Tribune hires bankruptcy lawyers
December 7, 2008 – 11:02 pm
[Update Monday 2PM: Tribune has filed for bankruptcy protection according to the WSJ]
According to NYT’s DealBook, Tribune is investigating a bankruptcy filing.
Tribune has hired bankruptcy advisers as the ailing newspaper company faces a potential bankruptcy filing, people briefed on the matter said.
The newspaper, which was taken private last year by billionaire investor Samuel Zell, has hired advisers including Lazard and Sidley Austin, one of its longtime law firms, these people said. Tribune has been hobbled by debt related to that sale last year, which has been compounded by the growing drought of advertising for newspapers.
Like many other over-leveraged companies in this nasty economic environment, Tribune’s pile of debt is toxic: the recession hammers earnings (and thus the company’s ability to make interest payments), while the credit crunch makes it difficult/impossible to refinance debt. Tribune is now a private company, so its stock doesn’t trade. But the stock price of another over-leveraged newspaper company provides a fine example: MNI.
This is a good opportunity to introduce a new concept to novice investors out there. The “Value Trap.”
Many see low-priced stocks and consider them “cheap.” Not true. Recall “The Accounting Equation” from this previous post: Assets = Liabilities + Equity. One side must equal the other. When assets fall substantially in value on the left side of the equation, something on the right side has to give. Debtholders aren’t about to forgive the company’s debt, so equity holders lose. If assets fall far enough, equity can go negative. This is effectively what happens in a bankruptcy: Assets are no longer sufficient to pay back debt.
A friend told me he thought SIRI must be cheap since the stock was below $1. But he hadn’t looked at the balance sheet. With all the debt they have to pay off, the equity is more likely worth $0 than anything north of a buck.
Don’t get caught in a value-trap. Make sure you look at a company’s balance sheet before you decide a low-priced stock is a good investment.
Posted in bankruptcy, credit crunch, stocks, tutorial |
One Response to “Tribune hires bankruptcy lawyers”
Just desserts for Sam Zell, to be sure.
One of the casualties of this, the LA Times (my local paper), has been bemoaning the sale of the Times to Sam Zell since the beginning. He bought the outfit not for the media outlets but for the real estate the entities owned.
I guess his idea was to sell the properties, thinking of course that the value of these was greater than the companies themselves.
Guess this little downturn caught him by surprise, too. I’d laugh at the irony of it, but schadenfreude isn’t really the proper reaction to even less oversight from the 4th estate.
Thank God for the internet…
By Lisa on Dec 10, 2008