Extra! Extra!

In the Tribune-Times Mirror merger, one small piece promises a big Internet return.
S.L. MintzMay 1, 2000

It may not erase the sting of that infamous banner that proclaimed Thomas Dewey winner of the 1948 Presidential election, but “Tribune Buys Times Mirror” certainly sounds better to Chicago’s newspaper publishing giant.

In one fell swoop, Tribune Co. secured a national footprint by adding the Los Angeles Times, New York Newsday, and the Baltimore Sun— powerful voices in the other three of the nation’s four largest metropolitan areas. And Tribune already has a strong presence in Florida, through the Orlando Sentinel and Fort Lauderdale’s Sun- Sentinel. Include Tribune’s big-market television stations, and the new No. 3 newspaper company becomes one of the country’s largest media conglomerates.

The combination creates a sturdy vehicle for national advertising, the most lucrative form for TV, radio, and print. And from here, Tribune can launch further consolidation rounds with less apprehension about falling prey itself.

All this great news, however, lacks a crucial component: real growth prospects. Snaring a few points of newspaper or local-TV market share creates no excitement in this world of new media. Exploding revenues nationwide, or at least expectations of an explosion–now that’s the growth to be coveted in the Internet Age.

Indeed, investors have seen the $8 billion Tribune­Times Mirror Co. combination chiefly as an enlarging of Tribune’s stable of mature assets. And in that context, the tab sounds out of line: a market price nearly twice Times Mirror’s selling price before the announcement. Times Mirror shareholders came out well, to be sure, with the Los Angeles­based company’s shares leaping nearly 80 percent on news of the deal with its controlling Chandler family, which owns 60 percent of voting shares.

But Tribune got knocked more than it expected, based on a dilution of existing shares by 16 percent, and the addition of nearly $6 billion in goodwill to the balance sheet. Investors thought the combination a lurch backward into the tired old paper-and-ink economy, not a leap forward into the compelling new-media era.

In terms of cash flow return on investment [CFROI], an inflation- adjusted measure of economic performance, the deal looks especially overpriced. The $95- a-share price is what Tribune should pay for a business earning a CFROI of about 22 percent with 5 percent asset growth, according to HOLT Value Associates, not the 10 percent CFROI Times Mirror currently earns.

The acquisition news sucked 18 percent from the company’s market value in a day, as the stock price plunged to a low of $31, before recovering most of the loss in the next week.

A Hip Investor
Yet, forward is exactly where the company is heading, says Donald C. Grenesko, Tribune’s CFO. Tribune’s Internet linkages will give it “national reach”–built around its major-market newspaper Web sites–and “better leverage in creating a national E-commerce type of business,” he says. These operating efficiencies will increase revenue by between $10 million and $20 million the first year, while also resulting in cost savings of $10 million to $20 million. That’s not quite enough to make the operation profitable. But that equation would change in five years, when the Web-based revenue gain from the combination hits $90 million.

Combining operations will also give Tribune a new handle on what is emerging as a huge Internet threat for newspapers: loss of its lucrative classified- advertising base to the Web. “Up to this point, the damage has been more than offset by advertising from dot-coms in newspapers and on television,” says Grenesko, but he expects “erosion in the next 5 to 10 years.” The combination with Times Mirror, which like Tribune has a 16 percent stake in CareerPath and a 17 percent stake in ClassifiedVentures, both Internet operations, creates a clear leader in those enterprises.

Add in the benefits from traditional newspaper advertising under a more-competitive national structure, as well as cross-media sales, and revenues will rise by $200 million in five years, Grenesko says. Overall–in part because of the Internet contribution to the deal–Tribune’s model foresees an annualized return on investment of 18 percent in 2005, versus a 10 percent cost of capital.

Tribune’s gift for spotting what’s next in the media–and for investing there–has a long tradition, beginning with one of the country’s earliest television stations. It modestly took the call letters WGN, shorthand for “World’s Greatest Newspaper.” In an effort to energize its online presence, Tribune made an astute 1991 investment in America Online Inc., and five years later jumped into Excite.com. The AOL stake ballooned to about $357 million in market value by the time AOL snapped up Time Warner this past January.

Meanwhile, the company consistently beefed up chicagotribune.com, and enlarged its broader Internet presence with hip investments in job site brassring.com and blackvoices.com. These sites will ring up sales of roughly $30 million this year, reports Mark Zadell, a Banc of America Securities LLC analyst, although operating losses will hover near $45 million. Only weeks before the bid for Times Mirror, Tribune disclosed an investment in iBlast Networks, a distributor of music, video, games, software, and other digital applications to local TV stations.

CFO As Middleman
The Chandler family saw the potential in Tribune’s approach. But Times Mirror was far less wired into the Internet world, and more dependent on print. So the ties between the Chandlers and Tribune began to form. Tom Unterman, the former Times Mirror CFO who had moved to the separate TMCT venture last December, served as one contact.

It was not a role he could have played easily as Times Mirror CFO, if for no other reason than CEO Mark Willes opposed the merger. Approached by a Merrill Lynch investment banker on behalf of Tribune, Willes, who was recruited from General Mills Inc. in 1995, shot down the overture. When the deal was inked, Willes professed to having been in the dark about it until the last minute.

“As CFO, I could not have been an adviser to the Chandler family,” Unterman says. Through Rustic Canyon Group, however, he enjoyed access to the Chandlers as an adviser to the family trust fund. After Tribune suggested a deal to the Chandlers, the family sought Unterman’s advice. Unterman discussed the matter with Tribune Publishing’s president, Jack Fuller, whom he knew through their involvement with the classified-ad Internet sites. For his part, Unterman deflects credit for making the Tribune-Chandler connection. “There is no doubt in my mind that Tribune would have reached them anyway,” he says.

Turbocharged Earnings
The Tribune is hardly the only newspaper with a growing foothold online. “Locally focused sites, especially newspapers and broadcasters, should also realize additional value as their online potential crystallizes,” says Banc of America analyst Zadell. And those that can achieve national brand recognition, as has Gannett Co.’s USA Today, stand to reap even bigger payoffs. “The exciting growth comes from convergence,” says Unterman.

Gannett’s Web sites lured approximately $40 million in total revenue, in the lead at this fledgling stage in terms of unique users of the sites. Knight Ridder Co. and New York Times Co. each pulled in about $30 million on several sites. All told, the five leading U.S. newspaper publishers rang up nearly $160 million in sales. With the combination, there will be four leaders. Collective operating losses for their Web sites, however, hovered near $110 million, according to Zadell. While internal growth is indeed feasible, a decline in market prices for Internet assets would not be bad news. Newspapers rich in cash flow could snap up more properties at bargain prices.

Newspaper managers naturally want online businesses to turbocharge earnings–something they expect to happen eventually. Meantime, strategies for monetizing include spinning off related businesses or creating tracking stocks.

What are the online assets of the combined Trib­Times Mirror worth today? A conservative postmerger estimate assigns a revenue multiple of 15 times, or around $825 million–still a very small portion of Tribune’s total market capital. Yahoo, with a much larger national footprint, changes hands at around 75 times revenues.

Even one-quarter of that Yahoo multiple would lift the value of Tribune’s online properties to more than $1 billion. It may sound like pie in the sky, but it’s the kind of pie that investors these days are lining up to eat.