DBRS Places Tribune Company Under Review with Developing Implications

Dominion Bond Rating Service (DBRS) has today placed the ratings of Tribune Company (Tribune or the Company) Under Review with Developing Implications following the Company’s recent announcement that it has formed a special committee to explore alternatives for creating additional value for its shareholders. DBRS believes that this has increased the probability of the Company undertaking another sizeable shareholder-friendly initiative which could change the structure of the Company, and/or lead to further increases in debt levels.

DBRS notes that there has been ample speculation over the past few months on the strategic direction of the Company after one of its largest shareholders has openly disputed the Company’s debt-financed recapitalization announced in May 2006. It was as a result of this plan (which remains ongoing) that DBRS lowered the Company’s ratings to their current level in June 2006.

While DBRS cannot predict the outcome of this initiative, it may involve significant changes in the business risk profile the Company should some (or all) of its businesses be sold. The Company is expected to complete this initiative by the end of 2006. Furthermore, this initiative could lead to a further change in the Company’s financial risk profile which weakened recently (took gross debt-to-EBITDA to roughly 3.75 times on a pro forma basis from roughly 2.20 times) after $2.5 billion in bank debt was borrowed in July to fund the first stage of its 75 million share repurchase program. Also In conjunction with today’s announcement, Tribune announced it was restructuring two partnerships (TMCT, LLC and TMCT I) that are owned by the Company and the Chandler family, which is also the Company’s largest shareholder. DBRS does not view this restructuring as having a significant impact on the Company’s operations but resolves some complexity and additional uncertainty regarding this structure. The restructuring will unwind the shares owned by these partnerships, which included 51.3 million Tribune common shares and all of the Company’s preferred shares. Additionally, this will give Tribune the right to purchase real estate owned by the partnerships that the Company currently uses.

Despite today’s announcement, DBRS notes that Tribune’s newspaper operations continue to remain relatively robust. However, this business remains susceptible to broader industry trends including advertisers reducing print spending and long-term circulation erosion. The Company continues to attempt to offset these factors by raising its advertising prices, moving advertisers to online distribution channels in addition to traditional channels and undertaking cost-cutting efforts that include the lowering of its newsprint consumption and the streamlining of operations. However, DBRS notes that two of its flagship newspapers – the Los Angeles Times and Newsday – continue to experience an acceleration of these industry trends along with strong competition and soft print-advertising environments.

DBRS notes that Tribune’s broadcasting business is also experiencing modest EBITDA pressure as a result of some of the same broad industry trends and strong competition in the large markets (as its television stations are in the top 55 markets). Furthermore, DBRS notes that Tribune’s portfolio of Internet distribution channels, while growing, does not have the scale necessary to capture enough of advertisers’ shift toward the Internet spending. All of these factors continue to moderately pressure Tribune’s EBITDA and EBITDA margins.

Despite the above factors and significantly higher debt levels in 2006 (H2 2006), Tribune’s cash flow from operations is still expected to be sizeable – at least $800 million in 2006 and 2007. DBRS notes that debt, and the majority of Tribune’s free cash flow in 2006, is expected to fund its massive share repurchase program (75 million shares for roughly $2.5 billion). As a result, DBRS expects debt levels to rise to roughly $5.3 billion for 2006 which will weaken its credit ratios, with gross debt-to-EBITDA expected to end the year at 3.65 times.

Notes:
All figures are in U.S. dollars unless otherwise noted.
These ratings are based on public information.