Should newspapers be next for government bailouts?

Philadelphia Newspaper Holdings L.L.C., owner of the Philadelphia Inquirer, is looking for a bailout from the state of Pennsylvania. The paper, for which I have done freelance work for in the past, has like other major metropolitan dailies struggled for years with declining advertising and circulation. It has been trimming staff with a vengeance but it has done little good.

When Tribune Co. (OTC: TRBCQ) owner Sam Zell took the publishing and media giant private about a year ago, little did he know that his move would completely backfire, leading to a bankruptcy just under a month ago. With way too much debt, one of the nicer possessions in Zell's closet has been the Chicago Cubs. Outspoken billionaire Mark Cuban wants to buy them, but at a discount to Zell's asking price of course.

Cuban's balking at the approximately $1 billion price tag that seems to be the asking price for the Cubbies. Cuban probably is thinking that Tribune and Zell are in such dire straights that he can hold out a bit and score the Cubs for a much lower price -- perhaps $600 million or so. Zell, who is going to have to generate some asset sales regardless of how Tribune navigates through bankruptcy, needs to make this sale. In fact, all of the flash wrapped up in Tribune's assets that don't have a core function in its business probably will have to go. Time for egos to take a vacation.

Tribune Co. was for a time a great collection of media assets. Just like any other newspaper publisher, it was caught off-guard when most news seekers turned to the internet for instant news -- not late news like newspapers generally supply. Local content and freshness has been what has saved many publishers, but who knows if this will last.

For now, Zell's huge misstep with Tribune is going to demand he bite his tongue and rake in some cash. It's nice to know that two outspoken rich guys will be the ones getting to deal with each other soon, and perhaps Cuban will use his blog to chip away at the Cubs' price even more.

I guess I'm a bit old school, but I like the idea of walking to my mailbox to get my newspaper. I even like the feel of the ink that bleeds onto my fingers, but I recognize that I'm a bit unique.

Too unique, actually, and that is a problem for the newspaper business.

Yesterday, we learned that the old Tribune Company, privately owned by billionaire Sam Zell, is filing for protection under bankruptcy law. The company is drowning in a sea of debt and trying frantically to sell assets in order to raise cash.

It is obvious to management that subscriptions and advertising revenue will not be enough to pay off debt. The company will need to work with creditors on delaying principle and interest payments while it raises cash.

With the advent of the Internet and explosion of cable news networks, little old print media is going the way of the buggy whip.

Across the newspaper business, circulations have been falling for many moons and advertising dollars are taking their business elsewhere. Losses have been piling up, making it difficult to pay down debt used to consolidate the industry.

It's a complete mess.

MAJOR PAPERS:

• The Wall Street Journal reported that a spokesperson for New Corporation (NYSE: NWS) said the company has dropped out of the bidding for Tribune Co's (NYSE: TXA) Newsday. This leaves Cablevision Systems Corporation (NYSE: CVC) as the apparent winner of the auction.
• According to people familiar with the matter, the Wall Street Journal reported that American International Group Inc's (NYSE: AIG) airplane-leasing unit is considering a split from the company. The people said International Lease Finance Corp have grown "increasingly concerned" the company will be hurt by AIG's financial troubles.
• Royal Dutch Shell Plc (NYSE: RDS.A) and Spain's Repsol YPF SA (NYSE: REP) are pulling out of one of Iran's biggest gas projects, the $10B-plus development of phase 13 of South Pars, the world's largest gas field, the Financial Times reported.

WEB SITES:

• Bloomberg reported that HSBC Holdings Plc (NYSE: HBC) set aside a smaller-than-forecast $3.2B for bad loans in the U.S. The bank also said its Q1 profit was higher than Q107.

The Wall Street Journal, which is owned by News Corp. (NYSE: NWS) is reporting that News Corp. has withdrawn its bid for Newsday (subscription required). Rupert Murdoch's News Corp. was unwilling to match the $650 million bid offered by Cablevision (NYSE: CVC). New York Daily News owner Mort Zuckerman had also bid on Newsday.

Besides being higher, Cablevision's bid is likely to face fewer regulatory hurdles, considering Murdoch's and Zuckerman's New York holdings. But, according to the Journal, the bid could prompt some pushback from investors who question the the strategic rational for the deal. Cablevision could bundle Newsday subscriptions with other broadband and phone services it offers in the New York area.

Tribune Co. (NYSE: TXA), current owner of Newsday, recently reported that first-quarter revenue and circulation was down, as newspapers continue to struggle. Cablevision also reported a first-quarter loss of 11 cents per share.

Every day, about 20,000 local news stories are published in the U.S. Interestingly enough, there are more than 32,000 ZIP codes. Simply put, there are many cities where you won't find any local stories.

