HJS AT A GLANCE

 

 

 

 

 

 

Situation Overview HJS recently closed at $1.75. Per the table below, at a buy-in price of $1.75, you need Tribune to make two the next two interest payments (Nov 2009 and May 2010) in order to get your money back. The analysis in the table below assumes only the receipt of interest and attributes no value to principle – that is it assumes that HJS shares are worth $0 after you receive the interest payments required to pay back your original investment. You can see that when at a buy-in range of $2.00 - $2.50, you would need Tribune to make the next three interest payments to recoup your original investment. Given the recent trading of HJS in the $1 - $2 level, it seems that the market has confidence that Tribune will only make 2 – 3 more interest payments before defaulting.

Note on Current Restructuring To be clear, Tribune is in a difficult liquidity position given its enormous debt load, the eroding fundamentals of its core businesses, and the standstill in the capital markets. In coming up with a set of projections, it is difficult to see how Tribune will be able to generate consolidated EBITDA much above $550mm for 2009 and 2010 given the difficult time management has had in cutting costs at pace that keeps up with the declines in revenue, particularly in the newspaper segment. EBITDA of $550mm is a bit shocking given that the business generated more than $1 billion of EBITDA in recent years; however, such is the reality in this tough operating environment.

In some ways, this tough operating environment will be beneficial for the newspaper in the long run – that is for those companies that are able to survive. Newspapers are notoriously tough businesses to restructure. They are mired in union contracts. The culture has been historically dominated by editorial types rather than the sales and business types. And the fact that they’ve historically enjoyed a virtual monopolistic position in their local markets in classified, employment, and display advertising has made them ill-positioned to innovate now that they are facing tough competition from the Internet. However, the difficult operating environment that newspapers are now facing seemingly has put all options on the table for newspaper operators, and we can see this given the steps that Tribune has taken in downsizing the bloated editorial departments at the various papers. These tough times are allowing Tribune to take the tough medicine that it badly needs, which should enable the Company to grow EBITDA as ad spending recovers.

Financial Projections Assuming the current economic downturn depresses profitability through 2009 and 2010, Tribune should see EBITDA growth starting in 2011 (See line 1 in the table below). I have assumed that in a normal operating environment and after it has completed the rationalization of its labor force, the Company generates close to $800mm of EBITDA. I do not see Tribune ever again generating $1 billion of EBITDA given the secular shift away from print advertising.

Liquidity Situation The most important part in coming up with a valuation for HJS is understanding Tribune’s liquidity needs over the projection period. From line 5 in the table above, Cash From Operations is projected to be negative through 2012, meaning that Tribune does not generate enough cash to cover its operating needs and financing costs. You can see that the Company has an enormous interest burden. In addition, we can see that in line 6, Tribune has significant debt maturities that it must meet over the next two years. Including the notes that mature at the end of 2008, Tribune must repay $1.4 billion of its debt ($238mm + $512mm + $675mm) by 2010. Therefore, given that Tribune generates negative free cash flow, its only ability to meet its near term debt maturities (in line 6 above) are with existing cash on hand, cash from its revolver, or by selling assets, and based on the analysis below, it seems that Tribune may be able to make it past 2010. Here’s how I envision it happening.

Q4 2008 – Tribune has cash on hand of $260mm and announced early in Q4 that it had drawn $237mm from its Revolver. I project that Tribune, after meeting the $238mm maturity and covering its funding needs, will have $160mm at the end of 2008.

FY 2009 – I am confident that the Cubs sale is going to happen in 2009. Perhaps Tribune may not receive the $1 - $1.5 billion in proceeds that it originally had expected, but it must sell the franchise if it is to avoid defaulting on its debt. Getting $600mm in proceeds for the Cubs, drawing down the remaining $363mm on its revolver, and with $160mm of beginning cash, Tribune will be able to cover the $300mm operating need and $512mm debt maturity to end up with $315mm in cash.

FY 2010 – The story in 2010 becomes significantly more uncertain given the inability to predicut the operating environment at this point. Tribune will need $951mm to cover its operations and meet a $675mm debt maturity. Tribune at this point must sell its stakes in the Food Network, Career Builder, and its Times Mirror Square real estate holdings. These are all premier assets that will have substantial strategic interest; however, a weak operating environment could hinder Tribune from reaping a fair value for these assets. Nonetheless, Tribune indeed has the collateral to sell, and the collateral is indeed extremely attractive.

FY 2011 & 2012 – Tribune will need to raise $75mm in proceeds, which it could do by selling Tribune Tower, to fund operations.

FY 2013 – Without a faster recovery in profitability that what I project in my financials, Tribune will run out of cash by 2013.

FY 2014 – If Tribune does not run out of cash by 2013, then 2014 will pose a significant challenge, as the Company must refinance $7.6 billion of debt.

Returns I feel that Tribune has a clear path to meet the ‘09 and ’10 maturities given that there are clearly identifiable assets that can be monetized. How it makes it through 2013 is unclear, and so I have run a returns analysis based on Tribune paying its interest on HJS through 2012. From the table below, a buy-in price of $2.00 produces a handsome return of 3.5x and 107%. I would certainly not bet the farm on HJS, but I feel that there is enough daylight to see Tribune surviving for the next few years so as to warrant an investment in Tribune at the current trading levels. If and when the Cubs sale gets done, I would seriously consider becoming a buyer of HJS up to a range of $3 - $4, but let's wait and see if a deal gets done.