Friday, March 21, 2008

For whom the Zell tolls

Tribune owner hopes to revive embattled Times

Sweeping through his newly acquired business units with characteristic bluster and bluntness, it didn't take too long for Tribune Co. owner Sam Zell to acquire the nickname Yosemite Sam.

And when he met with employees of what has been the Tribune Co.'s problem child, the Los Angeles Times, last month, he was quick to define the newspaper's problems with a kind of cartoonish naughtiness.

"The challenge is, how do we get somebody 126 years old to get it up?" Zell said, referring to the newspaper. "Well ... I'm your Viagra."

But for all the color that has trickled out of these gatherings, and all the fear and loathing that has rippled through the more refined parts of Tribune, there are serious questions as to whether Zell can actually pull off a transformation of the media empire.

He is trying to lead a revolution inside the rock-ribbed, old media business culture of the 160-year-old company whose marquee properties are losing audience and market share.

Zell has brought in new executives who talk of "breaking the rules" and bringing "rock 'n' roll" and "street moxie" into play to reinvigorate Tribune's eight daily newspapers and 23 TV stations. But the solutions to the fundamental problems that spurred Tribune's sale are not so easily prescribed. Changing a corporate culture in any business is a formidable assignment, especially for a company that has been stuck in an L.A.-vs.-Chicago civil war ever since Tribune acquired the L.A. Times parent in 2000 (for $8.3 billion, a little more than the $8.2 billion buyout that Zell led last year).

The influx of new blood and nontraditional creative thinking that Zell and his lieutenants have promised also will take time to implement.

But that is complicated with a much more immediate problem -- one that even raises questions about the long-term stability of the complex deal.

Advertising revenue at Tribune's newspapers has dropped sharply, down more than 15% so far this year compared with 2007. That's much more than Zell's number-crunchers predicted when the deal was being completed in December. It's the perfect storm of a general slump in the newspaper business and the economic slowdown hitting key print advertising sectors like real estate and automotive.

Although the Zell-led buyout took the company private again, and freed the company from the scrutiny of quarterly results and share price, the complicated, $34-per-share buyout under an Employee Stock Ownership program left Tribune with $13 billion in debt.

So where once Zell roundly criticized Tribune's previous management for being too focused on cost-cutting to improve its financials, he said last month that the weaker-than-expected revenue left the company no choice but to implement layoffs of 400 to 500 staffers in its publishing and corporate units.

In the meantime, publisher David Hiller tapped Russ Stanton as the Times' next editor, replacing James O'Shea, who resigned rather than presiding over the cuts in the newsroom. Stanton, a 10-year veteran of the paper, was a relatively unconventional choice, because he has cut his teeth most recently in trying to boost the company's online presence, among other endeavors. He became the paper's fourth editor in three years.

Outside observers say that Tribune is under pressure to maintain annual earnings in the neighborhood of $1 billion to service that debt and not run afoul of the covenants with the banks that helped finance the buyout, including Citigroup, JP Morgan Chase and Merrill Lynch. (Zell invested $315 million in Tribune in exchange for a note allowing him to acquire up to 40% of the company within 15 years.)

Why enter into such a deal, particularly when it was clear that the newspaper business is faltering? On the upside, the company is not obligated to pay taxes because of its employee-owned structure. All of its available cash can be used to pay down debt, and the more Tribune whittles down its debt, the more equity employees have in the company. On the downside, if Tribune's businesses deteriorate, the company runs the risk of defaulting on its debt payments and the possibility of bankruptcy.

Even with the complex deal, Zell won Tribune despite a high-profile bid from Los Angeles billionaires Eli Broad and Ron Burkle. Tribune's board was said to lean toward Zell's bid because he was a fellow Chicagoan and a hard-driving businessman who would make the most of Tribune's newspaper and TV assets.

That Zell even completed the deal was, to be blunt, against all odds. Given the turmoil in the credit markets, there was much speculation that he would have to dramatically restructure or table the Tribune deal. But Zell was just coming off the February 2007 sale of his office building portfolio to private equity behemoth Blackstone Group -- a $39 billion transaction that yielded tens of millions of dollars in fees for the financial community.

"The banks couldn't turn around and say no to him" on Tribune, a former company exec observed. "Sam Zell was probably the only guy in the country who could get that deal done."

Zell has been candid in telling employees that 2008 is shaping up to be a "shitty year" financially for the company -- a point he reiterated in a recent letter to Tribune personnel. Addressed "Dear Partner," Zell said employees must take the initiative and that success will rely upon "heroes in the field who lead a grass-roots sea change."

For the first time this month, he said that asset sales may have to be considered. But that is a tricky option: The ESOP structure is hinged on the asset base that the Tribune had in place at the time of the sale.

