STRATEGIC REPORT FOR TRIBUNE CO.

PATRICK FLEMMING

SAMUEL MEEHAN BENJAMIN KRAUS

April 18, 2007

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EEXXEECCUUTTIIVVEE SSUUMMMMAARRYY

Tribune Company is a media, entertainment, and broadcasting company which

operates in the publishing, radio, television, and sports industries. Its primary

revenues are in the newspaper industry, where it owns such powerhouses as the

Chicago Tribune and The Los Angeles Times. Tribune’s varied and unique

holdings also include television stations (23 major market TV stations, including

a 31% equity stake in the Food Network) and radio stations (most importantly its

WGN radio station) as well as the Chicago Cubs Major League Baseball team. In

2006, 73% of Tribune’s revenues came from publishing and 27% came from

broadcasting and entertainment. Of the revenues from publishing, about 79%

came from sales of advertising in print and online, about 15% came from

circulation, and the remaining 6% from various other sources.

Tribune truly is a giant among its peers in media, entertainment, and

broadcasting. Its national reach is almost unparalleled among its competitors:

eight million people read its newspapers daily and eleven million read on Sunday.

Unlike its competitors, its internet portfolio is strong and growing with 50

newspaper websites attracting an audience of at least 13 million visitors per

month. Tribune’s broadcasting portfolio is also quite strong, with 23 stations

reaching nine of the top ten media markets, including the top three markets

where it has a strong presence (Chicago, Los Angeles, and New York). The

company’s national flagship WGN Superstation (which broadcasts Cubs games

nationally) reaches 67 million viewers.

Tribune currently faces several pressing strategic issues. First, the entire

publishing industry is mired in one of the worst deteriorations of print

advertising spending in years. Print ad sales fell 3.7% in the fourth quarter of

2007 after falling 2.6% in the third quarter and .2% in the second quarter.

Classified ad revenues have been hit particularly hard; historically, classified

sales compose about half of revenues from advertisers for publishers like

Tribune. In addition to a slowdown in print advertising, paid circulation has

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been trending down since the mid-1980s, and the trend has accelerated in the

last several years. Since 2002, Tribune’s shares have fallen almost 40%.

Disappointed with the company’s lagging share price, the company’s largest

shareholders, the Chandler Family trusts, agitated the board to put the company

up for sale in the fall of 2006 in order to return value to shareholders.

The auction languished for months with only tepid interest from private equity

groups and other suitors. In April 2007, after six months of boardroom warfare

over the failing auction, the board accepted a buyout offer of $34/share from

Chicago real estate magnate Sam Zell. If the deal is approved by shareholders in

the fourth quarter of 2007 as is expected, ownership of the company will transfer

to Mr. Zell and an Employee Stock Ownership Plan, which is being used in the

deal for tax purposes. The buyout is highly leveraged and will leave Tribune with

expected annual interest payments of over $1 billion (about four times its debt

service in 2006) compared with expected net income of $1.2 billion. In the face

of such a razor thin margin for error, Tribune’s new owners will quickly need to

decide how to restructure or repackage and sell parts of the company.

5

CCOOMMPPAANNYY BBAACCKKGGRROOUUNNDD Tribune Company, founded in 1847, is a leading worldwide media company

based in Chicago, Illinois. Its operations include newspaper publishing,

television and radio broadcasting, as well as interactive businesses. With unique

properties reaching more than 80 percent of household in America, Tribune is

the only media company with newspapers, TV stations, and websites in the top

three U.S. markets, New York, Los Angeles, and Chicago.

Tribune’s notable newspaper holdings include the Los Angeles Times, Chicago

Tribune, Newsday, Baltimore Sun, South Florida Sun-Sentinel, Orlando

Sentinel, and Hartford Courant. The company’s diversified entertainment

holdings include Superstation WGN on national cable, WGN-AM radio in

Chicago, as well as the Chicago Cubs Major League Baseball team.

The company printed its first copy of the Chicago Tribune in June, 1847, with all

400 copies of the first-ever edition printed on a hand press in a one-room

headquarters in Chicago. Though the Chicago Fire of 1871 destroyed the original

headquarters in downtown Chicago, the Tribune was back in just two days

claiming in an editorial, “Chicago Shall Rise Again.” Then-editor and part owner

Joseph Medill was elected mayor and led the city’s reconstruction, illustrating

Tribune’s connection with the city.

Tribune’s WGN radio station was born in in 1924. Its call letters stand for

“World’s Greatest Newspaper,” the Tribune’s slogan. WGN was an innovator in

radio for the time and was the first radio station to broadcast the World Series,

the Indianapolis 500, and the Kentucky Derby. In an effort to expand its media

presence, the company entered the television industry in 1948, founding WGN-

TV in Chicago and, later, WPIX-TV in New York. Both stations are now affiliates

of The CW Television Network, the result of the merger of The WB and UPN

Networks. In 1981, Tribune Broadcasting Company was formed. The company

also acquired the Chicago Cubs baseball team in 1981 from the Wrigley family for

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$20.5 million. The company’s WGN radio and television stations had covered the

Cubs since the stations first started many years earlier. (Cubs games have aired

nationally since 1978.) Tribune’s television networks have tremendous national

reach; through cable and broadcast satellite, Superstation WGN reaches about 60

million U.S. homes outside Chicago.

Based in Hollywood, California, and founded in 1982, subsidiary Tribune

Entertainment Company develops, produces and distributes television

programming for Tribune and non-Tribune stations nationwide. Tribune

Entertainment currently hold the distribution rights to over 15 series including,

notably, Comedy Central’s popular animated hit South Park, as well as some film

packages from DreamWorks SKG, the production house responsible for Shrek,

Anchorman, and Flags of Our Fathers, among others.

After 136 years of private ownership, Tribune became publicly owned (NYSE:

TRB) in 1983 with an initial offering of 7.7 million shares valued at $206 million.

