Monday, August 31, 2009

Tribune Chief May Remain For The Cleanup

The New York Times

The Tribune Company could well emerge from bankruptcy this fall with much of its current top management intact, according to people briefed on restructuring plans, but it remains unclear whether that might include the top dog himself, Samuel Zell, the chairman and chief executive who took the company private.

From the day Tribune filed for bankruptcy in December, it has been clear that Mr. Zell’s $315 million investment and warrants to buy a large share of the company would almost certainly be wiped out. He is being sued on multiple fronts over the $8.2 billion deal that took the company private in December 2007; he has called it a mistake and “the deal from hell”; and some people familiar with the plans are guessing that, when the dust settles, he will be out.

But other people close to the restructuring talks, speaking anonymously because the discussions were supposed to remain private, caution that the major creditors have not yet given a clear indication whether they want Mr. Zell to leave or remain in some capacity. Nor has Mr. Zell said clearly whether he wants to go, though he is used to being the man in charge, and his authority would be diminished under new owners.

“I think the jury is out on Sam,” one of them said. “That is going to be a point of discussion.”

Mr. Zell, 67, made billions in real estate by buying depressed assets where others saw more risk than value, and knowing when to sell them. But that touch faltered when, with the Tribune deal, he moved into an unfamiliar field.

Mr. Zell is not granting interviews, according to Tribune, one of the nation’s largest media companies. Its properties include some two dozen television stations and a string of some of the most important newspapers in the country, including The Los Angeles Times, The Chicago Tribune and The Baltimore Sun.

People briefed on the talks say that the company and leading creditors could agree by September or October on a restructuring plan that would wipe out more than $12 billion of the company’s roughly $13 billion in debt. Such a plan would need the approval of the bankruptcy court in Delaware.

In 2007, a group of major banks lent Tribune about $8 billion to go private, but they have since sold much of that debt to other banks and investment firms. Under the anticipated restructuring plan, it is the holders of that senior secured debt — first in line for some repayment — who would end up owning the bulk of the company.

That, too, was considered the likely outcome from the start — in fact, the bankruptcy filing last December was in part an attempt to protect the interest of those lenders as Tribune’s cash reserves dwindled.

Mr. Zell told senior secured creditors then that, in essence, the company was in their hands, and that making a scheduled payment on junior debt would leave less for them, and asked what they wanted to do. They endorsed bankruptcy.

Mr. Zell isn’t the only one responsible for this debacle. With one of the grand old names of American journalism now confronting an uncertain future, it is worth remembering all the people who mismanaged the company beforehand and helped orchestrate this ill-fated deal — and made a lot of money in the process.

They include members of the Tribune board, the company’s management and the bankers who walked away with millions of dollars for financing and advising on a transaction that many of them knew, or should have known, could end in ruin.

It was Tribune’s board that sold the company to Mr. Zell — and allowed him to use the employee’s pension plan to do so. Despite early resistance, Dennis J. FitzSimons, then the company’s chief executive, backed the plan. He was paid about $17.7 million in severance and other payments.

The sale also bought all the shares he owned — $23.8 million worth. The day he left, he said in a note to employees that “completing this ‘going private’ transaction is a great outcome for our shareholders, employees and customers.”

Well, at least for some of them.

Tribune’s board was advised by a group of bankers from Citigroup and Merrill Lynch, which walked off with $35.8 million and $37 million, respectively. But those banks played both sides of the deal: they also lent Mr. Zell the money to buy the company. For that, they shared an additional $47 million pot of fees with several other banks, according to Thomson Reuters. And then there was Morgan Stanley, which wrote a “fairness opinion” blessing the deal, for which it was paid a $7.5 million fee (plus an additional $2.5 million advisory fee).

On top of that, a firm called the Valuation Research Corporation wrote a “solvency opinion” suggesting that Tribune could meet its debt covenants. Thomson Reuters, which tracks fees, estimates V.R.C. was paid $1 million for that opinion. V.R.C. was so enamored with its role that it put out a press release.

