Why Big Activist Is Targeting Tribune Media

 | Feb 22, 2017 | 2:46 PM EST
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Starboard Value's Jeff Smith recently disclosed a 6.6% stake in Tribune Media (TRCO) , one of the fund's largest positions and an investment that suggests an activist campaign pushing for stock buybacks, asset sales or even an auction of the whole company could be next.

The activist investor's securities filing late on Tuesday disclosing the position provides few details. It does say, however, that Smith may make recommendations to the television station owner involving board structure, capitalization and "potential business combinations."

Smith often issues an initial activist Schedule 13D securities filing with some vague details that is then followed up weeks or even months later with more specifics, such as a letter to management or even a director-election proxy contest to help drive his share-price-improving agenda. (Smith did not return a request for comment.)

Starboard's track record suggests an escalation down the road -- and even pressure to have the company sold -- is a real possibility. According to FactSet, Starboard Value has launched 133 campaigns, including 62 director-election proxy fights since 1999. Smith often launches director battles to help drive a share price improvement and M&A agenda.

Last April, Smith settled a pending change-of-control proxy contest and got himself a seat on Yahoo!'s (YHOO) strategic review committee, a panel charged with evaluating potential bids to acquire the business. From his position on the panel, Smith was integrally involved in assessing every possible bid and their financing options. Soon afterward, in July, Yahoo! agreed to sell itself to Verizon (VZ) .

More recently, Smith reached a deal to give Starboard Value five director seats on Perrigo's (PRGO) board. Smith also received a spot on two critical strategic review committees and is likely pushing the company to sell noncore assets.

When it comes to Tribune Media, a major spectrum auction and possible relaxation of Federal Communications Commission media ownership rules could be driving factors when it comes to Smith's campaign. The Chicago owner of cable network WGN America also is a large television broadcaster, with 42 TV stations and a market capitalization of more than $3 billion. (The stock was up 3% Wednesday afternoon to $34.72 in the wake of the 13D release.)

A January Morgan Stanley analyst report suggested that Tribune Media is constrained by an FCC ownership rule limiting the size of the national audience one company's broadcast stations can reach. The report added that relaxation of the measure could meaningfully expand the company's strategic options.

In other words, relaxation of the ownership rule could make it easier for Tribune to sell itself or buy another station group, or acquire stations in attractive markets. The deregulatory views of the new Trump administration's pick to chair the FCC, Ajit Pai, soon could result in looser media ownership limits and allow for more broadcaster dealmaking in the coming years.

Tribune Media also may be in a vulnerable position when it comes to M&A, in part because CEO Peter Liguori announced last month that he will step down after the company releases fourth-quarter results in March. The lack of a full-time CEO could help push Tribune Media into selling itself.

One proxy solicitor who has advised both companies and activists in the midst of director-election battles noted that corporate boards faced with an ongoing search for a new chief executive face an existing void and could be pressured by an activist to sell rather than find a new CEO. Alternatively, he noted that it's possible that Smith and Starboard will want to get involved in recruiting the new CEO, to shift the business in a new direction and potentially later auction the company.

Activists such as Starboard often pressure companies to sell assets and raise funds for debt reduction and stock buybacks. The Morgan Stanley report noted that Tribune Media could seek to sell noncore assets such as its stake in CareerBuilder and real estate, or even more core assets such as WGN America. The Chicago broadcaster could gain about $500 million from a sale of real estate, Wells Fargo's Marci Ryvicker noted in February.

Tribune already has been disposing of real estate, noting in its last quarterly report it received net pretax proceeds of $505 million in the nine months ended Sept. 30. In September, for example, Tribune received net proceeds of $302 million for Tribune Tower in Chicago and the north block of its Los Angeles Time Square property, Securities and Exchange Commission filings show.

Tribune Media also has raised funds via a recent FCC auction. The company said earlier this month that it collected about $190 million from the auction, which allowed TV station owners to sell their broadcast TV spectrum licenses to wireless carriers, with the government acting as a middle man.

A number of broadcasters reported lackluster results from the incentive auction, according to Wells Fargo, but Tribune surpassed the firm's forecast for $168 million in auction proceeds. The sum may not be enough for Tribune to make a major stock buyback, but Starboard could pressure it to boost returns to shareholders.

Moreover, now that the broadcast portion of the auction is completed, Tribune Media and other TV station owners that participated in the spectrum sale are open to discuss M&A and other strategic topics. Government restrictions on talks meant to prevent collusion on bids have been in place since January 2016 -- meaning that TV station owners involved in the auction have been locked out of M&A talks for more than a year.

Starboard Value's large position, accumulated between Dec. 30 and Feb. 17, suggests that Smith is hoping to accomplish something larger at the broadcaster owner, and it's hardly alone in seeing potential in the sector.

A rival large broadcaster, Sinclair Broadcast Group (SBGI) , for example, said Wednesday that it anticipated "the long-awaited deregulation of the industry's antiquated rules and the end of the spectrum quiet period to spur consolidation." --Chris Nolter contributed to this report.

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