The opening price per share was $26.75. In the heady M&A environment of the

mid-1980s, strategic acquisitions helped propel significant growth at Tribune

after the IPO. In 1985, Tribune purchased KTLA-TV in Los Angeles for $510

million. The acquisition made Tribune the only non-network company to own

VHF stations in the country’s top three markets; this was a key step towards its

strong positioning in the country’s top three markets today. Television stations in

Atlanta and New Orleans were acquired shortly before KTLA, and the Daily Press

(Newport News, Va.) joined Tribune’s newspaper group in 1986. The dramatic

growth fueled by acquisitions in the 1980s continued in the 1990s after the

Federal Communications Commission (FCC) relaxed crossover media ownership

rules. Mirroring industry consolidation, Tribune expanded its holdings in the top

40 markets. The company emerged from this period of consolidation as one of

the major media powerhouses in the country.

In 1995, the company acquired an equity stake in thenascent WB Television

Network. The WB’s target market of teens and young adults is one of the most

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important to advertisers trying to reach consumers in the formative years when

consumers develop brand loyalty. Tribune continued its acquisitive streak in

1997, adding seven more television stations to the portfolio by purchasing

Renaissance Communications. In addition, the company divested its legal

publishers, selling to Reed Elsevier for $1.1 billion. In 1999, the company formed

Tribune Interactive. The new branch of the company was designed to handle the

growing online presence of the company’s newspaper, television, and publishing

businesses.

In June, 2000, Tribune acquired Time Mirror Co., publisher of the Los Angeles

Times, for $8.3 billion. The acquisition of Times Mirror Co. made the Los

Angeles Times-founding Chandler family Tribune Company’s largest

shareholders. By most accounts the merger has been largely a disappointment.

A significant fall in print ad revenue nationwide, particularly in Tribune’s biggest

markets (Chicago, Los Angeles, and New York), made it difficult to realize the

goal of finding synergies in combining the ad businesses of TV stations and

newspapers in the nation’s big markets. The Chandlers, upset with a lagging

share price over the last several years, instigated the auction of the company that

officially began in September 2006 with the board’s formation of a special

committee of independent directors.

Late in 2001, in an effort to refocus on its core media and entertainment

businesses, Tribune sold Tribune Education to McGraw-Hill, Times Mirror

Magazines (part of the Times Mirror acquisition) to Time Inc., and its flight

information services provider to Boeing. In an effort to offset declining classified

ad sales, Tribune and Knight Ridder joined in a venture to merge

CarrerBuilder.com and CareerPath into CareerBuilder.com, a job site that would

a year later acquire rival HeadHunter.net—Tribune has continued to increase its

online classified ad presence, and management hopes that online ads will account

for 12-15% of advertising revenues by 2010.

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Due to a precipitous decline in print advertising revenue during the economic

slowdown in 2001—then-CEO John Madigan called it, “the worst advertising

environment since the depression”i—major cost-cutting was announced and

executed with wages being renegotiated. A year later, however, the company

bought Chicago magazine for $35 million and also added to its television station

portfolio, buying two Indiana stations for $125 million. Madigan handed over the

title of CEO to executive Dennis FitzSimmons in 2003 (he remains CEO currently

and will remain on board for the immediate future if Sam Zell’s proposal to take

the company private for $34 per share is approved by shareholders later this

year, as is expected). FitzSimmons continued to grow Tribune’s already sizeable

television portfolio by spearheading the purchases of stations in St. Louis and

Portland, Oregon for $275 million.

The company moved the majority of its television stations in 2006 to a new

network called The CW (a joint venture between CBS Corp. and Warner Bros.

Entertainment which was formed when The WB and UPN Networks folded last

year). In addition to the company’s 15 CW Network affiliates, Tribune also has

one Fox affiliate and several ABC affiliates.

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CCOOMMPPEETTIITTIIVVEE AANNAALLYYSSIISS Tribune Company is a media, entertainment, and broadcasting company which

operates in the publishing, radio, television, and sports industries (primarily SIC

codes 2711, 4832-3, and 7941). Its primary revenues are in the newspaper

industry, where it owns such powerhouses as the Chicago Tribune and The Los

Angeles Times. As we have discussed, Tribune’s varied and unique holdings also

include television (23 major market TV stations, including a 31% equity stake in

the Food Network) and radio stations (most importantly its WGN radio station)

as well as the Chicago Cubs Major League Baseball team. There exists no pure

play to compare to Tribune, so we will broadly consider Tribune’s competitors in

newspaper publishing as well as the broadcast and entertainment industries.

IINNTTEERRNNAALL RRIIVVAALLRRYY

There are few publicly traded (or private) firms that compare perfectly with

Tribune because the firm is composed of such a varied selection of businesses.

Tribune’s main competitors in the publishing industry, however, include Dow

Jones & Company, Inc., publisher of The Wall Street Journal; Gannett Co., Inc.,

publisher of USA Today and the nation’s largest newspaper publisher by

circulation; and The New York Times Company, publisher of The New York

Times, The Boston Globe, and the International Herald Tribune. Other

competitors include Time Warner Inc., Hearst Corp., CBS Corp., ABC, NBC, and

News Corp.

We will focus much of our analysis of the competitive landscape on publishers

and media and entertainment companies that operate in Los Angeles, Chicago,

and New York, the nation’s three largest markets and those in which Tribune

primarily operates. In 2005, 73% of Tribune’s revenues came from publishing

and 27% came from broadcasting and entertainment. Of the revenues from

publishing, about 79% came from sales of advertising in print and online, about

15% came from circulation, and the remaining 6% from various other sources.ii

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This is on par for the newspaper industry as a whole, where newspapers expect to

earn about 80% of revenues from advertising and 20% from circulation.iii

To put Tribune’s power as a publisher in perspective, the Tribune and the Los

Angeles Times are the eighth- and fourth-ranked newspapers by circulation

respectively (see Table 1 below). USA Today is ranked number one, with an

average weekday circulation of over 2.2 million compared only about 840,000

copies for the Los Angeles Times.iv Despite its size, Tribune has failed to

outperform its rivals in recent years (see the Financial Issues section) and its

tendency to acquire has not always yielded the best results. Most recently, the

Times Mirror merger failed to create synergies and cost-savings that managers

and analysts expected.

