Sam Zell's new mantra: Sell low!
The real estate-turned-media mogul finds himself forced to sell off Newsday on the cheap.
(Fortune) -- Nobody's timing was better at the top of the last boom than Sam Zell. Just before the credit markets collapsed, he sold his real estate empire for $36 billion. Now Zell is trying to sell newspapers, and his timing couldn't be worse.
Last December, Zell took the Tribune Co., publisher of the Los Angeles Times and the Baltimore Sun, private in a deal financed with $8.4 billion in debt. But the newspaper business proved to be far more difficult than he expected. So the former real estate mogul is trying to sell Newsday, one of the Tribune's flagship papers, to satisfy the company's creditors.
As Zell himself is no doubt lamenting, newspaper valuations have declined dramatically since he got into the business. The deal he structured to take the Tribune private valued the company's publishing division at 7.6 times cash flow. He's not likely to get that for Newsday.
Zell is nearing a deal to sell the Long Island paper to News Corp. for $580 million. Tribune doesn't disclose Newsday's cash flow. But Hale Holden, a high yield debt analyst at Barclays Capital estimates that the paper's EBITDA threw off $95 million in EBITDA last year. In other words, Tribune is selling one of its most prominent papers for six times cash flow - even though Daily News owner Mort Zuckerman and New York Observer proprietor Jared Kushner were also chasing the tabloid. Newspaper industry analyst John Morton isn't surprised: "If it weren't for the fact that there were several prospective buyers, it might be going for as low as five times."
The eventual deal may be sweeter than it appears. It is being structured as a joint venture with News Corp.'s s money-losing New York Post. Tribune would retain an ownership stake of less than 5% ownership stake in Newsday, enabling it to defer taxes. Not surprisingly perhaps, Zell's company would retain Newsday's real estate. Even so, this must be a sobering experience for a guy who sold his real estate company only last year to the Blackstone Group for an estimated 18 times EBITDA.
What's more, the deal could be scotched by regulators who may be concerned that News Corp. already owns not just the Post but two television stations and the Wall Street Journal in the New York area. If that happens, Tribune may end up putting Newsday back on the market and getting an even lower multiple if the newspaper industry continues to deteriorate.
None of this would matter if Tribune wasn't pressed for cash. It has a $650 million debt repayment looming in December. Another $750 million is due in May 2009. Even before Zell took control of Tribune, he announced plans to sell the company's Chicago Cubs franchise. But it hasn't happened yet. Analysts say part of the reason is that Zell wants to sell the team, Wrigley Stadium, its 25% stake in Comcast Sportsnet and the parking structures around the ball field separately. "In our view, Tribune may have erred in delaying sales to pursue what appear to be the highest [value] options," Holden recently wrote.
Zell will almost certainly raise enough money to keep his creditors at bay. He can always sell the Los Angeles Times, Tribune's crown jewel. The bigger question is whether he can keep his new company's revenues from eroding further. The self-described "Viagra of the newspaper industry" is trying to radically change Tribune's culture.
Under Zell's leadership, the company's papers and television stations in Los Angeles and Florida are combining their newsrooms. Tribune is raising its sales people's commission-based compensation and letting them roam into each others's territory. The former real estate mogul is also trying to loosen things up. On April Fool's Day, Tribune satirized its debt obligations on its web site. You don't see that kind of thing at the somber New York Times. The newspaper industry could use a little more levity. Hopefully, Zell and his underlings will still be in laughing mood in December.