Tribune on the Brink

The financial crisis has dealt a deadly blow to its chances

The Journal scooped last night that Tribune Company may file for bankruptcy this week. The other papers follow suit (not in bankruptcy—give that a few months) and while this news shouldn’t be too surprising to anyone in the news business, it adds to an already beyond-bleak landscape, one that has deteriorated sharply in the last few weeks.

Tribune is not exactly emblematic of the state of the rest of the industry, it’s an accelerated version of it. It’s demise was essentially assured from the day bubble-era Wall Street lenders gave Sam Zell billions of dollars to leverage up the company to the point where it was likely to fail even if the economy and markets hadn’t fallen off a cliff.

To meet the company’s incredibly high debt payments, Zell always intended to parcel off the company’s assets, including valuable ones like the Chicago Cubs. He sold Newsday to the Dolans in May for $650 million, a price the Cablevision crazies surely rued almost immediately. But the Cubbies still haven’t gone, and Zell made a critical error in not selling them in the spring. Whatever price he gets now will be limited by selling into the most distressed market since the Depression.

Still, any bid to stave off bankruptcy almost certainly depends on their sale. I’m sure The Audit’s own Lou Piniella, Dean Starkman, wouldn’t mind running that show, so maybe I’ll pass the cap later (it actually wouldn’t be a bad idea to let the Cubbies be civic-owned like the NFL’s Packers). Even a sale of the Cubs or other assets like Food Network will only delay the inevitable.

In fact, Tribune is probably already in default, having breached debt covenants that it barely cleared when the deal was closed a year ago. As I wrote in the magazine in March:

The company loaded itself up with so much debt that it will struggle to pay the interest—about $1 billion a year. As you see below, that is nearly as much as its 2008 estimated cash flow. Tribune has little room for error.

But what do lenders have to lose letting them slide a bit? The Washington Post adds an interesting, if incomplete, detail along those lines:

Bankruptcy, however, may not be the endgame for Tribune: Some creditors feel that newspapers forced into bankruptcy protection have even less chance of repaying their loans.

Why? The Post doesn’t say.

But the WSJ reports that the banks may not be able to cut Trib any more slack:

Lenders so far have been willing to give the companies a pass in exchange for higher interest rates and other concessions, but Tribune has little wiggle room. Terms of the company’s debt already are so loose and its financial standing so unsteady that a covenant waiver may not help.

Though it notes that:

To be sure, a restructuring outside of bankruptcy court remains an option for Tribune. Executives have indicated that its talks with lenders are amicable, and it remains possible the two sides can agree to rework the company’s borrowings on their own, as other newspaper publishers are doing.

And the Trib-owned LA Times’s story has this bit from an ex-executive:

“This might all be posturing and positioning. They could be looking for a new [debt] structure … without actually having to take the bankruptcy action.”

A new structure would delay some of the big payments until financing becomes easier, presumably.

But while Tribune’s woes are somewhat unique in the industry because of the leveraged buyout Zell engineered (with almost none of his own money at risk), that doesn’t mean it’s not a canary in the coal mine. The average paper’s revenues are deteriorating so rapidly that many are going to go out of business in the next year. It’s going to be gut-wrenching.

The last hope for the newspaper industry to avoid a massacre was the brand value, the cachet, of newspapers. They are (yes, still) power centers in their communities and are trophy assets for the rich players in those places. Those rich folks aren’t so rich anymore and nobody will lend them money to buy a fifty-cent copy of a paper now, much less $500 million for the whole operation.

Think the news has been bad for the industry in the last couple of years? The real blood-letting is about to begin.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.