TABLE 1: The Top 15 American Newspapers (by Circulation)

NEWSPAPER OWNER

1. USA Today Gannett Co.

2. The Wall Street Journal Dow Jones & Co.

3. The New York Times New York Times Co.

4. Los Angeles Times Tribune Co.

5. New York Post News Corp.

6. New York Daily News Daily News LP

7. The Washington Post Washington Post Co.

8. Chicago Tribune Tribune Co.

9. Houston Chronicle Hearst Corp.

10. Newsday (Long Island, N.Y.) Tribune Co.

11. Arizona Republic (Phoenix) Gannett Co.

12. The Boston Globe New York Times Co.

13. Newark Star-Ledger Advance Publications

14. San Francisco Chronicle Hearst Corp.

15. Minneapolis Star Tribune Avisa Capital Partners Source: Audit Bureau of Circulations, The Wall Street Journal

The entire publishing industry is mired in one of the worst deteriorations of print

advertising spending in years. Print ad sales fell 3.7% in the fourth quarter of

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2007 after falling 2.6% in the third quarter and .2% in the second quarter.

Classified ad revenues have been hit particularly hard; historically, classified

sales compose about half of revenues from advertisers for publishers like

Tribune. Classified ad revenue was down 9% in December alone and this slide is

expected to continue through the first half of 2007.v Many of the classified

listings that would once have automatically gone to newspapers are now listed

online at sites like Craigslist for free. This migration from print to online

classified ads is expected to continue into the future. Tribune hopes that its

strong positioning in the internet classifieds arena will offset the industry-wide

flee from print advertising.

SSUUPPPPLLIIEERR PPOOWWEERR

Newsprint is traditionally one of the most major (and unpredictable) cost

components in the publishing industry. As consolidation of newsprint mills in

North America has increased, suppliers have been able to wield considerably

more pricing power. As one of the largest publishers in the United States,

Tribune has historically been able to keep newsprint costs relatively low by

purchasing in volume and engaging in long-term contracts. This year’s annual

report warns, however, that “[f]ailure to maintain our current consumption

levels, further supplier consolidation or the inability to maintain our existing

relationships with our newsprint suppliers could adversely impact newsprint

prices in the future.”vi

Newsprint consumption is down nearly 10% this year and prices have fallen

about 5% from their highest levels in 2006. In an illustration of the great lengths

publishers have had to go to cut costs, The Wall Street Journal in January cut its

pages down from 15 inches to 12 inches in width. Continued declines in

consumption by publishers may push newsprint prices further down in 2007. In

January alone, newsprint prices slid more than 1% after falling 2-3% in the

preceding months. If the newspaper industry and print advertising continue to

decline as they have over the last several years, those newspapers that do weather

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the storm will benefit from lower newsprint prices caused by reduced demand for

the commodity.vii

Tribune’s 23 television stations get the majority of their content from outside

sources, though Tribune Entertainment Company does supply some content in-

house. Costs of syndicated programming are significant and often involve multi-

year contracts—last summer, for example, Tribune acquired the syndication

rights for the hit animated comedy Family Guy to begin airing in Fall 2007.

Tribune currently has the syndication rights to Sex in the City through 2009,

According to Jim through 2010, Friends through 2012 and Everybody Loves

Raymond through 2013 (excluding Raymond’s major markets).viii

TABLE 2: Tribune’s Formidable Television Station Portfolio

Source: Tribune Co. Form 10-K (2007)

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The Chicago Cubs have a unique supply: Major League Baseball players. In the

era of free agency, player salaries have skyrocketed. The Cubs, often

affectionately referred to as lovable losers, have resorted this season to spending

big in an effort to win. In a $300 million spending spree, the Cubs signed

outfielder Alfonso Soriano, re-signed third baseman Aramis Ramirez, and added

two competent above-average starting pitchers. Though market forces should in

theory bring player salaries in line with the value they bring to their team, in

practice players (and their agents) wield a significant amount of bargaining

power in contract negotiations. Given Mr. Zell’s intention to sell the Cubs after

the 2007 season, we do not expect the Cubs to spend any more money on player

acquisitions this season.

BBUUYYEERR PPOOWWEERR

The two main buyers that publishers face are readers (viewers in the case of

television) and advertisers. Both groups are facing more options at lower prices

than ever before. This increased competition for both consumers’ and

advertisers’ dollars gives buyers significant power and requires publishers like

Tribune to either enhance offerings, lower prices, cut costs, or exit unsuccessful

and declining businesses.

In addition to dwindling ad sales, newspaper circulation is steadily falling.

Circulation of Tribune’s dailies was down 4.5% in 2006 from 2005 levels;

Sunday circulation was down 4.4%. Revenue growth has been flat and earnings

have been declining since 2004 for Tribune’s three largest newspapers in the

three largest markets (Chicago Tribune, Los Angeles Times, and Newsday in

New York). Tribune’s revenue summary for the period ended March 4, 2007

indicated advertising revenues were down 5.1% and circulation was down 7%

year-over-year. This troubling negative trend in readership and circulation

revenues is pervasive throughout the newspaper industry and is expected to

continue.

