Sam Zell making a point to Baltimore Sun employees.
But all the twittering and tut-tutting over Mr. Zell’s remarks — and his suggestions that some reporting jobs are not needed — masks a more serious concern. With the newspaper industry going through an unexpectedly sharp contraction, Tribune is struggling under $12.8 billion in debt, and its financial condition has deteriorated, creating what specialists say is a very real risk of credit default in the next year or so.
That has forced the company to consider the sale of Newsday, one of its most profitable newspapers — precisely the kind of move Mr. Zell had said he did not want to make. “We didn’t do this deal to figure out what to get rid of,” he told the company’s flagship paper, The Chicago Tribune, last year.
Mr. Zell said from the start that he would sell the Chicago Cubs baseball team, but that deal has been delayed. Now, analysts say, Tribune probably needs to sell both the Cubs and another major asset like Newsday, and relatively soon, to remain solvent.
Of course, if this house is ablaze, Mr. Zell has supplied much of the kindling. Almost $8 billion of Tribune’s debt came from the highly leveraged deal, which he engineered, that took the company private. That borrowing now looms as the biggest threat to the company, at least in the short run.
“There’s very little margin of safety,” said Mike Simonton, senior director at Fitch Ratings. “The company needs to execute asset sales and cost cuts in order to make its debt service payments and offset the significant revenue declines.”
Mr. Zell understands that. He had criticized the previous management for repeatedly cutting newspaper staffs, but under him, the Tribune Company has eliminated more than 400 jobs at The Los Angeles Times, The Chicago Tribune, Newsday, The Baltimore Sun, The Orlando Sentinel, The Hartford Courant and other papers.
“I have discussed with many of you our mutual concern about the cyclical eroding of content quality to meet budgets manufactured in the corporate office,” he wrote in a staff memo in February. “I promise you, in time, we will end that downward spiral.”
Mr. Zell and the company declined to comment for this article, but they have scheduled a conference call with bankers and journalists on April 17 to discuss Tribune’s finances.
Meanwhile, he has been making business moves and rallying the troops, supplying what analysts and Tribune executives say are healthy ideas and a needed sense of urgency. He has dashed around the country to Tribune newspapers and television stations, warning that a somnolent corporate culture had better get moving.
At a company known for its cautious pace, he has made quick decisions and given more authority to managers who felt hamstrung by the top-down style of the old regime.
But at times, his message has been overshadowed by confrontational or provocative statements. He told reporters in Washington, D.C., that there were far too many of them, and said to employees they should be free to look at explicit Web sites while at work. He has also told journalists that they must be part of the quest for revenue, an unsettling prospect for people in a line of work who have prided themselves on remaining apart from their employers’ business concerns.
When Tribune agreed to an $8.2 billion takeover offer from Mr. Zell in April 2007, many analysts said the price was high and left little maneuvering room.
“This thing looked shaky from the start,” said Ken Doctor, lead analyst with Outsell. “It looked worse by the time the deal closed in December, and it’s gotten worse since then.”
But Mr. Zell was not taking on much of the risk. He put up $315 million, and the company borrowed the rest. Tribune’s stock is now held by an employee stock ownership plan. That makes the company tax-exempt, partially offsetting the interest payments, but as profits dwindle, so do the tax savings. Tribune reported $87 million in net income last year, down from $594 million in 2006. And the company cannot escape capital gains tax on asset sales until it has been tax-exempt for 10 years.
Since Mr. Zell made his bid for Tribune, things have been worse for newspapers than many predicted, with advertising revenue down almost 8 percent in 2007 and 2008 off to a poor start.
Tribune’s papers fared worse yet, losing 10.5 percent of ad revenue last year. Even so, the company’s operating margins were healthy by industry standards. What sets Tribune apart is its debt burden. Its debt service bill this year is almost $1 billion, not including a $650 million balloon payment from the takeover financing that is due in December, and one for $750 million due in mid-2009.Last year, the company had earnings (before interest, tax, depreciation and amortization) of about $1.2 billion. But 2008 is expected to be more difficult, and the company’s bond covenants require it to have earnings around $1.1 billion or risk being declared in default — even if it has the cash to make its interest payments.
