By Michael Oneal | Tribune reporter
Chicagotribune.com
Tribune Co., Ricketts family face tough financial, tax hurdles
In the good old days—say, 18 months ago—when financing was plentiful and bankers were lining up to do deals, doubting whether Tribune Co. could close a complex transaction to sell the Chicago Cubs would have provoked guffaws.
All anyone wanted to talk about then was how far above $1 billion Tribune Co. could push the deal's price tag. The sky seemed the limit.
But now the Chicago-based media company and owner of the Chicago Tribune has ended an epic two-year auction for the team and Wrigley Field by choosing a bid worth $900 million from Omaha's Ricketts family, and still there are whispers that closing a deal will be no slam dunk.
What's changed is everything: The economy is in convulsions, the banking industry is in crisis, and Tribune Co. has tumbled into bankruptcy court. The danger is that things will get worse as Tribune Co. and the Ricketts try to hammer out a final transaction able to pass muster with Major League Baseball, Tribune Co.'s bankruptcy judge and the banks financing the deal.
"Will the banking market totally collapse?" asked one person close to the situation. "I doubt it, but that's the risk."
Allen & Co. investment banker Steve Greenberg, who worked on a competing Cubs bid for a group led by Chicago financier John Canning, said there's no doubt "it's a daunting environment to get deals done."
But he said he is confident the Ricketts family and Tribune Co. can produce a deal that is bankable. The Ricketts are credible with both the banking world and the MLB owners group, he said, and the Cubs remain one of the sporting world's most prized properties.
What worries some observers, however, is that ever since Chicago billionaire Sam Zell first got involved in Tribune Co. more than two years ago, the company has attracted complexity like the Wrigley Field bleachers attract rowdy fans. Nothing has been simple. Little has been straightforward.
The structure of the proposed Cubs deal is a prime example.
Sources close to the matter said that at Tribune Co.'s urging, the Ricketts bid mimics the tax-advantaged structure known as a leveraged partnership, used last year to finance Tribune Co.'s $650 million sale of Newsday in New York to Cablevision Systems Inc.
The objective in both deals was to shelter Tribune Co. from several hundred million dollars in capital gains taxes that would be generated by selling assets the company had held through decades of growth.
In the Cubs deal, sources said, a new partnership would be formed to own the assets Tribune Co. is unloading: the Cubs, Wrigley Field and 25 percent of the Comcast SportsNet cable channel.
Tribune Co. would own about 5 percent; the Ricketts the rest.
By using this structure, which likely would last about 10 years, Tribune Co. would not officially sell the assets for Internal Revenue Service purposes. Yet it would receive the better part of $900 million in cash tax-free (it's not yet clear exactly how much).
Robert Willens, a New York-based tax analyst, said one arcane complication in this structure is that in order to avoid triggering capital gains taxes, the cash payout to the owner has to be entirely funded by debt. Tribune Co. also has to act as a guarantor of that debt to make sure it has a legitimate stake in the partnership's fortunes.
Those provisions raise several complications.
First of all, since banks will lend only so much, and Major League Baseball has rules about the level of debt a team can carry, the Ricketts will have to get highly creative to make the structure work.
Sources say they likely would borrow $450 million in the traditional way from banks. But they would raise another $450 million by liquidating family assets and moving the money between family-owned entities to create a debt-like structure designed to satisfy the IRS but not overly burden the Cubs enterprise. The cash from the deal would flow to Tribune Co.
In any leveraged partnership, Willens said, the risk is that the IRS will challenge it and, ultimately, force the taxes to be paid. And in this case there is an added twist: Would the tax agency accept that a company in bankruptcy can act as a credible guarantor of the debt?
"That's uncharted territory," said Willens. "The IRS will be looking at this very closely."
The Ricketts family and Tribune Co. declined to discuss the proposed sale.
For Tribune Co. and its creditors, things could get even more tangled. If the IRS challenges this deal over the bankruptcy issue, would it then challenge the Newsday transaction and create a tax liability that would have to come out of Tribune Co.'s bankruptcy estate?
It is also the case that the long-term tax advantages of both deals depend partly on Tribune Co.'s corporate structure, which is wrapped around an employee stock ownership plan.
Through yet another set of highly arcane rules, the S-Corp ESOP would allow Tribune Co. to unwind these partnerships in 10 years without triggering the deferred capital gains taxes.
The trouble is, it isn't certain whether Tribune Co.'s $13 billion in debt can be restructured within the context of an S-Corp ESOP. If the structure doesn't survive bankruptcy court, Tribune Co. would have to find another way to shelter the tax burden generated by the Cubs and Newsday deals or pay the taxes.
Willens said if anybody can solve the IRS issues, Zell can, noting that the Tribune Co. chairman's expertise in creating tax-advantaged structures is well-established. A source close to the deal said that Zell's team is working within established rules regarding leveraged partnerships and S-Corp ESOPs. They are confident they can get over the hurdles with the IRS regarding guaranteeing the debt while in bankruptcy.
But another source with a stake in the deal's success worried that the sheer complexity of the situation creates risks of its own. Working through all these issues, documenting them and explaining them to a slew of constituencies will take enormous time and effort. And in a period of massive uncertainty, time is not on the side of Tribune Co. or the Ricketts.
"My biggest source of trepidation is the amount of work that has to be done," the source said. "Who knows who might jump up and object?"
mdoneal@tribune.com
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