Wednesday, March 28, 2007

The Home Stretch

Come Monday, things will be fresh again in Cub Land. Sure, the baseball season starts, but Monday should also signal a new direction for the Chicago Cubs ownership. The Tribune Company is expected to make a decision on its future. That future includes lots and lots of debt. The question is, who will control that debt? Will it be Denis FitzSimons running a scaled down version of the company? Will it be Sam Zell and his employee stock ownership plan (ESOP)? Or will it be billionaires Ron Burkle and Eli Broad who really want the LA Times and not much else?

The betting here (and many places elsewhere) is that Sam Zell will be the winner.

Tribune Co., owner of the Los Angeles Times and Chicago Cubs, will probably accept real estate billionaire Sam Zell's $8 billion takeover offer by the end of the week, according to people familiar with the matter.

An agreement is likely by Tribune's self-imposed deadline of March 31, said the people, who declined to be named because no decision has been made. Zell's offer of $33 a share is 6.8 percent above yesterday's close.

So, if Sam does buy the Trib, what does that mean for our favorite baseball team? The key is, and remains, the total amount of debt.

"assuming no asset sales and both the Chandler Trust and McCormick Foundation sell their stake, we estimate pro forma leverage slightly greater than 10 times, which we do not view as a realistic capital structure for a structurally declining business," (Barclays Capital analyst Hale) Holden said.

A more realistic scenario would be a sale of the Cubs and Tribune's 31 percent stake in the Food Network, in addition to rolling over the McCormick Trust's equity stake and potentially their proceeds from the dividend, estimated at $548 million, into the LBO financing, the bank said. A sale of the cubs is valued between $450 million and $500 million and the company's stake in the Food Network is valued around $700 million to $750 million.

But, even if Sam loses out and the Trib goes with the "Self-Help" option, the Cubs are likely out from under the Trib umbrella.

The most plausible alternative structure appears to be a "self-help" option, which could include less leverage and a smaller dividend than what Zell is proposing, as well as the spin-off of Tribune's television group

If the television stations are sold, there is no reason for the Cubs to remain. There is no grand synergy for the team without the paper, TV and radio all together.

And don't let goofs tell you that the Cubs won't be sold because of the tax implications. The taxes on a sale of the Cubs at $500 million would equate to $75 million at long term capital gains rates. Additionally, if the Trib were to sell other assets for losses, or report operating losses because of increased interest expense, a CPA friend informs me that the gains for the Cubs would be offset. The Cubs could be sold without any tax consequence whatsover because of the overall financial situation of the company.

This story is nearly 18 months old. It may be over in the next 100 hours.

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