Conference Call Regarding
Dutch Auction Tender Announcement
May 30, 2006
Ruthellyn Musil, Sr. Vice-President/Corporate Relations
Good morning and welcome to Tribune’s conference call
to discuss the announcement we made this morning. Our opening
remarks will be brief and then we’ll take your questions.
As is our usual practice, we expect to finish within the
hour. Speakers this morning will be our CEO, Dennis FitzSimons,
and Don Grenesko, our senior vice president and chief financial
officer. Before turn the call over to Dennis, just a quick
reminder that our discussion may include forward-looking
statements that are covered in greater detail in Tribune’s
SEC filings. Here’s Dennis.
Dennis FitzSimons, Chairman, President, CEO
Good morning. As you saw in our press
release today we announced an important transaction that
will return significant value to Tribune’s shareholders
in the near-term. Our Board of Directors has authorized
the repurchase of up to 75 million common shares or 25%
of our shares outstanding. We plan to do this in three
steps.
First, we are offering to repurchase
up to 53 million shares through a Dutch Auction tender
at a price range of $28.00 to $32.50 per share. Second,
we’ve agreed to repurchase
of a total of 10 million shares from the McCormick Tribune
Foundation at the same price we buy shares in the tender
offer. Assuming the full 75 million shares repurchased, the
foundation would maintain an interest in the Company of about
14%. And third, we plan to repurchase up to 12 million shares
in the open market after the tender offer expires. Finally,
management will not be selling in the tender.
We decided to take this action now for
several reasons. We believe the Tribune’s current stock price does not
reflect the value of the company or the potential we have
for creating shareholder value. The credit markets are accommodating
with interest rates at the lower end of their historical
range, and we’re optimistic about the prospects for
improved performance in our media businesses.
There are a number of positives to this
transaction -- it’s
an opportunity to reduce shares outstanding in an attractive
valuation; there’s an immediate substantial return
of capital to shareholders which addresses the needs of those
who want liquidity; we expect it to be accretive to EPS;
and it lowers Tribune’s cost of capital through the
replacement of higher cost equity with lower-cost debt.
Since we will no longer pay a dividend
on shares that will be retired the incremental after-tax
cash cost of the transaction will be very reasonable. Don
will have some more color on this and other financial details
in a moment. Let me emphasize that in addition to disciplined
debt repayment we will maintain our current dividend. We’ll
also still have flexibility for investments that will improve
our top-line growth.
We would expect to increase our stake in CareerBuilder and
make more acquisitions like forsalebyowner.com. Our return
capital investments like additional color capacity at our
newspapers and in technology that improves efficiency will
continue. In addition, we plan 200 million in cost savings
across the Company over the next 24 months.
This next wave of cost savings will come through a combination
of common systems for advertising, circulation, content and
interactive capabilities that will improve efficiency plus
greater collaboration across business units, outsourcing
and local initiatives. Overall resources will be redeployed
to support key growth opportunities particularly in our interactive
businesses.
Publishing expenses from existing operations are expected
to be about flat through the end of 2008 excluding stock-based
compensation. Broadcasting will have normal inflationary
increases in expenses primarily related to programming costs.
These cost savings coupled with revenue improvement should
yield meaningful cash flow growth. Our plan also calls for
selling certain non-core assets and we are targeting proceeds
of at least $500 million. These may include non-core broadcasting
and publishing businesses as well as real estate and securities
held for investment.
We’re confident that this combination of share repurchase,
disciplined debt repayment, improved operating performance
and asset dispositions will create long-term value for Tribune
shareholders. Now let’s go to Don and then we’ll
take your questions.
Don Grenesko,
Sr. Vice-President/ Finance & Admin.
Thanks, Dennis. Good morning, everyone. Here are a few more
details about the tender offer. It will be open for 20 business
days and is expected to close on Monday, June 26th. All shareholders
will have the opportunity to tender shares within the range
of $28.00 to $32.50 per share. What we ultimately pay will
be determined by selecting the lowest price within this range
that allows us to purchase 53 million shares. All sellers
will receive the same price per share. The total cost of
all 75 million shares we plan to repurchase will be in the
$2 billion to $2.4 billion range. We will finance this through
a combination of bank debt and publicly issued bonds.