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EENNTTRRYY

The publishing industry is fragmented and always in a state of flux. There are

more than 65,000 publishers in the United States, according to Standard &

Poors.ix Entry is always possible, especially as we expand the definition of the

industry to wherever the printed word exists. Anyone can start their own blog

this second and compete for eyeballs with Tribune, McClatchy, McGraw-Hill, and

Dow Jones—but to become popular and one of the biggest publishers in the world

is no small feat. Newspapers have high fixed costs tied up in printing facilities

and national networks; indeed, it is prohibitively expensive to enter the national

newspaper publishing industry. Entry most often comes via acquisition.

As advertising dollars continue to migrate away from traditional print media to

the internet and the degree of competition from internet news destinations

continues to increase, entry becomes cheaper and easier. A printing press is no

longer required equipment. Indeed, all that is necessary is internet access. Thus,

although traditionally threat of entry has been quite low, today’s connected world

makes entry into publishing, media, and entertainment easier than ever.

Instead of turning on the TV, consumers turn to YouTube to watch news and

entertainment clips and publish their own videos. They read blogs and

Salon.com to catch up on the world. Though the threat has been here for years, it

is now more imminent than ever.

In television, the threat of entry is extremely low. There are high fixed costs

associated with operating television stations and the right to broadcast is allowed

on a license basis governed by the FCC. This gives incumbents an advantage

because newcomers must jump through significant regulatory hurdles even

before they can begin to attempt to steal market share from entrenched

broadcasters.

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SSUUBBSSTTIITTUUTTEESS AANNDD CCOOMMPPLLEEMMEENNTTSS

Readers of the news are increasingly moving to the internet to get their daily fix

of headlines. For savvy internet users—and, increasingly, even comparatively less

savvy users—it is quite easy to aggregate news from many different sources into a

one-stop homepage of all the information you need. Many such news aggregators

cull RSS (Real Simple Syndication) feeds from popular and unpopular sources

alike; most of these “reader” programs are free and their use is growing. Google

and Yahoo!, for example, each offer their own customized homepages where

users can choose what syndicated content they want to see and how they want it

displayed. One can personalize a My Yahoo! page with news headlines and

analysis from such varied sources as the San Francisco Chronicle Sports Section,

political blogs like Daily Kos, as well as the popular blog of Harvard economics

professor Greg Mankiw.

Amid already sagging circulation, the ease with which consumers can go to

Google’s or Yahoo’s news sites instead of traditional sources is quite worrying to

the old guard media giants like Tribune and Dow Jones. Warren Buffett writes in

this year’s Berkshire Hathaway annual report, “The economic potential of a

newspaper Internet site—given the many alternative sources of information and

entertainment that are free and only a click away—is at best a small fraction of

that existing in the past for a print newspaper facing no competition.”x In short,

traditional newspapers are quickly losing ground to bloggers and newer media in

cyberspace.

In the television industry, the two main substitutes for live network television

programming are time-shifted watching via digital video recorders (DVR) like

TiVo and, as with print media, the internet. Although DVRs still only penetrate

16% of the United States market,xi they present a significant challenge to

television networks whose advertisers cry fowl when consumers can fast-forward

through the commercial spots they pay dearly for. (Notably, ratings company

Nielsen is developing an improved ratings system in concert with broadcasters to

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track if commercials are being skipped over by DVR users.) As DVRs penetrate

deeper into the national market and consumers can more easily substitute away

from live television to time-shifted viewing, thereby avoiding commercial breaks,

advertisers will demand rate cuts or broadcasting companies like Tribune will

have to come up with an alternative rate structure. In addition to the DVR

problem, consumers are also moving out of the living room to watch video

content. YouTube’s popularity has grown immensely over the past year and is the

place where many people catch up on popular news clips and interviews and even

entire episodes (albeit illegally) of hit shows like Comedy Central’s The Daily

Show that they would otherwise watch on television with advertisements (the ads

are usually cut out of illegally uploaded TV episodes). The popularity of YouTube

and TiVo is only a symptom of a greater trend by consumers to wrest control of

programming schedules from the broadcasters. Nowadays, it is just as easy to

watch this week’s episode of ABC’s hit show LOST on Apple’s iTunes (for a fee) or

on ABC’s website (free with commercials) as it is to watch live on television. This

trend is an important one for broadcasters and will continue to shake up the

advertising revenue streams as dollars move from traditional 30-second

television spots to the internet.

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SSWWOOTT AANNAALLYYSSIISS Strengths

Tribune truly is a giant among its peers in media, entertainment, and

broadcasting. Its national reach is almost unparalleled among its competitors.

Eight million people read its newspapers daily and eleven million read on

Sunday. As we have discussed, its internet presence is strong and growing with

50 newspaper websites attracting an audience of at least 13 million visitors per

month. Tribune’s broadcasting portfolio is also quite strong, with 23 stations in

nine of the top ten media markets, including a strong presence in the nation’s top

three markets (Chicago, Los Angeles, and New York). The company’s flagship

WGN Superstation (which broadcasts Cubs games nationally) reaches 67 million

viewers.

In addition to an ability to leverage its size via economies of scale, Tribune has a

formidable internet presence. Revenue at Tribune Interactive was up 31% in the

fourth quarter of 2006, up 28% in the third quarter, up 27% in the second

quarter, and up 30% in the first quarter. Online classified revenue was up 26% in

the fourth quarter. These results are very encouraging and indicate that

Tribune’s online strategy is bearing fruit. The company has a 42% equity stake in

CareerBuilder.com through a strategic partnership with rivals Gannett and

Knight Ridder. The job-search website is the market leader in both job postings

and site traffic; revenue at CareerBuilder was up 29% in the fourth quarter of

2006 while rival Monster.com has recently predicted an expected slowdown in

growth in the first half of 2007, good news for Tribune. In the face of declining

sales of traditional print classified ads, Tribune owns a 28% equity stake in

Classified Ventures, operator of cars.com and apartments.com. In a separate

joint venture with Knight Ridder (since acquired by McClatchy in 2006) and

Gannett, the three publishers own 75% of Topix.net, a service that monitors the

news.