The company, then, would face a huge tax bill if it tried to sell off one of its big pieces, like the Los Angeles Times, though some Tribune insiders believe there are creative ways to structure a transaction or partial sale. Those reportedly interested in buying Newsday include Rupert Murdoch, Mort Zuckerman and James L. Dolan.

Tribune executives are emphatic that there is "no risk" of the company defaulting on its debt payments this year, according to Randy Michaels, Tribune's newly appointed CEO of broadcasting and interactive.

Michaels was recruited by Zell in December to be his top lieutenant overseeing Tribune's TV stations, Internet operations and its smaller newspapers. Michaels previously ran Jacor Communications, the Zell-owned radio station that went on a buying spree in the mid-1990s and was later sold to Clear Channel Communications.

The immediate focus at Tribune seems to be on staunching the bleeding at newspapers and broadening and improving the company's online offerings.

Michaels says that his lack of a background in the publishing world will help him brainstorm new ways to approach the print business. The same goes for Lee Abrams, the former XM Satellite Radio exec who has been recruited by Michaels to serve as Tribune's chief innovation officer. And Ed Wilson, a veteran in the syndication business, was brought in last month as the new president of Tribune Broadcasting.

What they face, Michaels observes, is a Balkanized bureaucracy.

Says Michaels: "I've been surprised by ... how silo-ed we are and how little communication there is. The best practices in one part of the company aren't shared anywhere else. This has been a vertically silo-ed company. While certainly each of our brands needs to be individual and reflect our communities, at the backend, we need to do a much better job of using the resources we have and using the clout we have. Sam likes to say, 'We haven't been a media company; we've been a collection of media outlets.' "

Like many media congloms, Tribune faces the dilemma of needing to invest in Internet businesses to make it more competitive, even as the vast majority of revenues still come from the old-school of print and 30-second spots on its TV stations.

"You have to understand that traditional media is (often) trading dollars for dimes when its advertising business moves online," Michaels says. "I think we have an opportunity to trade a dollar for 50¢ (online) and lose 60¢ in costs, so we come out ahead."

Nevertheless, such a transition is proving wrenching, not just as to the prospect of layoffs but in the entire notion of exactly what content the Chicago Tribune or the Los Angeles Times provides. The Times' website's entertainment page now tilts less toward industry-centric news and much more toward Us-inspired celebrity photos and the latest on Lindsay Lohan.

Last week, Tribune announced a plan to combine the operations of its South Florida-based newspaper and TV station under one roof, a melding of formerly distinct operations that is likely to be replicated in other Tribune markets as the new regime overhauls its local management structure. The plan calls for Tribune's Miami station, CW affiliate WSFL-TV, to move into the Fort Lauderdale offices of the South Florida Sun-Sentinel. The paper's publisher, Howard Greenberg, also will assume general manager duties for the TV station. In the words of Greenberg, the move is intended to make the operations "work together to develop unique content and programming" and to be a one-stop shop for local advertisers.

"The big message right now is changing the culture, and changing our focus," Michaels says. "You have journalists who write mostly for each other, not readers. I laugh when I sit in on ad department meetings and hear them talk about what sized ads we ought to sell instead of what the customer wants to buy. We need to get reader-focused and customer-focused."

That's just the kind of talk that sets off alarm bells among journos who believe there is a public service aspect to the newspaper business, as Zell has been informed during his tour of Tribune's newspapers.

Zell's response has been clear: He has said that he brings no editorial agenda, nor does he have any sentimentality about newspapers' role as civic institutions.

Zell also said the value of stock held by an employee trust was $593 million, or $10.50 a share, as of Dec. 31. The going-private deal was valued at $34 a share. Under the Zell-led buyout, an employee-stock ownership plan is Tribune's majority owner.

"I'm a businessman," Zell told Times employees in February. "All that matters in the end is the bottom line."


So much for Sam Zell's promise he wouldn't sell off Tribune Co. piecemeal. He's considering doing exactly that with the shadow auction of Newsday, now in play with a guesstimated price tag of $350-$400 million.

That would almost make up for the $500 shortfall in profits last year at Tribune, which is doing even worse than Zell thought (and he didn't think much of the company.)

Rupert Murdoch
and Mort Zuckerman -- owner of the New York Post and Daily News, respectively -- have offered to form joint partnerships that would save on back-end costs (read: layoffs for the press workers and other unionized employees), while Cablevision has offered to buy the paper outright, promising bold management on par with its ownership of the New York Knicks.

The real losers, of course, would be the paper's employees, who would no doubt be let go in droves to pay for the latest round of debt needed to finance the deal...

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