Zell-Tribune Deal Threatened by Slipping Revenue

Tribune’s outlook has dimmed since its deal with Sam Zell was first announced, and, though the FCC has granted an exemption that should allow Zell to close on his $8.2 billion deal to take the company private, making the deal pay off remains a challenge.

Indications that the economy may be on the edge of a recession, along with several of Tribune’s key markets having been overwhelmed by the real estate crash, have some analysts believing it may prove difficult to make the deal pay off, reports the Chicago Tribune.

One credit analyst, John Puchalla with Moody’s Investors Service, says the newspaper industry is already in a recession and, while good management and execution could help the Tribune, it will be difficult to raise its prospects without an improvement in the advertising market. Tribune’s revenue has been slipping since April, with an acceleration of the process taking place in October. Cash flow, however, has held up better than revenue in recent months, due largely to cost cutting.

The banks behind the deal - Citicorp, Merrill Lynch, Bank of America and JP Morgan Chase - could slip out of the deal if Tribune suffers a “material adverse change,” which could mean anything from results far lower than what was presented in April to malfeasance. Yet while numbers are below April’s presentations to the banks, they are not low enough to meet the material-adverse-change standard, according to a source with knowledge of the situation.

The banks are likely to wait as long as possible before closing the deal in order to see how financial results unfold.

The company will need a solvency opinion from an outside financial expert and will need to show that its post-deal debt is no more than nine times the cash flow generated in the four fiscal quarters before the closing, writes the International Herald Tribune.

To pay down an estimated $13 billion or more in post-deal debt, Tribune is widely expected to sell some of its 23 TV stations .

Both Zell and Tribune Co. claim they are confident the deal will close. However, one source close to the deal says, “you don’t know until you know.”

The deal did clear one hurdle earlier this week, as the FCC granted a temporary waiver allowing the company to continue to own newspaper and television stations in the same market.