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The company’s goal in increasing its internet presence has been to offset declines

in advertising revenue, particularly in classified ads. To that end, it continues to

seek out the dollars that have steadily been fleeing from print to the internet. In

late 2006, Tribune announced intentions to purchase real estate listing website

ForSaleByOwner.com and will continue to expand online in an effort to meet the

goal of 12% to 15% online revenue exposure by 2010.

Weaknesses

For better or worse, Tribune is a conglomerate and thus its overall valuation

could be subject to a “conglomerate discount.” The company’s holdings across

the board in media, publishing, and entertainment make it difficult to convince

shareholders and outsiders alike that the company has a focused vision among so

many disparate companies, divisions, and managers competing for executives’

attention. This could be one great benefit of Mr. Zell’s taking the company

private—the opportunity to focus, reorganize, and sell various parts at retail

prices after acquiring them in a package at wholesale.xii

Tribune is currently operating in one of the worst print advertising environments

in years. Advertising revenues were down 5.1% in February 2007 year-over-year.

Classified ad revenues, already in a downward trend, were hit particularly hard

over the past year. Classified revenue was down 13.3% with real estate down

14%, help wanted down 17%, and automotive down 14%. Meanwhile, interactive

revenues, primarily composed of online classifieds, were up 17%, evidence of

Tribune’s growing online presence.xiii It is unlikely that Tribune can stop the

bleeding completely by increasing online classified sales only, but it is at least

encouraging that its recent internet ventures are showing growth.

Paid circulation has been declining at a more rapid rate in the last two years. the

negative trend is not a new phenomenon, however. Newspaper circulation has

been steadily declining since the mid-1980s—circulation reached its peak in 1984

19

with 1,600 morning and evening dailies with paid circulation of 63 million. By

2003, there were only 1,450 dailies with paid circulation of 53 million.xiv

FIGURE 1: Paid Circulation for Morning/Evening Daily Newspapers and Sunday Editions, 1990-2003

Morn / Eve and Sunday Circ Both Declining

50,000,000

52,000,000

54,000,000

56,000,000

58,000,000

60,000,000

62,000,000

64,000,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

Paid

Circ

ulat

ion

M&ESunday

Source: Newspaper Association of Americaxv

Increasing popularity of cable television through the late-1980s initially helped to

spur the decline in popularity of dailies. In the 1990s, the Internet further helped

to aid in the negative trend in circulation as people turned to the web for instant

news updates.

Opportunities

Tribune owns some of the most unique publishing, media, and entertainment

assets in the world. If it can time sales right and find the highest bidder, Mr. Zell

and Tribune employees can benefit immensely from a strategy of buying

wholesale and selling retail. While we do not recommend an immediate break-up

20

and fire-sale of Tribune, the company will find itself needing to service a high

level of debt over the next several years after the company goes private later this

year. One way to find cash to cover the interest payments will be to sell assets.

Under the leadership of CEO Dennis FitzSimmons, Tribune expects to book more

than $100 million of a planned $200 million in cost cuts over 2007. If costs can

be cut more than expected or newsprint consumption by the publisher falls more

than expected (or newsprint prices continue to slide), then Tribune will benefit.

Threats

If the negative blip in advertising and circulation revenues over the last year does

not rebound and continues to trend downward, Tribune’s main sources of

revenue are greatly threatened. Advertising spending is Tribune’s main source of

revenue and should industry conditions continue to weaken, Tribune’s strength

in the industry will be compromised.

Macroeconomic factors play a key role in determining advertising spending,

particularly spending on classified ads. Industry insiders have blamed the

precipitous decline in real estate classified advertising on the overall slowdown of

the housing market in the United States over the last year. California and Florida

were hit particularly hard by the slowdown in real estate classified spending. In

Tampa, Florida, for example, real estate classified ad revenue fell 44% compared

to February 2006, and overall classified ad revenue was down 27% in the city.xvi

Tribune is also more exposed than its peers to downturns in the retail sector

which can lead to declines in help wanted advertising. When department stores

in particular cut ad spending, publishers like Tribune feel the heat. A February,

2007, report from Deutsche Bank warns that the Federated/May merger may

have a significant impact on ad revenues at Tribune as together the two

department stores would be the single largest advertiser with Tribune.xvii

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Tribune’s crossover broadcast, entertainment, and newspaper holdings are

concentrated highly in top-30 markets and thus make the company more

susceptible to the risk of re-regulation and stricter enforcement of crossover

ownership rules by the FCC. For the Zell-led deal to be finalized, the FCC must

allow the transfer of broadcast licenses to new ownership. FCC rules state that

one company is not allowed to own both a newspaper and a television station or

radio station in the same market. Currently, Tribune has waivers from the FCC

to do so in five markets: Chicago; Fort Lauderdale, Florida; Hartford,

Connecticut; Los Angeles; and New York. News reports indicate that there is

little reason why the FCC would disallow the transfer of the licenses and waivers.

22

FFIINNAANNCCIIAALL IISSSSUUEESS

Tribune’s Ballooning Debt Load

Tribune’s most pressing concern going forward is the level of debt it will be

carrying when Mr. Zell’s go-private transaction is

approved by shareholders later this year. Mr.

Zell’s offer of $34/share values Tribune at

roughly $8.2 billion. If the deal is completed on

schedule by the end of 2007, Tribune will be

saddled with more than $12 billion in debt, about

10 times annual cash flow, a higher multiple

carried by most businesses in the media industry.

