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Wednesday, November 3, 2010

Tribune Deal 'Among Worst In American Corporate History'




(Crain's) — A creditors committee in the Tribune Co. bankruptcy case has sued myriad parties involved in a 2007 leveraged buyout that it called “among the worst in American corporate history,” alleging the deal pushed the company into bankruptcy less than a year later.

The committee of unsecured creditors in one of two lawsuits it filed in U.S. Bankruptcy Court in Delaware named as defendants Chairman Sam Zell, who bought Tribune in the $8.2-billion deal, and Tribune board members who negotiated with him, including Betsy Holden and William Osborn, saying the deal amounted to a fraudulent transfer of assets.

Also named as defendants in the suit are former top executives, such as ex-CEO Dennis FitzSimons, who guided the transaction, and one-time major shareholders, such as the Chandler family, who cashed out through the deal. The second suit targets bank lenders who financed the deal and creditors who purchased that debt later. The committee seeks to reclaim profits and fees.

The Chicago-based media company filed for bankruptcy protection in December 2008 and has been in a fight with creditors ever since, spending more than $135 million on the proceedings.

The company, along with creditors Angelo Gordon & Co. and Oaktree Capital Management L.P., has proposed a reorganization plan that has won the committee's support but has yet to secure court or full creditor approval. The proposal will be weighed by creditors and the judge overseeing the case against three competing creditor plans filed Friday.

“The committee brings this action to hold accountable the persons and entities responsible for crippling the Tribune Co., once one of the country's most venerable companies,” the lawsuit says. “Through a leveraged buyout transaction, tainted from start to finish, that venerable company lost billions of dollars in value.”

The committee is suing on behalf of the company and creditors who were left with billions of dollars in debt after the deal. It blamed Mr. Zell and Tribune officers and directors for lining their pockets as major shareholders who collectively owned 33% of the company sold their stock in the deal. Through the transaction, the Tribune became a private, employee-owned company.

Mr. Zell, who provided $315 million in debt and equity financing for the deal, has said he's already lost hundreds of millions of dollars on the buyout and will fight any lawsuit brought by creditors.

In addition to the fraudulent transfer claim, the lawsuit cites the defendants, including adviser Valuation Research Corp., for breach of fiduciary duty and unjust enrichment. Morgan Stanley, the adviser to the company's special board committee on the transaction, is cited for professional malpractice.

A court examiner who reviewed the LBO said in August that some of the claims would likely stand up in court.

The lawsuit says one of the engineers of the deal at one point said: “This is like carrying a fat person up Everest, hopefully it doesn't kill us.” It did kill the company, the lawsuit alleges.

The committee filed the action now to avoid a two-year statute of limitations from the December 2008 date of the filing for bankruptcy, but it has promised the court it won't pursue them until after a reorganization plan is confirmed or April 1, whichever comes first.

In the second lawsuit, the committee sued the banks that financed the deal and some that also advised on it. Those same banks have limited liability for the buyout under terms of the reorganization plan proposed by the Tribune group.

As part of that lawsuit, the committee named J. P. Morgan Chase & Co., Merrill Lynch, Citigroup Inc., Wells Fargo & Co. and other banks as defendants, saying they reaped more than $200 million in fees on the doomed LBO and stroked a relationship with Mr. Zell for future business.

It says Tribune borrowed $13 billion to complete the deal, more than doubling its debt load.

The complaint also alleges that two of the lenders, Citigroup and Merrill Lynch, acted in conflicting roles, simultaneously advising the company on the transaction while providing loans for it.

“Contemporaneous e-mails and other documents in defendants' files demonstrate that defendants recognized the LBO and the LBO debt would render the company insolvent or, at a minimum, create a high risk of insolvency,” according to the lawsuit. “Defendants were willing to proceed with the LBO notwithstanding the insolvency risk because they were paid large fees up front and imposed most of the insolvency risk on others.”

The lawsuit argues that the bankruptcy claims of the lenders on the debt they incurred as a result of the LBO should be disallowed or subordinated to other creditors because of the fraudulent transfer of assets caused by the deal. It also argued that $2 billion paid by the company on the debt to the lenders and the $200 million in fees should be returned to the Tribune.

The committee also named creditors Oaktree and Angelo Gordon as defendants in that suit, saying the debt they own was incurred through the bank loans.

Some creditors filed a separate lawsuit against the LBO lenders in New York State Court Friday, making many of the same charges.

Tribune, which owns the Los Angeles Times, Chicago Tribune and 23 local TV stations, today pushed out nine executives in its interactive and human resources divisions as part of an organizational overhaul engineered by an executive council that replaced ousted CEO Randy Michaels.

The council told employees in a memo that it was eliminating the positions of Marc Chase, who was president of the company's interactive division; Jeff Kapugi, who was chief operating officer of that division, and Barb Buchwald, senior vice-president of human resources, among others.

The corporate revamp comes ten days after Mr. Michaels resigned in the wake of a lewd email sent companywide by one of his top broadcast executives, Lee Abrams, just a week after a front-page New York Times story compared the Tribune's workplace to a frat house.


More Lawsuits in Tribune Bankruptcy Saga


By SEAN KELLY

WILMINGTON, Del. (CN) Another group of creditors has sued Sam Zell and others who engineered and benefited from Zell's leveraged buyout of now-bankrupt Tribune Company. The two new complaints were allowed by U.S. Bankruptcy Judge Kevin Carey, who permitted the adversary filings because of statutory limitations.

The Committee of Unsecured Creditors filed two complaints in U.S. Bankruptcy Court on behalf of the bankruptcy estates of Tribune and its subsidiaries. Naming more than 100 defendants, the committee calls the leveraged buyout of Tribune "among the worst in American corporate history."

"This is like carrying a fat person up Everest, hopefully it doesn't kill us," an engineer of the buyout is quoted as saying in one complaint, which names Zell and the Chandler Trust among the defendants.

In that complaint, JPMorgan Chase and Merrill Lynch head the list of banks, lenders and advisers accused of benefiting from the leveraged buyout of Tribune in 2007, by garnering more than $120 million in fees.

This complaint is downloadable in two parts.



Sam Zell and Tribune's management, directors, officers and large shareholders are the target of the second complaint. Both were filed on behalf of the Tribune Co. et al.

According to the second complaint, Tribune's management facilitated the leveraged buyout by "caving to the pressure from large shareholders and the lure of substantial financial incentives."

Those large shareholders "collected billions of dollars and then - finally satisfied with the enormous value they had extracted from their stock - walked away from the ruined company," the complaint states.

Tribune Chairman Sam Zell used an employee stock ownership plan, or ESOP, as the takeover vehicle, "by enticing Tribune's directors and officers with tens of millions of dollars in stock sale proceeds and special incentives to close his deal," according to the complaint.

Tribune filed for bankruptcy less than a year after Zell closed the merger, which he financed in great part by piling debt onto the company he was buying.

Another lawsuit, with similar defendants, was filed Friday in New York County Court by a group of institutional investors. That suit took aim at the banks that financed the leveraged buyout and the fees they earned from the deal.

This has been a turbulent two weeks for Tribune Company, owner of the Los Angeles Times, Chicago Tribune and other media outlets.

In addition to the recent lawsuits, Tribune CEO Randy Michaels resigned under pressure from the company's board of directors. His controversial management style was skewered in a New York Times article that revealed deep resentment by Tribune staff to Michaels' frat boy corporate culture.

The adversary suits were filed by Thomas Macauley with Zuckerman Spaeder.

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