Tribune Co. may be best known as a newspaper publisher, but its television business could hold the key to its future.
All of the offers submitted for Tribune last week hinge on the value of the company's 23 TV stations, which account for about one-third of the company's profits. Industry executives note that while Tribune's newspapers, which include the Los Angeles Times and Chicago Tribune, have relatively high profit margins, the TV stations lag behind some competitors.
After reviewing the offers in a meeting with its advisers Saturday, the special committee of Tribune's board that is overseeing the auction appeared to lean towards taking action on its own. It is considering "potential transactions involving third parties as well as actions the company may take alone," said William A. Osborn, chairman of the special committee and Tribune's lead director.
On its own, Tribune could borrow money to pay a big dividend to shareholders and then explore a spinoff or sale of its TV stations. A person familiar with the process said that the company also was exploring how to use the McCormick Tribune Foundation, a charitable foundation controlled by Tribune's management, in any possible transaction.
Tribune is looking at how a "self-help" option stacks up to proposals from bidders such as Los Angeles businesspeople Ron Burkle and Eli Broad, who propose a recapitalization that would give them effective control. The pair, who traveled to Chicago to personally pitch their proposal to the special committee Saturday, suggest taking on a heavy debt load to fund a $27-a-share dividend payout to shareholders.
The pair see the TV stations as offering the most obvious opportunity for increasing profits, according to a person familiar with their thinking. Private-equity firm Carlyle Group, which submitted a bid for only the station group, appears to have the same view. Private-equity firms tend to want to buy assets that have potential for improvement, ensuring they can get a big return on their investment.
The third bidder, Tribune's biggest shareholder, the Chandler family, is interested in buying only the newspapers and proposes spinning off the TV stations. The prospects for their offer rest heavily on the value put on the proposed new TV company. The Chandlers believe the TV stations are worth $4.2 billion, or $12.40 a share, but Tribune believes the stations are worth much less, according to a person familiar with their thinking.
A spokesman for the Chandler family declined to comment, as did a spokeswoman for Messrs. Burkle and Broad. Carlyle also declined to comment.
Both Tribune's newspapers and television business have experienced a decline in operating profit in recent years. Newspapers have been hurt by a shift of advertisers to newer media such as the Internet. TV ad revenue has been affected by similar trends although Tribune's stations — mostly affiliated with the fledgling CW network — have also been hurt by ratings erosion against rivals such as News Corp.'s fleet of stations.
Few people who have looked at Tribune see obvious ways to significantly lift its newspaper earnings, particularly as newspaper industry ad revenues are flat. There are different views about the broadcasting side. Messrs. Broad and Burkle, for instance, think Tribune could take more advantage of duopoly ownership rules allowing a broadcaster to own two stations in a market, a person familiar with their thinking has said. Duopolies allow station managers to cut costs, particularly in areas such as news. Tribune has duopolies in a handful of midsized markets such as Indianapolis and Hartford. The person said one possibility for Tribune is to swap its stations in big markets such as Los Angeles and New York for a second station in smaller markets where it owns one station.
Some in the industry question that strategy, however. Giving up a presence in big markets is risky, according to Bill Carroll, a vice president and director of programming at Clear Channel Communications Inc.'s Katz Television Group, which advises stations on programming. "If you want to continue to be a dominant player, it would seem that you are best positioned by being one of the gatekeepers in the top markets, rather than having duopolies in smaller markets," he said.
Another issue a buyer of the stations would have to confront is the CW network's low ratings. Formed last year from the merger of the money-losing WB and UPN networks, the CW has posted declines among total viewers and adults age 18 to 49, compared with the defunct networks. The 18-to-49 age group is the demographic most advertisers pay a premium to reach. The CW is flat among its target audience, adults age 18 to 34, according to Magna Global analysis of Nielsen Media Research data.
Tribune says that in its top markets such as New York, L.A. and Chicago, the network's ratings have increased significantly from last year.
Dawn Ostroff, the CW's president of entertainment, says viewership has declined because audiences continue to have a difficult time "finding the shows." Because of a realignment in affiliates, about 67% of UPN viewers had to look for programs on another channel this fall. Followers of former WB shows needed to switched channels in about 28% of the country. "We've got a long way to go, but we're happy with where we are," she says.
Given this situation, it is unlikely any buyer of Tribune's CW affiliates could boost revenue without first spending heavily to market and brand the new network in the local marketplace.
TV isn't the only area where a Burkle-Broad-controlled Tribune would make changes. Mr. Broad, in particular, believes the Los Angeles Times should be repositioned to be a strong regional newspaper serving Southern California.