Warren Buffett has been a newspaper investor for decades now. Hence, I guess he had liked to invest in the Tribune Company (TRBAA). According Oppenheimer's analysts, the Tribune Company could be a great long-term investment idea and, after I read their pitch on the company, I agree with them. The reason is simple: There are significant opportunities for the company to unlock value going forward and the company's management seems fit to take advantage of those opportunities. From transforming acquisitions to non-core asset sales or national stock exchange listings, there are plenty of opportunities ready to be taken. Let's take a look at the company's past, present and potential future.
Tribune's long history and vast assets.
The Chicago Daily Tribune was founded in 1847 and by 1924 the company entered broadcasting by leasing one of Chicago’s first radio stations. Afterward, the company acquired numerous newspapers and broadcast station holdings. In 2007, Sam Zell bought the company for $8.2 billion in a leveraged buyout transaction which eventually led the company to file for bankruptcy in December 2008 – at the moment the company had accumulated an unsustainable $13 billion debt.
Four years later, Tribune emerged thanks to Oaktree Capital Management - which now owns 23% of the company - JPMorgan and Angelo, Gordon & Co. In July 2013, Tribune purchased 16 stations owned by LocalTV for $2.75 billion and made the decision to spin-off its newspapers into the Tribune Publishing Company. All the other assets such as the broadcasting and digital media businesses would remain within the Tribune Company. Post spin off, the two companies would be: (A) Tribune Publishing Company, composed by Los Angeles Times, Chicago Tribune, The Baltimore Sun, South Florida Sun Sentinel, Orlando Sentinel, Hartford Courant, The Morning Call and Daily Press and (B) The Tribune Company, which includes the local television stations, WGN Radio, superstation WGN America, Antenna TV, Tribune Studios, Tribune Digital Ventures, Tribune Media Services, its equity interests in Classified Ventures (Apartments.com, Cars.com), CareerBuilder (32% stake), and real estate assets which could be worth up to $1 billion.
On Tribune's Valuation
Since the company has liabilities for $32.5 per share we could try to make a quick sum of the parts valuation. First of all, taking into account that broadcasters such as Time Warner Cable (TWC) trade at 8.2 times 2013 EV/EBITDA, the broadcasting arm of Tribune could be worth up to $57 per share. For the same reason, taking into account the fact that The New York Times Company (NYT) trades at 7 times 2014 EV/EBITDA, the company's publishing arm could be easily worth up to 4.5 times 2014 EV/EBITDA, or $13.50 per share. Meanwhile, the newly added incremental retransmission could be valued at $30 per share. On the other hand, real estate and equity holdings such as Classified Ventures could be worth up to $5 and $17 per share, respectively – taking into account a conservative $750 million valuation for the real estate holdings. Adding up together assets and liabilities it's clear that Tribune could be valued at $90 per share, which is well above today's $77 market price.
I believe the company will reshape itself in the coming years selling its equity interests in non-core assets – such as Classified Ventures and CareerBuilder – in order to become a stronger player in broadcasting and retransmission. On top of this, the company is ready to generate more than $630 million in cash flows by 2014, which represents a 9% yield.