Shortly after the deal was announced, one analyst

at Barclays wrote, “We think it is possible that

Tribune is leveraged higher than the total assets of the company after taxes.”xviii

Mr. Zell will contribute only $315 million in equity, leaving Tribune with a debt-

to-2007-expected-profits (E-EBITDA) ratio of 10x, “far too high for secularly

declining businesses,” Lehman Brothers analyst Craig Huber wrote in early April

2007.xix A Goldman Sachs reportxx notes that the new debt load of over $12

billion will leave Tribune with estimated annual interest payments of over $1

billion (compared with $260 million in 2006) and expected net income of just

$1.3 billion, leaving only the smallest margin for error if the deal is completed as

planned.

The details of the two-step take-private transaction are relatively complex, and

thus merit a summary review. In the first stage in the second quarter of 2007,

the company will accept a $4.3 billion tender offer at $34/share for 126 million

shares. Concurrently, an Employee Stock Ownership Plan (ESOP) will buy 9

million new shares and Mr. Zell will buy 1.5 million new shares. The first stage of

the buyout will be financed by $250 million in equity from Mr. Zell and newly

issued debt.

Source: The Wall Street Journal

23

Source: The Wall Street Journal

In the second stage, another tender offer for the remaining shares will be made at

$34/share and Tribune will merge with the ESOP. At this point, Mr. Zell will

invest another $65 million, bringing his total initial equity stake to $315 million.

In the future, Mr. Zell will have the right to acquire 40% of the company and,

should the deal turn out well, Mr. Zell will reap outsize gains. Tribune will issue

$8.4 billion in new debt to complete the transaction.

Mr. Zell’s offer of $34/share values the company at roughly $8.2 billion, or 9.1x

2006 EBITDA. A year ago, Knight Ridder was acquired by McClatchy for 9.6x

trailing EBITDA—in the 2 months following the announcement of the deal,

Knight Ridder stock sold off 9%. Since then, the acquisition has not gone well for

McClatchy: since the deal was completed in June 2006, McClatchy’s shares have

fallen from highs in the mid-40s to current lows in the low-30s. This does not

bode well for current Tribune shareholders and seems to indicate why the

Tribune’s own auction languished for months with only tepid interest.

On the upside, between 1995 and 2005 historical newspaper transactions were

completed at between 11x and 13.5x EBITDA, meaning that if the industry does

rebound from its current slump, Mr. Zell and Tribune’s future employee-owners

could see significant value creation in the newspaper portfolio. This could be

false hope, however, considering that the newspaper sector is currently publicly

valued at 8.4x 2006 EBITDA and prospects for an immediate rebound in

earnings in 2007 and 2008 not strong, according to analysts at Deutsche Bank,

Goldman Sachs, and Lehman Brothers. The future owners of Tribune may find

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value in selling off assets in the television portfolio, however. Historically,

television station transactions were completed for ratios of around 15x EBITDA

over the last decade.xxi

TRB’s Share Price Lags the Market and the Industry

Tribune’s stock price has underperformed the market (as tracked by the S&P

500) since the summer of 2004. This underperformance is one of the main

reasons why the Chandler Family Trust demanded the board begin exploring

strategic alternatives for creating value for shareholders.

FIGURE 2: TRB Performance Relative to the S&P 500, 2002-2007

Source: Yahoo! Finance

Though the declines in advertising spending and circulation have been

widespread throughout the newspaper industry, Tribune’s diversification in

television and broadcasting has failed to save it from the same fate as its peers in

publishing. As we can see from Figure 3 below, without the recent pop in its

share price due to acquisition speculation, Tribune would have performed as

25

poorly as Dow Jones and Co. over the last 5 years, whose stock has seen a 40%

slide over the period. Only The McClatchy Co., whose stock has plummeted

following its acquisition of Knight Ridder last year, and New York Times Co.,

have performed worse than both Tribune and Dow Jones and Co.

FIGURE 3: STOCK PERFORMANCE RELATIVE TO PEERS, 2002-2007

WPO: Washington Post SSP: E.W. Scripps Co. MNI: The McClatchy Co.

GCI: Gannett Co., Inc. DJ: Dow Jones and Co., NYT: The New York Times Co.

Source: Yahoo! Finance

Tribune has been unable to increase revenues significantly over the last three

years due to the declining advertising and circulation environment in the

newspaper industry. Investors have responded to the poor results by selling off

TRB nearly 40% over the last three years. Table 3 shows Tribune’s growth over

the last three years as compared to both the publishing industry and to the

overall market. Compared to both the industry and the overall market, Tribune

has faired terribly, logging negative growth of revenue, net income, and earnings

per share (EPS).

26

TABLE 3: Growth Compared to Industry and Market (last 36 months)

Growth Tribune

Co. Industry Median

Market Median

36-Month Revenue Growth -1.40% 15.20% 38.90% 36-Month Net Income Growth -33.40% 21.70% 50.50% 36-Month EPS Growth -22.30% 24.80% 45.80%

Source: Hoover’s

Tribune’s poor share performance may be the result of the market pricing in a

“conglomerate discount” because of the company’s disparate holdings across the

publishing, media, and broadcast industries. Are the synergies really great

enough to justify a publishing and media company owning a Major League

Baseball team? The market seems unconvinced. Tribune’s share performance is

particularly disappointing considering its relatively robust margin comparisons

with the industry and the overall market. Double-digit profit margins have

historically been typical of the publishing industry. Tribune’s 10.8% net profit

margin is on par with the industry and above the market median (see Table 4

below).

TABLE 4: Profitability Compared to Industry and Market

Profitability Tribune

Co. Industry Median

Market Median

Gross Profit Margin 50.40% 49.60% 51.60% Pre-Tax Profit Margin 18.30% 7.50% 6.60% Net Profit Margin 10.80% 5.20% 5.10% Return on Equity 10.80% 11.20% 9.60% Return on Assets 4.30% 3.60% 1.60% Return on Invested Capital 4.60% 6.20% 4.20%

Source: Hoover’s

Tribune’s valuation ratios support the conglomerate discount hypothesis.

