Wednesday, January 2, 2008

which LBO will go bust

--The bankruptcies of Revco and Federated heralded the end of the 1980s buyout boom. Traders and lenders are starting to wonder which of the current LBO crop will become the busted bellwether of the next downturn. One hint: The guy who bailed out Revco two decades ago is backing what appears to be today's biggest potential time-bomb. --Of course, when confronted with parallels between the bloody end of the 1980s boom and today's larger binge, deal makers tick off how things have changed. Deals, they say, have less leverage, and are subject to fewer restrictive debt provisions. --But the big buyout that traders see as the riskiest is Sam Zell's acquisition of Tribune, publisher of the Los Angeles Times. --Indeed, after the deal closed, credit traders quoted a staggering $1.8 million to insure $10 million of Tribune debt against default for five years. To do the same for New York Times debt cost only about $81,000. --They have got good reason to worry. First, Tribune's core media business is facing an industrywide decline in advertising revenue, which could be exacerbated in a recession. Mr. Zell believes he can increase Tribune's revenue, despite this. --Then there's the leverage. The company will have more than $10 billion of debt after the acquisition. Its forecast cash flow for this year is $1.2 billion and is expected to fall slightly over the next two years. That has to support debt service that could be as high as $900 million, assuming a blended interest rate of 9% on its various loans. --Finally, Mr. Zell has limited exposure to Tribune's fortunes. He is injecting only $315 million for a note and a warrant for 40% of the company's equity. Until then, it is owned by the employee stock-ownership plan. So Mr. Zell has a lot less skin in the game than buyout shops have in other megadeals, where equity can account for as much as 30% of the price. If Tribune's business hits the skids, he has less economic reason to bail it out.

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