Is the credit crunch giving only some “barbarians at the gate” cold feet?
The Federal Reserve?s 0.5 percent rate cut was welcome news for private equity deals whose financing could falter in a limited credit climate. But the cut came too late to save Kohlberg, Kravis, Roberts? bid for the District?s Harman International Industries. The $8 billion bid was withdrawn Friday ? ostensibly citing breach of contract.
The rate cut favors Tribune Co.?s highly leveraged, $8.2 billion conversion to an employee-owned corporation amid the same credit crosswinds and declining revenues that reportedly soured KKR ? whose record 1988 takeover of RJR Nabisco was pilloried in the book “Barbarians at the Gate” ? on the D.C. audio equipment maker.
“The real question is whether the [Tribune] company?s cash flow is sufficiently affected to interfere with their being able to borrow,” Silver Spring-based media analyst John Morton said. “And the company has said they don?t anticipate that it will.”
Tribune Co.?s first- and second-quarter ?07 operating revenue, year-over-year, retreated ? after a flat 2006 ? 4 and 7 percent respectively, its Web site reports. But deal projections have revenues rising in 2008-2010 ? after a down 2007.
Owner of 23 broadcasting properties and several dailies, including The Sun, Tribune Co. will assume a $13 billion debt in the public-to-private switch. It was orchestrated by real estate mogul Sam Zell, who, at deal closing, will become board chairman andhold a warrant for 43.5 million shares of company stock for $500 million ($11.50 per share).
But it still must pass regulatory muster and avoid triggering the same kind of loan hedging, “materially adverse effect” escape clauses apparently invoked in KKR?s case.
Deal failure, however, would not upset The Sun?s Newspaper Guild members, said Angie Kuhl, commercial vice chair of the union unit at the paper. Kuhl said that most members prefer local control ? a possibility if Tribune divests The Sun.
“It?s a big, unwieldy company ? and hierarchical,” Kuhl said of Tribune. “That?s one of the frustrations of employees here.”
A busted deal also would not upset Ted Venetoulis, spokesman for a local group interested in buying The Sun. “[Now] we just have to wait for Zell to make a judgment,” he said, “and not bother him until he gets his arms around [the merger].”