Tribune’s shares are trade at lower price-to-earnings, price-to-book, and price-

cash-flow ratios than both the industry and market medians (see Table 5 below).

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TABLE 5: Valuation Compared to Industry and Market

Valuation Ratio Tribune Co.

Industry Median

Market Median

Price/Sales 1.43x 1.24x 2.26x Price/Earnings 15.18x 19.48x 19.35x Price/Book 1.82x 2.19x 2.21x Price/Cash Flow 10.01x 11.15x 13.54x

Source: Hoover’s

Again, Gotham Global would like to emphasize that Mr. Zell and the future

employee-owners can potentially take advantage of this discount by selling off

parts of the company at “retail” prices in the years following the take-private

transaction.

28

SSTTRRAATTEEGGIICC IISSSSUUEESS AANNDD RREECCOOMMMMEENNDDAATTIIOONNSS

The Chicago Cubs

Because Sam Zell is an owner of the cross-town Chicago White Sox, Major League

Baseball rules require that he divest his ownership interest in at least one of the

teams. We strongly recommend that Tribune do as much as possible to get out of

this potential “must-sell” position in order to avoid depressed offers for the Cubs

(expected in the range of $600-$700 million). Though news reports around Mr.

Zell’s recent take-private offer for Tribune Co. have indicated his intention to sell

the Cubs, we recommend that Mr. Zell and Tribune’s current management

initiate a focused but subtle public relations campaign to reverse what has now

become assumed by the popular press. If Tribune is in a must-sell position, the

likelihood of receiving low-ball offers is much higher. If, however, Tribune’s

management can credibly say that the Cubs will not necessarily be sold (i.e.,

under the new ownership, Mr. Zell may choose instead to divest his stake in the

White Sox), then Tribune will be in a much stronger bargaining position after the

2007 baseball season (the most likely time the team will be sold).

The Cubs have an uphill battle this year in their quest to win the National League

Central, where the reigning World Series Champ St. Louis Cardinals are picked to

win. This off-season, the Cubs spent $300 million in an effort to bolster a roster

that year after year is affectionately full of media-adorned lovable losers.

Management signed outfielder Alfonso Soriano for $136 million for eight years,

gave third baseman Aramis Ramirez a $75 million extension for five years, and

added two more above-average starters for another roughly $60 million. This

off-season’s free agent market was more sellers’ market than it has been in

several years, so the Cubs were probably the victim of the winner’s curse with

their bids (particularly for Soriano, who, though extremely talented, tends to

strike out often and can be inconsistent). Mark Prior, Kerry Wood, and Carlos

Zambrano were the best one-two-three starting pitchers in baseball three or four

years ago; this is no longer the case (Wood will be making relief appearances only

for at least the foreseeable future). Prior and Wood show no ability to stay

29

healthy. Zambrano is an ace in his own right, but the Cubs did not sign him to an

extension this off-season past the 2007 season. We strongly believe that lovable

winners will sell for a higher price after the 2007 season. Under the most

favorable conditions, if the Cubs can win the NL Central—or, at the least, make a

good run—Tribune will be in a strong position to sell the team after the 2007

season.

It bears noting, however, that even in losing seasons the Cubs are one of the most

popular shows in town. Last season the Cubs had the worst record in the

National League, yet still managed to fill Wrigley Field to 95% capacity, second

only to the Boston Red Sox (another club that is as much cult icon as baseball

team). Already just the prospect of a sale of the Cubs in the late 2007 is

generating buzz among prospective buyers. Mark Cuban, owner of the NBA’s

Dallas Mavericks, Jerry Colangelo, owner of the Phoenix Suns, and Donald

Trump have all expressed interest in the past and recently. In Chicago, Don

Levin, the owner of a minor-league hockey team, and Michael Heisley, owner of

the NBA’s Memphis Grizzlies have also expressed interest. The Wall Street

Journal notes that “sales of sports teams can be contentious and don’t necessarily

go to the highest bidder.” The Red Sox, for example, were sold in 2002 for $660

million to John Henry when another bid for $750 million was still outstanding.xxii

The off-season spending spree that Tribune engaged in does somewhat

complicate any deal. New owners may want to re-shape the team and undo some

of the $300 million in signings that Tribune made over the last six months. This

could certainly play a role in any negotiations.

The Los Angeles Times

Southern California’s flagship newspaper has been a thorn in the side of Tribune

since the acquisition of Times Mirror Co. in 2000. In a dispute that has played

out very publicly over the last year, Times executives and editorial staff have

made it clear that Tribune’s cost-cutting from Chicago is not well-received in Los

Angeles. Amid disputes with Tribune over cost-cutting at the Los Angeles

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newspaper, publisher Jeff Johnson stepped down in October, 2006, and long-

time editor Dean Bacquet followed suit in November, 2006. Both publicly

refused to further cut costs at the newspaper despite the fact that newspaper

circulation had fallen 2.8% nationally and the Times itself had fared much worse,

with circulation falling 8% over the preceding six-month period ending in

September, 2006. Two Chicago Tribune executives replaced Johnson and

Bacquet.xxiii

The decision about whether to sell the Los Angeles Times is a difficult one for

several reasons. The newspaper alone brings in more than $1 billion in revenue

annually for Tribune, about as much as all of Tribune’s television stations

combined; this cash flow is going to be especially important as Tribune’s debt

level skyrockets after the company is taken private. The tax implications of a sale

of the Times are also important to consider. Though Tribune will benefit from

significant tax breaks under the planned ESOP that Mr. Zell’s offer includes, the

company will still be liable for capital-gains taxes on asset sales for the next ten

years. At an estimated tax rate of 35%, a direct sale of the newspaper would come

at a high cost. Los Angeles entertainment mogul David Geffen has indicated he

would be willing to pay around $2 billion for the newspaper; in addition, Eli

Broad and Ron Burkle showed considerable interest in buying the paper during

the six-month Tribune auction process. The Washington Post reported in early

April that Mr. Geffen and Mr. Zell have met to discuss a sale of the Times since

Mr. Zell’s buyout offer was accepted by Tribune’s board.

