Analysis

Tribune Publishing Analysis

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Let’s start with a little history. The Tribune Company started in 1847 and moved into broadcast in 1924. It went public in 1984. It grew in both of these industries with multiple mergers and disposals through the years. In 2007, Sam Zell purchased the company through a leveraged buyout and started selling assets. By 2008, they filed bankruptcy and the ownership transferred to employees and the largest debt holder: Oaktree Capital Management, JP Morgan Chase, and Angelo, Gordon & Co. Although considered privately held, there are A and B class shares trading on the OTC markets. The Tribune is once again restructuring. This time they are getting rid of the newspaper business. This spin off will be called Tribune Publishing (TPUB) and trade on the NYSE. Its big papers will be the LA Times and Chicago Tribune. It will issue debt and kick it back to the parent. It will not own the real estate it operates from, but will lease that from the parent company. It will only have an affiliate status for its job classifieds run with careerbuilder.com, which will remain owned by the parent.

Mar. 30, 2014 Dec. 29, 2013
Current Assets
Cash 0.34 0.38
Accounts receivable (net of allowances) 8.17 9.90
Inventories 0.58 0.56
Deferred income taxes 1.35 1.47
Prepaid expenses and other 0.58 0.53
Total current assets 11.02 12.85
Properties
Machinery, equipment and furniture 2.66 2.55
Buildings and leasehold improvements 0.17 0.15
Accumulated depreciation (0.74) (0.63)
2.09 2.08
Construction in progress 0.52 0.60
Net properties 2.61 2.67
Other Assets
Goodwill 0.63 0.60
Intangible assets, net 2.33 2.38
Investments 0.14 0.11
Deferred income taxes 1.46 1.56
Other 0.07 0.07
Total other assets 4.63 4.72
Total assets 18.26 20.24
Current Liabilities
Accounts payable 1.47 1.43
Employee compensation and benefits 3.58 4.07
Deferred revenue 2.89 2.67
Other 0.85 0.82
Total current liabilities 8.79 8.99
Non-Current Liabilities
Deferred revenue 0.37 0.28
Postretirement medical, life and other benefits 1.75 1.79
Other obligations 0.23 0.34
Total non-current liabilities 2.35 2.40
Total Equity 7.12 8.85
Total liabilities and equity 18.26 20.24

For the financial information, the amounts are shown per share using the shares expected to be outstanding post distribution. This will hopefully help the reader link the importance of the financial information to the value per share. Please share your thoughts on this experiment below.It is clear the owners consider this to be bad assets and are removing it from their prime offering, which will be a broadcasting company with cash and real estate. It is assumed by the primary investors being experts in distressed investment that the selling of the parent is where they will most likely make a majority of their return. As such, there is a chance they will not try to manipulate the price any greater than they already have to the market by slowly selling their shares and therefore the share price will be artificially low.

Normalized Projection Reported
Operating Revenues 12/31/2016 12/31/2015 12/31/2014 3/30/14 (TTM) 12/29/2013 12/30/2012 12/25/2011
Advertising 35.52 37.39 39.36 40.29 41.43 45.58 48.86
Circulation 19.52 18.59 17.71 16.87 16.87 16.71 15.36
Other 10.58 11.14 11.72 12.13 12.34 13.02 11.17
Total operating revenues 65.63 67.12 68.79 69.30 70.64 75.31 75.39
Operating expenses
Cost of sales 39.38 40.27 39.90 39.26 39.75 44.98 45.43
Selling, general and administrative 24.10 24.01 24.00 23.53 23.22 25.28 24.81
Depreciation 0.60 0.65 0.70 0.76 0.86 3.16 3.17
Amortization 0.26 0.26 0.26 0.26 0.26 0.25 0.23
Total operating expenses 64.34 65.19 64.86 63.80 64.08 73.67 73.64
Operating Profit 1.29 1.93 3.93 5.50 6.55 1.64 1.75
Gain (Loss) on equity investments, net – – – (0.05) (0.05) – –
Interest income (expense), net (2.36) (2.36) (2.36) (0.00) 0.00 – –
Reorganization items, net – – – (0.01) (0.01) – –
Income before income taxes (1.07) (0.43) 1.57 5.44 6.50 1.64 1.75
Income tax expense (0.45) (0.18) 0.66 2.50 2.79 0.52 0.12
Net income (0.62) (0.25) 0.91 2.94 3.70 1.12 1.64

As you can see the earnings for the last few years have been much higher than the years prior, this was driven from cost cutting as revenues were in decline. This appears to be a temporary measure to ensure a good issuance as costs have already started to increase per the quarterly information for March. Additionally, as the new spin off begins to work out of the transition service agreement, which ends two year after the spinoff date. Finally, the increased debt load will weigh down the company with additional payments not currently recognized. If potential investors realize this in addition to the current investors selling quickly and the disregard for the dying industry known as newspapers, then the price might fall excessively.

NYT GCI MNI TTM Normalized
P/S 1.33 1.34 0.37 92.17 34.00
P/E 35.89 21.60 29.01 58.80 10.60
EBIT/(NWC+FA) 13% 36% 23% 112% 11%
EV/EBIT 18.55 14.19 16.67 70.72 27.43
P/CFO 15.69 11.25 3.81 57.68 28.84
ROA 4.18% 7.06% 3.62% 16.09% 2.90%
ROE 7.18% 14.42% 12.10% 41.27% 2.90%

For comparables the New York Times and Gannet were selected. As the New York Times has a higher brand premium, which can be seen in the fact a majority of its revenue is from subscriptions rather than advertising, it is can be estimated to trade at a discount to the New York Times, but comparable to Gannet, whose biggest name asset is USA Today. As you can see they are currently trying to suggest a price around $60, which the fair value market is closer to $30 and could allow for shorting. If a change in strategy does not occur in the next few years, then the company will struggle to meet its obligations as the revenues continue to decline. For this reason, the stock option idea of theta is needed in your considerations of a margin of safety. A heavy margin is needed, where a price below $10, depending on your risk tolerance and investment objectives, should be considered. The record date is July 28th and distribution date is August 4th. Keep an eye on the share price to see what happens.

 

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