This financing structure is designed to minimize our ongoing
interest cost while maintaining the flexibility to prepay
as much of the debt as possible without incurring penalties.
The financing could total $3.4 billion including up to $2.4
billion for the stock repurchases and about $1 billion to
refinance outstanding commercial paper and fund other near-term
debt maturities. The financing structure will also include
a new 750 million five-year revolving credit facility to
replace our current agreements.
We expect that about one-third of our new financings will
be in the form of variable-rate bank debt tied to LIBOR plus
75 basis points. LIBOR is currently at 5.25%, so the initial
cost of this portion of the financing will be about 6%. The
remaining financing will be handled through fixed rate bonds
issued to the public in the third quarter. These bonds will
likely have maturities of five to 12 years and, based on
current market conditions, priced in the 7% range. By replacing
expensive equity with lower-cost debt we will lower our overall
cost of capital by about 50 basis points. In addition the
4% after-tax cost of the new data will be partially offset
by the elimination of the 2.5% dividend yield on the common
shares we are retiring.
As a result of this transaction our long-term debt rating
will be lowered by the rating agencies and we expect to lose
access to the commercial paper market. However, we plan to
pay down debt relatively quickly with a goal of regaining
a mid BBB bond rating and access to the commercial paper
market by the end of 2008. With that we will open it up to
questions.
QUESTION AND ANSWER
Frederick Searby, JP Morgan
Q. I wondered if you could give us some more insight into
the tax efficiency of this, specifically with the divestitures.
Whether your stake in TV Food Network is one of the assets
? On the real estate basis, what kind of tax planning you
can do to offset, I imagine, the low-cost basis? How should
we think about dividends going forward? Does this mean there
will be no dividend increase?
A. First, what we said is we’ll maintain our current
dividend; that is our intention at this point. In terms of
divestitures, we’ll always look at the after-tax
proceeds versus the cash flow that we would lose in a divestiture
to determine what is the best mix of divestitures for our
shareholders. In other words, where we can generate the
most value.
TV Food Network, as we’ve said before, is one of the
assets we would consider, but we’ve seen such good
growth in Food versus the discussions on price that we have
had, we feel it’s more valuable to keep the cash flow.
As we’ve said many times, Scripps has been a great
partner and they’ve done a tremendous job in growing
the cash flow, we see that continuing to grow. But we do
consider it non-core. If we could get the right price that
would make a positive event for shareholders, that is one
that we would certainly divest.
Lauren Fine, Merrill Lynch
Q. Just sticking with the potential
divestitures, a couple of questions there. Is the $500
million that you’re
discussing a pretax estimate or an after-tax estimate? And
it sounds like you’re willing to contemplate some
EBITDA generating assets, but should we focus more on assuming
that it will be non-EBITDA generating assets.
A. That $500 million number would be pre-tax. And we would
consider EBITDA generating assets. For example, certain television
stations, that are non-core to our program buying strategy,
something that we would consider.
Q. Can you give us any sense of timing
on the open market share repurchase that you’re discussing? And then also,
could you be more specific on the cost savings? That’s
a big number and you’ve already been doing an awful
lot of cost containment. How much will you need to invest
to get those cost savings in terms of some of the centralized
ad systems, things like that that you’re contemplating?
A. Just in terms of CapEx, the number that we have put out
this year is about $220 million. That number will not change.
That does include our investments in the common systems that
I described earlier. In terms of the share repurchases, we
can begin share repurchases 11 business days after the close
of the tender. So we would expect to be back in the marketplace.
It could take us some period of time, it could be a couple
months, but it could go through the remainder of the year.
Q. And have you approached the Chandler Trust at all for
any of these transactions?
A. The Chandlers are considering their options in terms
of participating in the tender. We have not heard from them
as of yet as to their intentions.