Well, with Topix, things are different. The site is categorized by ZIP codes and is chock-full of local stories. More importantly, users can post their own stories and links. In other words, anybody can essentially be an editor.

"A key is allowing the community to do its thing," said Chris Tolles, the CEO of Topix, in an interview with me. "Our site gets about 110,000 comments per day. Keep in mind that the Craigslist gets about 70,000 per day."

Sam Zell formally completed his buyout of the Tribune Company yesterday. It only cost $8.2 billion and months of difficult negotiations -- but now he can go out and get the pitching his newly acquired Chicago Cubs have long needed to win it all. Well, maybe not. Word on the street is that he plans to sell the Cubs and Wrigley Field for a cool billion as soon as he can.

Zell has made it clear that he plans on allowing the various units within the Tribune Company to stand on their own feet. By his count, there are over 60 entities within the company, and each one needs to strike out on its own. As Zell put it, "As I've said over and over again, there are something like 60 entities in the Tribune Co. and I view it as 60 ways to get lucky."

TheStreet.com's Jim Cramer says if any of your holdings in this sector have too much of any one kind of credit, use current market strength to sell.

Getting our arms around the problem. That's the real way we get closure on this credit problem. That's why the market was able to rally Tuesday, even though no one says the problem is getting better.

At last we're just trying to figure out how bad it can be because we know it is worse than the $42 billion that has already been charged off in subprime. By the way, even that figure, which seems staggeringly high, is only a fraction of the $250 billion minimum number I am using.

What's so maddening is that there isn't one kind of debt problem. There are three kinds of debt, with a subset for the worst kind. You have to run the gauntlet of all three kinds if you are going to be blessed by the market. And so far, only Goldman (NYSE: GS) (Cramer's Take) has done that.

Media owners have been chomping at the bit to be able to own both a TV station and a newspaper in the same city. Two major deal makers - Samuel Zell, a Chicago investor who is leading the charge to take the Tribune Company (NYSE: TRB) private, and Rupert Murdoch, Chairman and CEO of News Corp. (NYSE: NWS) who has tried for years to change the rule so he can continue to control both the New York Post and the Fox television station in New York -- hope it happens soon. If the rules change for Zell, he'll be able to own TV stations and newspapers in five cities - New York, Los Angeles, Hartford and the Miami-Fort Lauderdale area.

Well they may get their wish if Federal Communications Commission Chairman Kevin Martin has anything to say about it, according to the New York Times. The Times reports that Martin plans to repeal the decades-old media rule forbidding companies from owning both a newspaper and a TV or radio station in the same city. Right now an $8.2 billion buyout of the Tribune Company is hanging in the balance. Zell wants to take the company from a public to a privately held company by its employees, but the rule is in the way of completing the deal.

Many people are puzzled over Sam Zell's highly leveraged $8.2 billion purchase of the Tribune Co. in light of the decline in the newspaper business. One of the diamonds in the deal, however, is the Chicago Cubs, and indications are that he intends to quickly mine that gem for all it's worth.

According to the Los Angeles Times, the Tribune Co.'s (NYSE:TRB) avowed intention to sell the Cubbies may be considerably more complex than most franchise sales. The Tribune owns not only the ball club, but also the ballpark, and 25% of the cable TV network that carries its broadcasts, and could choose to sell them separately.

The Cubs, despite a century-long title drought, continue to draw capacity crowds to legendary Wrigley Field, over three million last year alone. This year, to the surprise of most prognosticators, the team is fighting for the NL Central pennant, great timing for the sellers. According to Forbes, the team alone is currently worth $592 million, on an operating income of $22 million.

Much of the one-day panic about the market was driven by the fear that falling housing prices will hurt consumer confidence. One aspect of that is accurate. As variable rate mortgages reset, people may lose their homes. Unless, of course, the problem become so wide-spread that banks or the Fed decide that mortgage payments need to be underwritten so that homeowners keep their places and the market is not flooded with cheap real estate.

Another reason that investors are worried is the private equity debt is becoming more expensive. Some of the deals for companies like Chrysler or The Tribune Company (NYSE: TRB) could fall apart. The other side of that worry is that banks may pull out of the largest and most risky deals. That could cause lawsuits, but save financial institutions from billion dollar loses. It could also take the prices of some stocks that were in the takeover pool down. But, a stock that KKR wanted to buy at $100 may be attractive to investors at $80.

Shareholders who have stocks that have done as well as the S&P 500 over the last two years are up 20%. And that does not include dividends. Those stocks may be worth less than they were a week ago. But, if they have not been sold, that really isn't important.

The current market may be an ugly business for day traders, but it may give them a break from sitting in their basements in the dark all day.

They just might be scared out into the sunlight.

Douglas A. McIntyre is a partner at 24/7 Wall St.

It looks like the complex $8.2 billion buyout deal for Tribune Co. (NYSE: TRB) is progressing.

