Posted by chicagomedia.org on November 12, 2008 at 13:59:11:
Tribune Gets Creative in Tough Times
By Price Colman
KWGN Denver anchor Ernie Bjorkman came up with an exit strategy two years ago: He went back to school to be a veterinary technician.
His timing was impeccable. He graduates in December and on New Year's Eve he's getting laid off after 30 years at the Tribune CW affiliate.
"Sam Zell, Randy Michaels and Ed Wilson came in [last summer] and told us how great we were, we had such a storied past, we'd been here for 40 years," Bjorkman recalls. "Then they left and this happened."
In early October, Tribune cut about a quarter of the 120 jobs at KWGN as it merged its operation with that of KDVR, the market's Fox affiliate owned by Local TV Holdings.
The layoffs are among hundreds that Tribune has made across its media empire of eight daily newspapers and 23 TV stations as it struggles for survival under heavy debt and the prospect of a long and deep recession. Billionaire investor Sam Zell took on the debt when he took the company private in December 2007.
Tribune is doing what every media company in trouble does, says Larry Patrick of Patrick Communications. "They'll implement hiring freezes, they won't replace any personnel except salespeople who quit, they'll enact 5-10 percent across-the-board spending cuts and they'll trim all possible expenses, from travel budgets to subscriptions."
But Tribune strategy is not simply one of consolidation and cost cutting, although that's crucial. It's also about developing and expanding operations where it makes sense to boost revenue and badly needed cash flow.
Under the direction of Tribune COO Randy Michaels and Tribune Broadcasting President Ed Wilson, Tribune is adding nearly 100 people in key broadcast markets and increasing news programming. In other words, at the same time it's slashing costs wherever and however it can, Tribune is spending money to make money.
"They have to try some new things," says a broadcast industry source. "They have a mountain of debt. They have to find some ways to break some of the rules, figure out how to generate more cash from some of these businesses. ... The trick is to do something on the cost side without damaging the revenue side. It's a difficult balance."
Michaels and Wilson declined to be interviewed for this story, as did station managers.
Tribune's most aggressive and apparent cost-cutting moves came in September when it turned over the operations of its CW stations in Denver (KWGN) and St Louis (KPLR) to Local TV's' Fox affiliates in each market, KDVR and KTVI, respectively.
That led to significant layoffs of Tribune employees, including the stations' top management — GM Jim Zerwekh and News Director Carl Bilek in Denver and KPLR GM Bill Lanesey in St. Louis.
Local TV's Dennis Leonard now runs the Fox-CW duopoly in Denver out of Local TV's KDVR, while Local TV's Spencer Koch manages the St. Louis stations out of Tribune's KPLR studios.
The joint operations were made possible by the special relationship between Tribune and Local TV.
Owned by Oak Hill Capital Partners, Local TV Holdings operates 17 network affiliates purchased from the New York Times Co. and Fox over the past two years.
Oak Hill initially named Michaels to run Local TV, then replaced him with his longtime broadcasting buddy Bobby Lawrence when Michaels answered Zell's call to become COO of Tribune Co. in May.
But rather than simply moving to Tribune, Michaels created a unique broadcast management company that oversees both the Tribune and Local TV station groups.
In July, Michaels and Wilson named Steve Charlier senior vice president of news and operations for the Tribune and Local TV stations, further aligning their management and operations under one banner.
The common management of 40 full-power network affiliates in 33 markets gives the combined group significant leverage as a buyer of programming and equipment.
It also is intended to appeal to advertisers.
"We see this as an opportunity to develop our relationship with local advertisers," says Gary Weitman, Tribune senior vice president-corporate relations. "This gives us, as well as Local TV, an opportunity to make ourselves more attractive to national advertisers ... to present ourselves as having a larger footprint."
In its relentless search for efficiency, Tribune has also merged its newspaper and broadcast properties in South Flordia. There, the broadcast operations of CW affiliate WSFL Miami-Fort Lauderdale were into those of the newspaper, the South Florida Sun-Sentinel. Journalists produce stories for both media.
Howard Greenberg, publisher of the newspaper, added station GM duties and Allyson Meyers, who had left WSFL last year, returned as station manager.
While the look is different, the goal is the same as in Denver and St. Louis: identify overlaps, eliminate duplication, use fewer people to produce more news, sell more advertising.
The real evidence that Tribune management is about more than slashing and burning is its commitment to increasing the news hours and, in some cases, the payrolls at its stations in Hartford, Conn.; Sacramento, Calif.; Grand Rapids, Mich.; Harrisburg, Pa.; New Orleans, San Diego, Chicago and New York.