Lee Westerfield, Harris Nesbitt
Q. Turning back to the cost savings
as you go to redeploy operating cost towards somewhat
more productive elements here, what’s the time frame we’re
looking at over the next two years? Should we be thinking
largely in terms of 2007 benefit as opposed to earlier?
And if you could just be a little more specific about
the nature of the systems integration?
And then the second question relates to the McCormick Foundation.
It may not be quite fair for you to speak for them, but what
is their motivation here, diversification of the portfolio?
What other factors may have weighed on their consideration
to sell the stock?
A. On the savings, that would be spread over the next two
years. Some of those savings would be this year, but again,
it would be spread. As far as the McCormick Tribune Foundation
diversification, they still have a very significant percentage
their overall portfolio in Tribune stock. But most comments
about that should come directly from the Foundation.
Debra Schwartz, Credit Suisse
Q. It seems like you are taking some pretty aggressive steps
here, but overall the local advertising growth is tough to
come by. I was wondering, is this the first step to taking
the company private and is the taking the company private
something you would consider?
A. We consider it a very significant
step and we wouldn’t
comment beyond what we’re doing today and the steps
that we’re taking. But you’re right in terms
of local market media growth being tough to come by. Look
at some of the factors that have impacted us over the last
18 months -- local people meters, challenges in growth at
the LA Times, specific issues at Newsday that we’ve
had to deal with related to circulation and preprint competition.
We feel we’re making progress on the West Coast. We
feel we’re making progress in cycling through some
of the issues at Newsday. We think this is a good time
for us.
Some of the specific problems that
have impacted Tribune we think we’re making progress on and that’s
why we’re making this step at this point. We think
our revenue prospects are going to improve. We have to
make that happen. Our goal is to under promise and over
deliver.
Scott Rattee, Bear Stearns
Q. I guess the first question is just
why now? Were there any sort of catalysts either coming
from shareholders or something like that that prompted
today’s announcement?
And then number two, you’ve been obviously fairly
specific about the time frame on the tender. I was wondering,
do you have an idea of what the time frame on the asset
sales are likely to be or what you would like to target?
A. In terms of the timing, some of
the points that I just made regarding our specific situation
would answer your question. Also that the credit markets
are very accommodating at this point, enabling us to
do this kind of financing at what we think is a reasonable
cost. So we think it’s
a good event for shareholders. Again, it gives liquidity
to those who want liquidity at this point and, again, we
see this as being accretive to EPS and a positive step
for us to return capital to shareholders.
The question was the timing on the
asset sales. So we would assume that we would try to
accomplish this within the next six to 12 months on the
asset sales. We’d
probably be looking on certain of those assets sales to
be in the nearer term. You can look for certain announcements
in the next weeks and months.
Peter Appert, Goldman Sachs
Q. Did I hear you say earlier in the call that you expect
to be able to increase your stake in CareerBuilder? And I
would assume therefore if I heard that right that this means
you and Gannett will get the piece that Knight Ridder had?
A. Those discussions are ongoing and we will look to continue
those discussions. But if anything we would expect to have
an increase in our position in CareerBuilder. But again,
McClatchy will continue to be an important partner in CareerBuilder.
Q. Okay. And would that involve therefore incremental spending
to acquire an additional stake?
A. Yes.
Q. Will the cost savings programs you envision, involve any
significant headcount reductions?
A. Yes, and we would attempt to accomplish as much of that
as possible by attrition, but there would be additional position
eliminations where we cannot accomplish it by attrition.
Q. And then finally, I’m assuming debt repayment then
becomes the top priority for free cash flow use. Is there
any rule of thumb or thought in terms of how you’re
going to think about how quickly you can repay the debt?
A. What I had indicated is that we’re
trying to get back to the mid BBB debt rating by the
end of 2008, so we would need to get down to about $5
billion or so we think in terms of the debt by that point
in time. Our debt should go up to about the $5.9 to $6
billion range with this transaction. So within the next
2.5 years we would expect to pay down a bout $900 million
in terms of debt.
Q. And then on a go forward basis, would you be looking
to hold the leverage at a relatively high level, implying
therefore continued aggressive share repurchases?