This week, the company's shareholders tendered 222 million shares. Keep in mind that Tribune was looking for about 126 million shares. Although, if I was a shareholder, I would want to get out, too.

But there's a problem. The company had to agree to some draconian financing arrangements to get the deal done. This is according to a report in The Wall Street Journal [a paid service].

Tribune has issued about $7 billion in debt (yes, this deal's almost all debt). However, the debt markets were not so easy.

Tribune not only had to up its interest rates but also sell notes at a discount. In fact, Wall Street advisers had to forgo some fees.

It's too early to know if this is a sign that credit markets are generally getting tougher. But as for Tribune, the company still will need to raise $4 billion more in financing at the end of 2007. So, if credit markets get tougher, the financing may get even more onerous.

Today, Tribune's stock price fell 2.77% to $32.28.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

The sale of the Tribune Co, (NYSE: TRB) seemed to take forever (the process took about ten months). Then again, the newspaper industry continues to sag.

That's why it took the financial imagination of deal maestro, Sam Zell, to get the deal done.

The price tag for the Tribune comes to $34 per share or about $8.2 billion. That is about 10X EBITDA, which is a pretty good valuation.

To finance the deal, Zell is using a leveraged Employee Stock Ownership Plan (ESOP). That is, he will borrow a huge amount of money and have employees vest into the stock over time.

A big attraction is the significant tax benefits. First, the interest and principal is deductible on the debt. Next, owners of the Tribune's stock may be able to rollover their holdings into other stocks or bonds – and avoid paying capital gains tax. Also, by being converted to an S Corporation, the Tribune might be able to exempt some of its profits from taxation.

Another benefit is that the employee ownership should be an incentive for the workers.

On the other hand, if the Tribune's business weakens over the next few years, it could be a big hit to the personal balance sheets of employees – and that, of course, would not be so good for morale.

Just look at the ESOP at UAL Corp(NYSE:UAUA). It turned out to be a disaster because industry fundamentals fell to pieces and the company finally had to declare bankruptcy.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

Ben Berkowitz is the business news editor for AOL. His weekly column looks at news stories with long-term significance that were initially overlooked.

The story you didn't read this week but should have is the almost off-handed way that super-billionaire Sam Zell said he'd perhaps like to buy Tribune Co. (NYSE: TRB). And if that wasn't enough, now everyone's favorite even-bigger billionaire Warren Buffett is said to be snapping up shares of the New York Times Co. (NYSE: NYT).

These titans of industry understand something that even the Internet has not changed: owning a newspaper is both a mark of prestige and an easy way to have a very loud voice. Anyone who thinks their motives are altruistic has perhaps been sniffing too much newsprint.

Sam Zell is a real-estate baron. What on earth would he do with a newspaper chain? (Yes, Trib also owns the Cubs, and some TV stations, and a few other properties, but the same question applies. There are easier ways to own a baseball team.)

Keep asking: why does housing developer and art patron Eli Broad want the Los Angeles Times? Or supermarket magnate Ron Burkle? Why would insurance heavyweight Hank Greenberg want the New York Times? Why does Jack Welch want the Boston Globe? Hint: remember the rumors about Welch trying to steer election coverage in various NBC newsrooms in 2000.

Simple: they want to control mainstream media outlets to push their agendas. Broad has a vision for changing the future of Los Angeles. Burkle is a big Democratic supporter. Greenberg has been abused mercilessly in the press for the financial doings at AIG. Welch's wife is a journalist.

The motives for Zell and Buffett are less clear; maybe Zell wants to take a crack at Trib for the sake of it? Great businessmen love challenges. And Buffett, well, just do what the man says. He buys it, you buy it. Really, he didn't get rich on his looks or fashion sense.

Tribune (NYSE:TRB) opened today at $30.92. So far, the stock has hit a low of $30.71 and a high of $31.05. As of 9:59 this morning, TRB was trading at $30.93, up $0.01 (0.03%) on extremely heavy volume.

After hitting a one year low of $27.09 on April 6, 2006, the stock worked its way up to a high of $34.28 on October 26, 2006. Tribune reported earnings yesterday all seemed positive as the company rode cost controls and non-operating gains to an 81 percent rise in fourth-quarter profits but said advertising, circulation and total revenues all declined excluding the benefit of an extra week in the period.The technicals for TRB have been improving lately and S&P gives the company a cautious 3 STAR (out of 5) hold rating with a current 12-Month target price of $34.

For a neutral to bullish hedged play on Tribune, I would consider an August covered call at the $30 level. There may even be a chance to pick up some of this stocks 2.3% annual dividend.

Vic Schiller is an analyst on the move at Investors Observer. (Free Subscription)

DISCLOSURE NOTE: Mr. Schiller owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about.

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