Monday, December 8, 2008

The Tribune Buyout: Was It Ever a Good Idea?

Posted by Heidi N. Moore

No one thought the buyout of Tribune Co. would work — and it didn’t.

The fact that Tribune Co. has hired Lazard as its adviser for a potential Chapter 11 filing ranks among the least surprising potential bankruptcies ever. That’s not just because bankruptcy is starting to take root in the industry, with Lazard advising Chapter-11-enmeshed Journal Register Co.

The inevitability is due directly to Tribune’s position before the buyout. All the warning signs were there from minute one of Sam Zell’s impending buyout of the newspaper company. Consider what CNBC journalist Julia Boorstin wrote nearly 18 months ago, when the buyout was in its early days:

The worse the company does, the worse the debt burden for the employee stock ownership plan that Zell’s using to structure the deal. Even if the deal wins approval from shareholders and the government it must borrow $4.2 billion (in addition to the $7 billion it’s already borrowed to buy back shares for the first step of the transaction). And think about the premium!

To many people, the math never worked from the beginning. Tribune’s revenues had been falling precipitously for years. Zell offered a generous $8.2 billion offer for Tribune to win against two other billionaires halfheartedly bidding for the company. From the beginning, his plan was that the price tag would be paid through the pensions of Tribune’s 20,000 workers, held in an employee stock ownership plan, or ESOP.

The ESOP structure was designed to reduce Tribune’s taxes to nearly zero and it lowered Zell’s own price tag to $315 million. Unfortunately, it also left a $12 billion debt load to pay just as the newspaper industry as a whole is largely cratering on lower ad revenues. The principle — that the company could hoard its declining cash flows to pay down this enormous debt — was flawed. Cash flows declined, and tax savings couldn’t help. A populism-friendly redesign did little to goose revenues.

Zell’s frustration did not take long to come through to the newspaper company’s beleaguered employees. “Am I the only person in this room who really wants to win?” he once demanded. “We are in crisis mode. The days of the newspaper being some kind of a holy monopoly are over.” In another conversation, he called the Tribune’s Washington bureau “overhead” because it did not generate revenue.

In a sprawling interview with the New Yorker’s Connie Bruck last year, Zell played up his reputation as a maverick. Bruck wrote, “He says that he is constantly trying to ’shut out the noise’ of conventional wisdom, because, although it may not always be wrong, it is rarely profitable.” The case of Tribune is one where the conventional wisdom — that the buyout would be disastrous — was nothing to sneeze at.

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