A. Still to be determined, but I think that that BBB debt
rating which would enable us to get back into the commercial
paper market, be an A2 and P2 commercial paper, would be
our goal at this point.
Q. The capital spending you’ve already indicated you’re
going to keep at the level previously described for ‘06.
Is that a number we should think about on a go forward basis
then as well or do you think there’s room to bring
that down?
A. Probably slightly less.
Paul Ginocchio, Deutsche Bank
Q. Let me just see if you have any view on May, if you can
give us a look at that. Obviously it is going to be better
than April, but if you had a view that would be great.
A. We’re seeing some encouraging signs for May and
we’ll make our usual mid-month announcement regarding
May revenues. But we are seeing some encouraging signs.
Craig Huber, Lehman Brothers
Q. You’ve talked about this in the past a few times.
The cost savings, this $200 million this round, could you
just discuss what signal that sends to investors? Given how
strong the U.S. economy is to announce another $200 million
of flat costs the next two years if I heard you correctly.
Should we read into that that means your own internal outlook
for your advertising and circulation is not real robust and
that’s why you were resorting to that? It’s
a very tough thing to run a company for five to six years
now with very, very tight cost controls like this.
A. What we’re trying to do is redeploy assets; we’re
trying to run our existing businesses which have had a difficult
growth period more efficiently while still maintaining quality
and relevance in our individual local markets. So we’re
going to continue to do that, but we’re doing it by
investing in technology. So we’re making capital expenditures
and trying to create efficiency by using the size of our
group. We’ll continue to do that. It says nothing about
our view of the future other than we’re in a changing
business and we feel we need to get out in front of it.
Q. And then my other question relates
to the McCormick Foundation, selling stock here, about
a quarter of their position at 8- to 9-year lows right
here. What should we read into that? Why are they selling
now at 8 to 9 year lows? They’ve
waited this long to sell?
A. Again, the question is best addressed
to the foundation, but it’s a diversification issue.
And again, they will still have 14% of the Company assuming
the 75 million shares are purchased. But those decisions
were made with the council of an outside financial independent
financial adviser and legal counsel and they still believe
that the 31 million shares or so that they will retain
in Tribune are an excellent investment.
Q. It is also interesting you did
not rule out that the Chandler family would not be participating
here. It’s
the same sort of signal there as well. It’s just interesting
8 to 9 year lows here, at least one of the parties is looking
to get out, meaning they don’t think they could sell
their shares higher in the future. What am I missing?
A. What you have to understand is
the McCormick Tribune Foundation has charitable giving
needs every year, so they need some liquidity and they
have been sellers of shares periodically. You really
shouldn’t read anything into
this because there are certain requirements and grant requirements
from grant pledges that have been made by the foundation
that require some liquidity in addition to the dividends
that they receive. Also, I don’t think you should read
anything into the Chandler decision or no decision; it’s
just that they’re evaluating what their position
will be relative to the tender.
William Bird, Citigroup
Q. I was wondering if you could just
give us some of the building blocks on the cost savings
of $200 million. I was just having difficulty understanding
how to arrive at such a large number. And also I was
wondering how that reconciles with your comments on publishing
operating expenses expected to be flat through ‘08
and TV growing with the rate of inflation?
A. The savings will come through a
blend of compensation savings and reductions in other
cash costs. We think common systems that we described
for content, advertising and circulation across the group
will save about $40 million annually. Plus, we would
hope with the advertising systems there will be some
revenue benefits. We’re looking for additional
savings in newsprint and distribution expenses. In broadcasting
we’ll continue to use technology to eliminate redundancy.
We’ll continue to make use of centralized distribution
centers for programming, regional operating centers. We’ll
continue to produce efficiencies across the group.
Edward Atorino, Benchmark Company
Q. What’s the future status
of the Cubs in the Tribune asset mix?
A. I think what we would say there is very clearly our media
assets in the top three markets -- our programming assets,
which the Cubs would be because they are so important to
our radio, TV and Superstations -- our top three market assets
are not for sale.
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