Friday, January 18, 2008

A freer hand for private Tribune

New CEO Zell urges entrepreneurial vigor as firm sheds Wall Street control. ESOP structure may aid performance.
By Michael A. Hiltzik, Los Angeles Times Staff Writer
December 24, 2007
After nearly a quarter of a century as a publicly traded corporation, Times parent Tribune Co. reverted to private ownership last week, making a bet that having Wall Street shareholders is more a burden than a boon to a struggling company in a mature industry.

The gamble by Chicago businessman Sam Zell, who took the company private Thursday, is that entrepreneurship -- his stock in trade -- will prevail over the transaction's financial risks to provide a richer future for the company and its approximately 20,000 employees.

"In Tribune's current state, there are not many benefits to public ownership," observed Julia Gardner Plotts, an assistant professor of finance and business economics at USC's Marshall School. "There's a lot of scrutiny by investors, and that's all going to go away. Mr. Zell is going to be able to make the decisions he wants to."

Tribune's shares had long been bereft of the key virtues of a publicly traded stock. The shares of richly valued companies with robust prospects -- such as Google Inc. or, at an earlier time, Microsoft Corp. -- can be used as inexpensive currency to make acquisitions.

Tribune's poorly valued shares were just the opposite. And their dismal trading history, which partially reflected perceptions that management would be unable to reverse declines in the newspaper and broadcasting industries, made it impossible for the company to raise more capital in the stock market.

Investors, concerned about the company's short-term prospects, would have bid down the shares if management had undertaken any initiative to build long-term value through new capital investments, especially in the absence of a clear strategic plan. For that reason and others, Tribune's capital investment stagnated.

The company's new private status will not eliminate all prying eyes. It still faces the obligation to report financial results to holders of its billions of dollars in bonds. Also, it must be appraised at least annually for the benefit of its new proprietor, an employee stock ownership plan, the interests of which are supposed to be safeguarded by its trustee, Lisle, Ill.-based GreatBanc Trust Co.

Zell pledged that privately held Tribune would be a model of disclosure. "I think this company and its employees are going to be shocked at the degree of information and the degree of candor that we intend to share with them," he said at a news conference Thursday. "This is not a Houdini game. I want everyone to know on an ongoing basis how we're doing. I want everybody to be motivated to see us do better, and I don't know how you can get excited if you don't know where the baseline is."

Tribune's structure as a private company does bring new complexities. Under Zell, Tribune is to convert to a Subchapter S corporation owned entirely by an employee stock ownership plan created for the purpose. The advantages of this arrangement lie in its tax treatment. Taxes on S corporation profit are paid not by the company, but directly by its shareholders, which in this case is a tax-exempt ESOP.

Tribune's operating profit, therefore, will be untaxed. That would have freed up roughly $300 million in cash for other corporate uses had it been in effect over the last year.

Gains on the sale of corporate assets also are untaxed if the assets are held for at least 10 years after the conversion to S corporation status -- in this case, until 2018 or later. That's an inviting target for Tribune, because it needs to sell some assets to pay down debt, and some have large built-in gains.

Among them is Major League Baseball's Chicago Cubs, which the company bought for $20.5 million in 1981. The team and its marquee ballpark, Wrigley Field, have been placed on the auction block and are expected to bring bids of about $1 billion. Almost all of the sale proceeds will be taxable unless the company can structure the transfer to take advantage of the 10-year exemption.

"The biggest challenge is to monetize Tribune's assets in a way that doesn't constitute a sale, at least until 10 years pass," said Robert Willens, a tax and accounting expert at Lehman Bros. in New York. He noted that some maneuvers that could achieve that goal have won court approval in the past. "There are ways to do it that give you all the cash as though you've sold, but because you retain certain rights in the asset, it doesn't constitute a sale."

Another issue will be the new Tribune management's relationship with its employees, who will own the company through their interest in the ESOP. Each year, employees vested in the ESOP will be allocated shares in Tribune at a value equivalent to 5% of their base wages. If the shares have retained or increased in value, they can be cashed out when an employee retires or after 10 years.

Owning a company through an ESOP is not the same as owning shares directly, however. ESOPs typically have only limited rights over management, except in cases of extreme malfeasance, and these are generally exercised by the plan's trustee, not via the votes of employees.

Moreover, the trustee is responsible to the plan rather than to the individual workers. This means that in some circumstances it may support management actions that the majority of employees oppose.

"The trustee is not like a union representative for employees," said Corey Rosen, executive director of the Oakland-based National Center for Employee Ownership. "The trustee deals with the issue of maximizing the plan's assets. If someone wanted to take over a company and offered $35 for a stock trading at $20, even if the employees didn't want it to happen the trustee would be very hard-pressed to say no."

Rosen did say, however, that ESOP-owned companies often perform better than others, particularly when employees have been given a voice in day-to-day operations. Minority ownership by employees at Chrysler Corp. and United Airlines, where unions were given board seats, failed to do much to turn around those limping companies. At the other end of the scale is W.L. Gore & Associates, the manufacturer of Gore-Tex and other products, which is owned by its 8,000 employees. The company, which encourages teamwork and factory-floor innovation, has annual sales of $2 billion.

Under the strong-minded Zell, Tribune is likely to fall somewhere between those extremes. But he has stated that he intends to give workers a greater voice in company operations. Within minutes of the completion of the Tribune sale Thursday, he sent an e-mail to all employees promising, among other things, to "reward innovation" and "tear down bureaucracy and reward entrepreneurial spirit."

"We will work hard and have fun," the message concluded.

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