Imagine this: you’re in an industry that hasn’t changed much in 100 years.  For the last 5 years the number of customers has been declining, as have revenues.  Your long-time users are aging and younger potential users say they have little interest in your product.  User interviews regularly say your business is out of date.  And new technology exists which completely obsoletes your product.  Would you find the answer to your dilemma in loading your company up with a HUGE amount of debt while selling off your most profitable assets?

That is of course the situation at the Tribune Company (see chart here), owner of The Chicago Tribune, The Los Angeles Times, the Chicago Cubs and 25 television stations.  If you ever wanted to know when a company moves from the Swamp into the Whirlpool, this is the time for the Tribune.  The Tribune Company has been horribly Locked-in to a failing Success Formula with declining results for years.  Now it is going to make any alternatives impossible by cranking up the debt load while selling the Cubs and other assets that are profitable and have potential for future growth.  Instead of using White Space to find a new Success Formula, which would require more understanding and success on the web, the Tribune is moving to Defend & Extend it’s dying newspaper business! (See article on company sale here.)

The Tribune’s newspaper business is in decline as readers abandon traditional print news for the web, and advertisers are following the subscribers.  So not only is the company selling off the Cubs and its investments in growing targeted television, but it is adding $7Billion of new debt (and yes, it’s keeping all the old debt) in order to buy back all the outstanding equity.  Yes, they are ADDING debt almost equal to the entire oustanding market value of the company  ($8billion).  Shades of Michael Milkin and the Junk Bond craze! What paper equity remains will be in an ESOP.  But for $320million (that 4% of the new debt added) billionaire Sam Zell gets a warrant to own 40% of the equity should this ever work out.  That $320M is less than 1% of the $39billion Sam just recently got for selling his REIT business – so you could say for him this represents a relatively small portfolio investment in a long shot.  If Tribune survives, his $.32B becomes worth $3.2B – or 10x return (see MarketWatch article here).

And of course all of this is for a valuation that is only half what the business was worth in 2000, and only 60% of its value as recently as 2004.  But that of course reflects the market Challenges which face the Tribune going forward.  Challenges completely ignored in this crazy financing scheme.

Meanwhile, the employees of the Tribune now get to spend all their energy looking for yet MORE cost cuts – after 5 years of cost cutting – in order to service this staggering debt load.  Just what you need in a situation where you missed the new technology boat.  They now have no resources for creating and managing any White Space to find a new Success Formula.   Amidst these financial machinations, the newspapers have turned over the publisher at the LATimes and several leading editors in just the last year (see latest article on editor resigning in protest here) demonstrating the disarray inside the business. 

The forecast here is not hard to make. I live in Chicago and read the Chicago Tribune.  It, as well as The LA Times and other Tribune-owned newspapers have a great history and many Pulitzer Prizes to their credit.  But that was the past. If you are an investor, or an employee, or thinking about being a bondholder in this new enterprise I would be looking for a far better future than is promised at Tribune Company.