ZELL'S ESOP FABLE

By HOLLY SANDERS WARE and JOSH KOSMAN
http://www.nypost.com/

TRIBUNE EMPLOYEES ARE SHORTCHANGED, AGAIN

Tribune's short-lived experiment with employee ownership is coming to an end.

While Tribune is still navigating the bankruptcy process, the creditors are unlikely to keep the employee stock ownership plan, leaving workers with worthless shares, a source involved in the negotiations said.

In 2007, real-estate tycoon Sam Zell used the stock plan, called an ESOP, to gain tax benefits on the $8.2 billion buyout of the struggling company.

As the employees who own the company see the value of their stake evaporate, sources said Zell himself appears to be ready to give up a warrant that gives him the right to buy 40 percent of the company for $500 million without being compensated.

Zell had raised eyebrows in late 2007 when he used a tax-exempt employee stock option plan, or ESOP, to finance Tribune's purchase. It meant Zell had little skin in the game, while the company's employees were left holding the bag.

The plan made employees official owners with 100 percent of the equity, but they have no say over management or the board. In the bankruptcy, they are viewed as common shareholders with less claim than other creditors.

Now that Tribune is in bankruptcy, the ESOP's value will be further diminished as creditors hold $8.6 billion in debt that will likely be settled up first.

"That's the typical scenario for bankruptcy," said Corey Rosen, executive director of the National Center for Employee Ownership. "The creditors say, 'Forget about the ESOP. It's common stock and well down the list of creditor situations.'"

When the plan began, Tribune's board appointed GreatBanc Trust to serve as the trustee for the ESOP.

GreatBanc's Marilyn Marchetti, who helped structure the transaction, declined to comment on creditors' plans but said the trustee remains involved in the negotiations.

"We are certainly representing the ESOP in the bankruptcy process," she told The Post. "We've been very active."

Although Tribune's ESOP has created a lot of confusion, experts said it is important to note that workers didn't directly fund the plan. Instead, the company agreed to make contributions like it would to other benefit plans, such as a 401(k) or pension.

The contributions were supposed to be invested in Tribune stock. However, Tribune filed for bankruptcy before it made its first contribution.

IRS investigators are “attempting to determine if the transaction was for the benefit of employees,” according to a declaration filed by a Waukesha, Wis.-based agent in charge of the probe. If the IRS determines that the transaction wasn’t prudent, Tribune could be subject to an excise tax and corporate income tax for 2008.

In June the IRS told the Bankruptcy Court judge that its investigation “has been hampered by debtor’s delays in providing accurate information to the auditors.”

The IRS audit could create a hefty bill for the media company. As much as $1.8 billion could be at stake, the amount that Tribune wrote off in net deferred income tax liabilities after Mr. Zell’s takeover was completed in December 2007.

In addition, he U.S. Department of Labor is investigating the ESOP, a probe Tribune called “routine.”

Former Los Angeles Times employees are also suing Mr. Zell and board members over the ESOP.

Meanwhile, some of Tribune's junior lenders are maneuvering to get paid before senior creditors do, arguing that the latter's financing role caused the company to become immediately insolvent as a result of the deal.

The junior creditors hired law firm Zuckerman Spaeder to determine whether they have a claim to fees that the banks involved in the buyout -- Citigroup, JPMorgan Chase and Merrill Lynch -- were paid for their services.

The idea would be for the junior creditors to leapfrog ahead of them in the capital structure in order to be paid back first, a source said.

Zuckerman Spaeder prevailed once before in a similar case in which it helped creditors reach an undisclosed settlement with Bain Capital over its buyout and dividend of KB Toys, which helped drive the retailer into bankruptcy.

Tribune, which owns the Los Angeles Times, Chicago Tribune, the Baltimore Sun, the Hartford Courant and other dailies, as well as 23 TV stations, sought bankruptcy protection last December because of dwindling advertising revenues and $13 billion in debt.

josh.kosman@nypost.com

(The Associated Press contributed to this report.)

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What do you think?

Joseph P. wrote:
Cost of anti-union consultants and lawyers to prevent employees from organizing or joining a union........$750,000.00/year (est.)Using the employees pension money to pay stockholders and executive bonuses..........PRICELESS!

John C. wrote:
It is about time! GO IRS! This was a sham from day one!