September 6, 2007 2:54 pm

Tribune: Books not out yet on Cubs/Comcast sale; may be necessary to hit leverage covenants, sources say

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Books for Tribune Co’s sale of the Chicago Cubs have not been distributed yet, but might go out in mid-September, people familiar with the situation said. Management may need proceeds from the sale to meet a 9x leverage loan covenant when the company comes back to market for the second step of its buyout financing, lenders said.

Tribune is selling the Cubs, their home ballpark Wrigley Field and a 25% stake in Comcast Sportsnet Chicago. Proceeds netted from the sale are expected to pay down debt stemming from Sam Zell’s USD 8.2bn buyout of the Chicago-based conglomerate.

If Tribune nets sale proceeds at the higher end of estimates, it could reduce leverage to just over 8x, as previously reported. Further, if it fails to meet the leverage test during Q4, it has until 31 May 2008 to comply before its debt commitment expires.

The auction could yield bids north of USD 1bn, said one potential buyside source. The Yawkey Trust sold the Boston Red Sox, Fenway Park and a majority stake in the New England Sports Network for USD 700m in 2002, but franchise values for major market teams has appreciated significantly since then, noted one industry source.

As widely reported, potentially interested bidders are expected to include an investment group fronted by Chicago private-equity magnate John Canning, Internet billionaire Mark Cuban and the Omaha, Nebraska-based Ricketts family.

Holders of Tribune’s USD 5.515bn seven-year term loan B issued in May to finance the first part of Zell’s buyout are looking forward to the sale of the Cubs and other potential assets, since sale proceeds will be used to pay down term debt, as previously reported. When Tribune returns to the loan market for its second step financing – USD 4.2bn in additional debt – it will need to meet the leverage test of 9x EBITDA, according to its credit agreement. JPMorgan and Merrill Lynch are arrangers for both steps of the financing.

Pro forma the transaction’s completion, Tribune’s leverage would hit about 8.8x, putting it just inside the 9x required for the financing’s second portion, buysiders said. Even if 3Q EBITDA drops Y-o-Y, the company is thought to be able to factor in proceeds from a future Cubs sale, using a “conservative” figure for the proceeds, said two people familiar with the situation.

That figure is thought to be around USD 600m, one of those people said. In a 11 May SEC filing, the second step of the transaction is described as including the Cubs/Comcast sale, “which may occur before or after the closing of the merger.”

Despite the prospect of deleveraging asset sales, many existing lenders would not be disappointed if the additional USD 4.2bn in loans never hit Tribune’s balance sheet, they said. If the company did not meet the leverage test by 31 May, it would continue operating “half-privatized,” as currently structured, they said. Its 118m currently listed shares would continue to trade publicly, and the shares bought out with the USD 7bn in loans raised earlier this year would remain privately held by Zell and the company’s employee stock ownership plan (ESOP).

“It is collective wisdom that no one wants to see that last USD 4.2bn come out,” said one lender, adding that its looming presence is partially reflected in the trading levels. It trades at a discount to many large, struggling covenant-lite deals, such as Univision and Freescale. The Tribune term loan trades in the 89.875-91.292 context, according to Markit. It priced at Libor+ 300bps, and at those levels its spread to maturity is Libor+ 463.9bps. Univision currently trades at 92.438-93.188, and Freescale trades at 93.266-94.313 with a spread to maturity of Libor+ 279.9bps.

However, if and when Tribune attempts syndication again, the existing loans will likely face more downward pressure, to the extent the new loans have superior structure and pricing, he added.

A spokesperson at Tribune declined to provide comment on the asset sales or the buyout financing.

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