Tuesday, August 14, 2007 1 comments ++[ CLICK TO COMMENT ]++

Another merger opportunity: the high-risk Tribune (TRB) buyout

I don't know if it's greed or if it is the best area right now but I'm looking more and more at announced takeovers. The experts consider it arbitrage but since I don't short it is only speculation (on a side note, even having the ability to short won't help in the cases I'm looking at because it is next to impossible to hedge some of the cash deals with questionable debt offerings). Takeovers look attractive to me because:

  1. Market is selling off so even "safe" deals are being indiscriminately being sold (to raise capital I assume). It is hard to find the present situations at other times of the market cycle. One can pick up almost 10% from a "somewhat safe" announced deal.
  2. If the market has entered a correction (one is never sure--I have been wrong for at least an year on some key calls) then picking up 5% to 10% on reasonably "safe" deals is amazing. Yes, it is speculation but it is a different kind of speculation from betting on, say, oil right now or whatever.
  3. Nothing else looks attractive to me. Since I don't short, and I'm a newbie, I don't feel comfortable with many others that I'm tracking. Even for securities that I feel are undervalued (say Takefuji (TSE: 8564) for example), I think the prices can drop. This is why I'm not a pure value investor (or even close to one). Value investors try not to predict these bottoms but I do.

Anyway, of many of the risky deals, the one I find attractive right now is the Tribune (TRB) deal. Unlike others trading way below their announced takeover price, this isn't in a questionable industry (like mortgage lenders) but it is certainly weakening and out of favour. For anyone not familiar, Tribune has announced that it is selling itself to Sam Zell. Get the full details here. There are multiple stages involved in the takeover, with complicated actions being performed along the way, but for my purpose I only care the last stage. Just to quickly summarize:

TRB takeover price: US$34
Shareholder vote: August 21, 2007
Closing Date: 4th quarter of 2007 (let's assume December 31st, 2007; note that it can be delayed)

Current price: $25.51

Simple Potential Return (excluding transaction costs, dividends, etc): 33.3%

Obviously the market thinks there is high risk to this deal given the potential 33% return.

What's the downside?

I don't know much about this company so it's hard to say how far the stock can drop. I follow newspapers and paper forestry stocks and I know newspapers are suffering with declines in circulation/sales/etc. So the company will likely post weak earnings numbers in the future. But most of the negativity is likely priced into Tribune (just like with most other newspaper stocks). I would say the downside is probably around -10%.

Furthermore, if you look at the long-term chart below, you will see that the stock is trading at a 52wk low.

It is unusual for takeover targets to be trading at such lows. I'm interpreting this to mean that the stock is already near a short-term bottom. Sure, it can drop a lot more (due to negative fundamentals) but it is cheap for a takeover target.

Is this deal going to go through?

I think so. I only know a little about Sam Zell but supposedly he is a contrarian investor. I doubt he will pull out even if earnings weaken before the deal closes. The risk clearly lies with the banks and other financiers providing debt financing. The market is clearly thinking that one or more banks may run into problems providing capital. Obviously this is a guess but I think the financing will come through.

I think the worst that will happen is that the takeover price may be negotiated down (but I think the price will still be much higher than what it is trading at right now) and/or the deal closing may be delayed. Since I'm just a small investor who really can wait, a delayed closing is fine with me (as long as it is only a few months and doesn't take a full year or something).

As with my comments regarding the other merger deals in prior posts, if I don't find anything else attractive, I may take a position in this. I am still leaning towards taking a position in the ABN-Amro (ABN) deal and then possibly consider this later. If I feel TRB's stock price will run up before the ABN-Amro deal then I might purchase TRB.

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1 Response to Another merger opportunity: the high-risk Tribune (TRB) buyout

February 10, 2008 at 3:01 PM

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