’s the magnitude of the declines that was so severe. It was a real eye-opener.”

According to numbers from the Newspaper Association of America, advertising revenues for newspapers increased in 2003, 2004 and 2005, and experienced a decline of 2 percent in 2006. That decline accelerated to 12 percent by December 2007, when the Tribune deal was finalised. In the first quarter of 2008, advertising revenues were down 14 percent, 16 percent in the second quarter and 19 percent by the third quarter.

Zell acquired the Tribune, which owns eight daily newspapers, including The Baltimore Sun, Chicago Tribune and the LA Times, last year in a deal in which he invested $315 million. As part of the transaction, Tribune agreed to sell the US baseball team, the Chicago Cubs.

Standard & Poor’s slashed Tribune’s credit to junk last month on the expectation that the company would default on its huge debt repayment obligations, which total more than $1 billion this year alone. The company also must make a $512 million interest payment in June 2009, according to The Wall Street Journal.

Avista Capital purchased the Star Tribune from The McClatchy Company in a $530 million deal. Avista made a $100 million equity investment in the transaction and wrote down 75 percent of that investment at the end of 2007.

The firm, which spun out of DLJ Merchant Banking, is trying to cut $30 million in costs at the newspaper, according to media reports. The newspaper has asked its unions for $30 million in cuts in a bid to have its lenders forgive about $400 million in long-term debt to avoid a bankruptcy filing.