Tribune’s credit rating has slipped several notches below investment grade, and its bonds are trading far below their face value, signaling that the market sees a high risk of default. The company’s long-term, unsecured debt can be bought for less than 50 cents on the dollar.
Despite these problems, some of Mr. Zell’s strategic moves have been praised by some industry analysts. Tribune created a subsidiary to combine and streamline back-office operations of television stations, and sold Tribune’s Hollywood production studios and some related real estate for $125 million. It merged the online operations of a Miami television station, WSFL, and the Fort Lauderdale newspaper, The Sun-Sentinel.
The company shifted a San Diego station, KSWB, from the CW network to affiliation with the more lucrative Fox network, and gave The Baltimore Sun the go-ahead to start a youth-oriented tabloid. Several stations have new general managers, and The Orlando Sentinel has an interim publisher.
Tribune has replaced most of the company’s upper management, hiring some highly regarded television executives, and also some from the radio and music industries who have no experience in television or newspapers. One of the latter, Lee Abrams, the chief innovation officer, has already gained something of a reputation with long, rambling, excited e-mail messages to the staff, loaded with references to the history of rock ’n’ roll, that have left people scratching their heads.
“If we can morph the Soul of Dylan ... with the innovation of Apple and the eccentric-all-the-way-to-the-bank of Bill Veeck, the WORLD will be a better place,” he wrote in one missive.
Still, a Tribune executive who, like others interviewed, declined to speak on the record, said, “I think that people are energized, where before they felt nobody could make any decisions, but there is still a healthy amount of skepticism and they know it’s going to be very hard.”
An equity analyst who follows the company said, “These mostly look like smart moves, but they might only help on the margins.”
Things have not gone according to plan for Mr. Zell on several fronts.
Last year, he said he did not want to part with any newspapers, but he recently began fielding offers for Newsday, based in Melville, N.Y.
He set out to sell the Cubs and their home, Wrigley Field, and Tribune executives talked of reaching a deal in 2007. But the talks have been slowed by the complex arrangements Mr. Zell is seeking, and Tribune executives now say the team might not be sold until after the baseball season ends in October.
He wants to sell the ballpark to a state agency, the team to a private buyer, and possibly the naming rights to the field to a third buyer. And he has insisted that a stadium deal has to be in place before he negotiates for the team.
Tribune put out word last month that it might sell Newsday, and three newspaper publishers with properties nearby signaled that they want it — Mortimer B. Zuckerman, owner of The Daily News; Rupert Murdoch’s News Corporation, which publishes The New York Post and The Wall Street Journal; and the Observer Media Group, which publishes The New York Observer. The Dolan family, owners of Cablevision, Madison Square Garden, the Knicks and the Rangers, have also expressed interest.
People advising potential buyers said the price for Newsday could exceed $500 million. But they also said that as with the Cubs, Mr. Zell has included an unusual twist that could delay a deal.
To minimize Tribune’s capital gains tax bill, they said, Mr. Zell wants much of the payment to be noncash and possibly deferred, most likely involving a real estate transfer.
Selling the Cubs and Wrigley makes sense because they could fetch a high price but do not generate proportionate income. Tribune executives have talked about reaping as much as $1 billion for the team, the ballpark and the naming rights.
Analysts say Tribune might also sell another valuable asset that is not part of the core business, its stake in the Food Network.
But Newsday seems like the kind of property a long-term owner would want to keep if he could. It is part of the core business — the newspaper business that Mr. Zell said he wanted to be a part of — and has the kind of cash flow the company will need for years as it pays off its bonds.
As Mr. Simonton of Fitch put it, “There is absolutely a paradox there.”
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