Showdown in Chicago
Why do the Chandlers of L.A. want to break up the Tribune Co.?
(FORTUNE Magazine) -- Did you ever get good advice from a sworn enemy from a sworn enemy? Did you grit your teeth and take it, or could you just not bear to give him the satisfaction?
That's the position Tribune Co. CEO Dennis FitzSimons is in now. He's in a very public battle with the Tribune Co.'s second-largest shareholders, the legendary L.A. newspaper clan called the Chandlers. On June 13, a family representative wrote a letter complaining to the Chicago-based company's board that Tribune shares had fallen more than 38% since January 2003. That, by the way, is when FitzSimons became CEO. The letter said Tribune had pursued a failed business strategy and that it was time to break up the company or maybe just sell the whole thing.
The tall, mustached CEO is furious with the Chandlers, though he works hard to conceal his anger. At his recent presentation to analysts at the Newspaper Association of America conference in New York City, FitzSimons made it clear he had no intention of selling Tribune Co.
Instead, he argued that the Chandlers' complaints are really just a smoke screen - the real issue between Tribune and the Chandlers, he said, are two tax-free partnerships in which each has a financial interest. The Chandlers want to unwind them; Tribune wants the Chandlers to indemnify it against $70 million in taxes the company might owe if they are unwound.
The Chandlers, known for their obsessive desire to avoid taxes, appear to be balking. "The disagreement is not so much about strategy as it is about economics and tax risk," FitzSimons said.
This is what the newspaper business has come to: The descendants of Gen. Harrison Otis, who bought a stake in the Los Angeles Times 124 years ago, want to sell the 159-year-old Tribune Co., and it's all because the two sides can't agree about a tax bill. (There's also a dispute over the value of some preferred shares and real estate that the Tribune would have to buy as part of the transaction.)
At least that's FitzSimons's side of the story. His not-so-subtle implication: The Chandlers are a bunch of greedy rich people who are raising a public ruckus because they couldn't get their way in the boardroom.
You can see why this fight has generated so many headlines. The Tribune Co. is a Chicago institution once run by newspaper legends like Joseph Medill and his grandson, Col. Robert McCormick. The Chandlers controlled Times Mirror for decades - a newspaper empire that has grown to include such respected dailies as Newsday, the Baltimore Sun,and the Hartford Courant.
Tribune Co. absorbed those papers in 2000 when it struck a deal with the Chandlers to acquire Times Mirror for $8 billion. That transformed Tribune Co (Charts). into the nation's third-largest newspaper publisher after Gannett (Charts) and Knight Ridder. But it also got a pack of Chandlers -170 of them controlling 12% of Tribune Co. stock - and handling them is proving to be more difficult than anticipated.
Now we're seeing the first big shareholder revolt at a newspaper company since last November, when Bruce Sherman of Private Capital Management sent a similar letter to Knight Ridder. That put the company into play, and now McClatchy (Charts) is acquiring it for $6.5 billion. The media world wonders if the Chandlers' letter will do the same to Tribune. As private-equity groups and other potential bidders circle around, FitzSimons's empire may be on the verge of unraveling.
The Chandlers of L.A. will never be confused with the Sulzbergers of New York or the Grahams of Washington, D.C., who put journalistic quality over economic self-interest.
Granted, the late Otis Chandler, publisher of the Los Angeles Times from 1960 to 1980, transformed the paper from a partisan rag into a Pulitzer Prize winner. The Chandlers were appalled because they felt the paper had become too liberal, and when Otis stepped down, people speculated he'd been eased out by his relatives.
Even though Otis stuck around on the Times Mirror board until 1998, his influence waned. In 1995, the Chandlers hired Mark Willes, a former General Mills executive who vowed to use his marketing skills - he claimed to have come up with the idea for Honey Nut Cheerios - to boost the Times' circulation. Willes became known as the "cereal killer" because of his proclivity for closing papers, selling off assets, and laying off employees.
The Chandlers also got a little carried away with minimizing taxes. "Times Mirror was very, very well known in the tax community for being the most aggressive corporate taxpayer in the country," says Robert Willens, a Lehman Brothers tax and accounting analyst. "They were willing to pretty much try any novel technique to avoid taxes."
The best example was Times Mirror's claim that it didn't owe taxes on the 1998 sale of its legal-publishing division to Reed Elsevier (Charts) for $1.65 billion. Why not? Because, Times Mirror argued, the deal was a "reverse triangular merger."
In September a federal tax court ordered the company to pay back taxes on the deal. Now you see why FitzSimons is loath to do any more deals with the Chandlers that might involve a potential tax hit. "As you are aware, Tribune absorbed a $1 billion tax bill in September that was inherited along with the Times Mirror acquisition," FitzSimons lamented. "This reduced our market capitalization and certainly damaged our stock performance vs. our peers'."
So why should Tribune take strategic advice from the Chandlers? Well, because the Chandlers, unsympathetic though they may be, have it right: The strategy behind Tribune's purchase of Times Mirror was deeply flawed.
When the deal was announced, FitzSimons's predecessor, John Madigan, predicted superior revenue growth for the merged company because it could use Times Mirror papers in L.A., New York, and Hartford to cross-promote content and advertising with Tribune's TV stations in those cities. The company promised "incremental cross-media, national advertising, and Internet revenues of $60 million in 2001, growing to $200 million in 2005."
But the robust growth didn't materialize. For the past three years Tribune Co.'s revenues have been virtually flat. Investors and analysts have since declared the merger a failure.
Tribune's response doesn't inspire much confidence. It threw investors a bone in recent days by announcing the sales of TV stations in Albany, N.Y., and Atlanta. Its most ambitious plan - 2 billion stock buyback - is a financial ploy that doesn't address the real issue confounding Tribune Co.: The Internet is eating up circulation and ad dollars.
So, the Chandlers' representative argued in a June 13 letter, the company "should begin promptly exploring ... strategic alternatives, including breaking up and selling, or disposing in tax-free spinoffs, some or all of its newspaper properties, and the possibility of an acquisition of Tribune as a whole at an attractive premium."
There's one problem: The Chandlers still seem blinded by their aversion to taxes. They are pushing for a tax-free spinoff of Tribune's 24 remaining television stations. That's a bad idea. Sixteen of the stations are affiliates of the new CW network, a partnership between CBS and Warner Brothers, a division of Time Warner (Charts) (which also owns Time Inc., FORTUNE's parent). The CW doesn't debut until September, and advertisers won't write big checks to the network until they see some ratings. So in the meantime, how do you value the stations? There's no point rushing down this road.
Here's a better idea. Tribune should sell the underperforming Los Angeles Times. Publicly traded newspaper companies might not touch it. But private buyers would pay a high price. David Geffen and Eli Broad have made no secret of their interest. The sale could raise $1 billion for Tribune and would stabilize its earnings. Most important, it would strongly signal to investors that it's no longer business as usual in Chicago.
The Chandlers have all but put the company in play with their letter. Now they have a choice: Do they worry about taxes, or do they push the company to actually make the bold moves they've called for. If the past is any indication, the Chandlers are likely to do the former. Then again, they watched the value of their stock drop by 38% since 2003. Isn't that as bad as paying taxes?