We believe that the Los Angeles Times does not fit in Tribune’s newspaper

portfolio. The merger with Times Mirror has never yielded the synergies that

were expected and the public cross-country discord is further evidence that it is

time for a change. We recommend that Tribune continue to thoroughly explore a

sale of the Times to an altruistic (and, hopefully, overpaying) bidder like David

Geffen, who seems to be showing interest in the paper more as a trophy than as

profitable enterprise. Because of the costly capital-gains tax that would come

31

along with a sale, some sort of tax-efficient structure would need to be worked

out in the details of any sale.

Other Newspaper Holdings

By all accounts, the newspaper industry is in a steady downturn for at least the

near future. Analysts do not expect a rebound anytime soon, writes the Financial

Times:

Merrill Lynch, for example, expects a 2.6 per cent gain in overall US advertising spending this year but anticipates that newspaper advertising revenues will be down 1.5 per cent. Analysts at Lehman Brothers are even more pessimistic: newspaper revenues are forecast to fall 4 per cent this year, partly due to a migration of property advertising to the web. ‘The movement out of print media continues and has lately been sharper than expected,’ says Peter Winkler, managing director of the entertainment and media practice at PwC.xxiv

This is the main reason why Tribune’s own auction languished on for six months.

Lukewarm interest from private equity firms and lackluster bids from others

forced Tribune to allow prospective buyers to bid for parts of the company. The

Financial Times wrote, “[The auction] drew no significant bid from private-

equity investors, who concluded there was no hidden pot of gold in the

newspaper industry and little certainty about future earnings amid internet-

fuelled declines in circulation and advertising revenue.” Comparing Tribune’s

prospective auction process to Knight Ridder’s sale process last year, the head of

the media practice at one New York based consulting firm said, “We all had a lot

of work on Knight Ridder. Not for Tribune, however. Potential buyers already

know the story—and it is not a good one." We believe that though the story is not

a good one yet, given Tribune’s unique mix of internet and television holdings—

Tribune is significantly more diversified than Knight Ridder, the most recent

comparable transaction—the company can weather the current storm cloud over

the publishing industry and emerge in future years with a newspaper portfolio

that has appreciated in value. That being said, it seems the best course of action

32

is to hold the portfolio unless offers are made at more than 9.1x EBITDA, since

this is what Mr. Zell paid for the entire company.

i Hoover’s: Tribune Company History, http://premium.hoovers.com/subscribe/co/history.xhtml?ID=ffffrrhfxffhrjrhct ii Standard & Poors Stock Report: Tribune Co., 3 Mar 2007. iii Standard & Poors Stock Report: Tribune Co., 3 Mar 2007. iv Standard & Poors Publishing Industry Profile, 2005, http://www.netadvantage.standardpoor.com/NASApp/NetAdvantage/simpleSearchRun.do?ControlName=HomePageSearch v Deutsche Bank Company Research, Tribune Company, “Cost control raises our ’07 EPS,” 8 Feb 2007. vi Tribune Co. Form 10-K, 2007, p. 22. vii Deutsche Bank Company Research, Tribune Company. See also, Debra Garcia, “U.S. Newsprint Prices Continue to Erode,” Editor & Publisher, 28 Feb 2007, http://www.editorandpublisher.com/eandp/columns/forestwebs_display.jsp?vnu_content_id=1003551728 viii Louis Hau, “Who Will Tune in Tribune’s TV,” Forbes.com, http://www.forbes.com/digitalentertainment/2006/11/15/tribune-tv-sitcom-tech-media-cx_lh_1116tribunetv.html ix S&P Publishing Industry Profile, 2005. x Alan Murrary, “Is Zell Just Joining Ranks of Poor Newspaper Fans?,” The Wall Street Journal, 4 Apr 2007, p. A11. xi David Goetzl, “Tampa Leads With Highest DVR Penetration, Miami Is Lowest,” MediaDailyNews, 13 Apr 2007, http://publications.mediapost.com/index.cfm?fuseaction=Articles.showArticleHomePage&art_aid=58696 xii Guidance from Jeff Parks, Kohlberg Kravis Roberts & Co. xiii “Tribune Revenues Down 3.4% in February; Publishing Advertising Revenues Decline 5.1%; Television Revenues Up 1.0%,” PR Newswire US, 21 Mar 2007. xiv Katherine Q. Seelye, “Drop in Ad Revenue Raises Tough Question for Newspapers,” The New York Times, 26 Mar 2007, p. C1. xv “U.S. Daily Newspaper Circulation,” Newspaper Association of America, http://www.naa.org/info/facts04/circulation-daily.html xvi Seelye, p. C1. xvii Deutsche Bank Company Research. xviii Sarah Ellison, “How Will Tribune Pay Its Debts,” The Wall Street Journal, 4 Apr 2007, p. A10. xix Craig A. Huber, Lehman Brothers, Tribune Co. Equity Research, 2 April 2007. xx Goldman Sachs Company Update: Tribune Company (TRB), “Thoughts on a go-private transaction,” 3 April 2007. xxi Huber, Lehman Brothers. xxii Darren Everson, “For Sale: Chicago Cubs; Losers, Lovable, but Pricey,” The Wall Street Journal, 3 Apr 2007, p. B1. xxiii Gary Gentile, “Los Angeles Times editor Dean Baquet is forced to resign over cost-cutting dispute,” Associated Press Financial Wire, 8 Nov 2006. xxiv Aline Van Duyn, “Digital deficit: how media groups are grappling with a drift of revenue to the web,” Financial Times, 2 Jan 2007, p. 11.