Tribune re-enters valley of debt

[Commentary] The last time Tribune Co. borrowed billions of dollars to finance a big acquisition, it didn't work out very well.

Real estate mogul Sam Zell’s ill-fated 2007 leveraged buyout cashed out existing shareholders and took the media company private in a deal that loaded Tribune with $8 billion in debt. That turned out to be too much for Tribune, which landed in bankruptcy after advertising revenues plummeted during the recession. Apparently the experience left Tribune executives with no fear of debt. Barely six months after emerging from bankruptcy, the Chicago-based media company is borrowing about $2.7 billion to buy 19 local television stations from Local TV Holdings LLC.

Debt-rating companies are alarmed. Standard & Poor's Ratings Services put Tribune on credit watch with “negative implications,” because the deal would boost debt to about 4.3 times earnings before interest, taxes, depreciation and amortization, a big jump from 2.3 before the acquisition but still within the range debt markets consider reasonable. Moody's Investors Service put Tribune credit on “review for downgrade,” citing increased debt levels resulting from the deal. Tribune predicts about $100 million in acquisition synergies, mostly from squeezing higher prices out of advertisers and boosting fees on cable TV companies that carry Tribune programming. The latter, known as “retransmission fees,” seem to be a driving force behind the recent spate of local television station buyouts. Industry experts predict broadcasters like Tribune will be able to boost retransmission fees substantially over the next few years. Tribune posted a 32 percent increase in retransmission fees during the first quarter.

The logic holds up — as far as it goes. Bigger broadcasting companies will have more clout with advertisers and cable operators. But even scale has limits.