The big changes are at KSWB San Diego, which grabbed the market's Fox affiliation from XETV Tijuana, Mexico, in August.
As a CW affiliate, KSWB had been outsourcing newscasts to NBC affiliate KNSD, but with the Fox pick up and the hiring of GM Ray Schonbak, it began adding people (as many as 50) and producing its own news programming — four hours in the morning and a 10 p.m. newscast.
All the changes are aimed at generating the cash the company desperately needs.
Even before the economy went into freefall, Tribune faced formidable obstacles in the wake of Zell's $8.5 billion highly leveraged buyout in which he took the company private.
Foremost are tough loan covenants that get even tougher over time. First, Tribune's debt cannot exceed nine times cash flow (EBITDA). At the end of second quarter, the ratio was 8.3 times. The company has not disclosed the ratio at the end of the third quarter.
Second, cash flow must be a minimum of 1.15 times interest expense. At the end of the second quarter the ratio was 1.6 times. The company has not disclosed the third-quarter ratio.
Then there's a looming $500 million loan payment that's due in early May.
Violating the covenants or failing to make the loan payment could be the first step down toward bankruptcy.
Rating agencies are divided on the likelihood of defaults. Emile Courtney at Standard & Poors says Tribune must sell the Chicago Cubs and its 25 percent share of Comcast SportsNet to avoid a default that could come as soon as early next year.
Fitch Ratings has already factored in the likelihood of default into its CCC debt rating, eight steps below junk. Before Zell took over, Tribune's rating was A-, indicative of investment grade debt.
"We believe default is a real possibility because the company has layered significant debt burden on a dramatically declining business that needs significant structural changes in order to improve its competitive position and establish itself as going concern for the long term," says Fitch's Mike Simonton. "They have a very thin margin of safety over debt obligations and very little flexibility to invest in turning around their business."
Some lenders are already trying to calculate what they would get in a fire sale of assets.
"They are absolutely panicked," Patrick says. "I can't remember a time when I've had so many different calls. All I keep hearing from money people behind Tribune is they're going to go under and I keep hearing the third or fourth quarter of 2009. They're saying we're urging them to sell, urging them to sell left and right."
Tribune did sell Newsday to Cablevision earlier this year for $650 million, with Zell retaining 3 percent ownership to keep the deal tax free. But since then, Tribune has not had much success.
With credit tight, even solid-gold borrowers are having a hard time coming up with loan commitments.
The company was close to a deal for Wrigley Field with the Illinois Sports Facilities Authority in June only to have it fall apart over tax issues. In August, Zell announced that Tribune had narrowed bidding on the Cubs to five potential buyers, including software exec-turned sports team owner Mark Cuban.
Last December, Zell said he planned on having the Cubs deal done before the season opened. Now, he's hoping for some kind of deal by year end.
So far, TV stations haven't entered into the sales scenario, although, predictably, there is speculation.
"There's a lot of talk they'll sell Channel 2 [KWGN] to Local TV," says Bjorkman.
A sale of KWGN and KPLR would benefit Zell, who badly needs cash, and Local TV, which would immediately have real, not virtual, duopolies in the two cities.
Tribune's Weitman declined to comment on the possible sale.
Third-quarter results, reported Monday, suggest that time is running out on Tribune's turnaround strategy. Undercut by a dismal ad market, broadcast operating revenues fell 8 percent to $264 million, cash flow dropped 34 percent to $64 million and cash operating expenses grew 5 percent.
Publishing results were markedly worse: Operating revenues fell 13 percent to $654 million, operating cash flow plummeted 91 percent to $13 million and cash operating expenses climbed 6 percent to $640 million.
Total debt stands at $11.8 billion.
"Sam Zell is a really smart guy," says Patrick. "He's been able to buy things, sell parts and pieces at a price better than what he paid. He ought to sell newspapers if at all humanly possible because they'll continue to kill you. He really needs to sell those and hang onto TV properties that are making the most money to continue to survive."
Zell and Tribune's best hope, at least in the near term, may not be improved operations or big numbers on the sale of assets, but the creditors' unwillingness to force Tribune into default.
"What are the banks going to do?" asks one mutual fund insider. "They have to extract their pound of flesh. Banks don't want these assets. I think you'll see more relief coming for a lot of leveraged media companies.
"I think I'd rather work with them than force them into default. If you trigger a bunch of media defaults, you end up writing down even more assets on the balance sheet. You try to work out something. Looking at Zell, maybe he actually has more leverage."
(TVNEWSDAY)