Randy Michaels, the chief operating officer installed by Mr. Zell, recently sent a memo to employees saying that for the most part, management and the lenders agreed on how to run the company. “While the ownership structure of the company is likely to change, current operating management is committed, and intends to remain in place during and after the restructuring,” he wrote.

That may have contained an element of bravado, but people briefed on the matter said the major creditors were not unhappy with the current team. “They’re pretty pleased with the way things are running,” one said.

For a few more months, at least, Tribune will remain in the limbo of bankruptcy, unable to make any major moves without court approval and uncertain about who its future leader will be.

Having stopped payment on its long-term debt, Tribune has continued to cut costs, reached a tentative deal to sell the Chicago Cubs baseball team for $845 million, and built its cash cushion from $317 million when it filed for bankruptcy last December to $743 million by the end of June.

But Mr. Zell’s maneuvering also contributed to more than a year of delays in selling the Cubs and, according to some analysts, may have resulted in a lower price than Tribune would have gotten when the economy was stronger. He sought to sell the team and its home, Wrigley Field, separately — the Cubs to a private buyer, the stadium to a government agency and possibly the naming rights to the stadium to a third buyer. But that strategy ran into trouble, and Tribune eventually reverted to an earlier, simpler plan to sell them as a package.

It was also Mr. Zell who engineered the complex deal to take the company private, which nearly tripled the company’s debt and left it with too little free cash flow to weather a sharp drop in advertising.

But what about those employees? They had no seat at the table when the company’s own board let Mr. Zell use part of its future pension plan in exchange for $34 a share. They have no seat on the board of the ESOP that now owns the company.

Mr. Newman, the analyst who predicted the trouble, said in an interview, “The employees were put in a very bad situation.” He added that while boards are typically only responsible to their shareholders, this situation may be different. “There has to be a balance,” he said, “to create sustainability for all the stakeholders.”

A group of employees sued this year, saying that the deal was certain to fail. Last week, a group of Tribune bondholders did the same.

Dan Neil, a Pulitzer Prize-winning columnist for The Los Angeles Times, led the lawsuit with other Tribune employees against Mr. Zell and Tribune. The suit contends “through both the structure of his takeover and his subsequent conduct, Zell and his accessories have diminished the value of the employee-owned company to benefit himself and his fellow board members.”

If the employees win, they will become Tribune creditors — and stand in line with all other creditors in bankruptcy court.

Some bondholders of the Tribune Company are seeking permission from a federal bankruptcy judge to investigate the company’s sale in 2007 to the billionaire investor Samuel Zell, a deal creditors claim led to a bankruptcy filing a year later.

The request was made by the Law Debenture Trust Company, a firm claiming to represent 18 percent of Tribune’s bondholders. The firm is seeking documents related to the leveraged buyout to help prove that the 2007 deal was done despite knowing it could render the company insolvent. The court’s approval would give Law Debenture access to Tribune documents that would otherwise be unavailable.

Should the judge reject the request for an investigation, Law Debenture asked that an independent examiner be appointed as an alternative.
The private equity firm Centerbridge Partners is a lead member of the group that is seeking an investigation, according to a person briefed on the filing. Centerbridge did not respond to a request for comment.

In the filing, Law Debenture points to statements by the Tribune Company that the assumptions behind the debt-heavy deal were “too optimistic.” The bankruptcy filing in December was no surprise to analysts, who have long criticized the sale to Mr. Zell as overburdening the company with more than $11 billion in debt at a time when advertising revenues were plummeting.

Whether either suit can upend the sort of restructuring plan sought by Tribune and its major lenders, or lower Mr. Zell’s chance of remaining in charge, remains to be seen.

A spate of high-dollar, high-leverage deals in 2006 and 2007 put hundreds of American newspapers, including many of the biggest, under new ownership — and in most cases put the new owners in financial jeopardy.

Mr. Zell’s Tribune takeover was the biggest of those deals, it was one of the last, and it was the first to land in bankruptcy.

Since then, Philadelphia Newspapers, owner of that city’s Inquirer and Daily News; The Minneapolis Star Tribune; and others have filed for bankruptcy, while some other publishers have had to restructure their debts to remain solvent.

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