Friday, December 19, 2008

Zell could recoup investment, but employees likely won't

By Julie Johnsson and Mary Ellen Podmolik | Tribune reporters

Entities tied to CEO are creditors likely to be paid

Sam Zell potentially stands to recoup some of his investment as troubled media giant Tribune Co. reorganizes under Chapter 11 protection.

But Tribune Co. employees are unlikely to see any gain from their brief stint as owners of their company through a transaction engineered by Zell that left the Chicago media firm saddled with $13 billion in debt, bankruptcy experts said.

Tribune Co., after United Airlines, is the second major Chicago company to seek bankruptcy protection this decade after forming an employee stock ownership plan.

In engineering a deal to take the media company private last year, Zell struck an agreement that left him poised to benefit richly if the complex transaction succeeded, while potentially hedging his losses if Tribune Co. wound up in bankruptcy.

For $315 million, entities affiliated with Zell bought a $225 million "subordinated promissory note" as well as warrants that would allow Zell to eventually buy 40 percent of Tribune Co. for as little as $500 million.

"He's a very smart guy and structured this to benefit him all the way," said Chicago compensation expert Don Delves.

The $225 million note means that Zell-controlled entities are a major unsecured creditor and, under bankruptcy law, will be compensated ahead of shareholders when a Delaware bankruptcy judge settles Tribune Co.'s debts, Monday's bankruptcy filings indicate.

Experts think the leveraged ESOP that gave Tribune Co. employees theoretical control of their company will likely be wiped out.

"The ESOP still exists and its value and role, long term, will be determined in the restructuring," said Gary Weitman, a spokesman for Tribune Co., which owns the Chicago Tribune and other media properties.

While United workers funded their ESOP by deferring pay raises, Tribune Co. workers stood to gain stock as their company paid off debt. Tribune Co. workers aren't vested yet, and the plan, less than 2 years old, hasn't garnered significant assets.

"Employees are marginally worse off now than before the ESOP," said Corey Rosen, executive director of the National Center for Employee Ownership.

For now, Tribune Co. says it intends to continue paying pensions, which aren't part of the ESOP.

Tribune Co. paid $59.5 million from pension assets as special one-time pension payments to 1,500 employees who left the company during the first nine months of this year.

The company said Monday that it had stopped ongoing severance and deferred-compensation payments to a handful of former employees, who will be required to file a claim with the court.

The bankruptcy filing comes less than three months after a group of six current and former Los Angeles Times employees sued Zell and Tribune Co. over the deal. The suit states: "Because Zell's outlay is primarily debt, Zell has greater protection in the event of bankruptcy; the employee-owners' shares, as equity, would not."

Phil Gregory, an attorney representing those suing Zell, said Monday: "This is exactly what we said would happen."


Chicago Tribune to print Wall Street Journal, Barron's

Chicago Tribune Deal expected to net company $2 million a year

The Chicago Tribune announced a new deal with Dow Jones & Co. to print daily and weekend editions of The Wall Street Journal and the weekly Barron's in the Midwest.

The Tribune already has had a distribution deal with News Corp.-owned Dow Jones.

Printing the Dow Jones papers at the Tribune's Freedom Center—a deal anticipated in early November when Dow Jones & Co. said it planned to shutter its printing facility in Naperville—is expected to net the Chicago Tribune more than $2 million annually, while reducing Dow Jones' expenses in the region.

"We're thrilled to be growing our business relationship with Dow Jones," Becky Brubaker, Tribune senior vice president of manufacturing and distribution, said in a statement.

Creditors picked in Tribune filing

Tribune Co.'s official committee of unsecured creditors will include Wall Street banks and the Pension Benefit Guaranty Corp.

JPMorgan Chase Bank NA, Merrill Lynch Capital Corp. and Deutsche Bank National Trust also won seats on the eight-member committee of unsecured creditors, which represents the interest of all holding debt not backed by collateral.

Tribune Co., the Chicago-based owner of the Chicago Tribune, filed for bankruptcy Dec. 8, less than a year after real estate billionaire Sam Zell took it private as an employee-owned company in an $8.3 billion deal that saddled it with debt. Most of the company's $13 billion in debt isn't guaranteed by Tribune Co.'s newspapers and broadcasting stations.

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