AJR  Columns
From AJR,   June/July 2007

A Private Affair   

Sam Zellís winning bid is the most promising resolution for the beleaguered Tribune Co.

By John Morton
John Morton (mortoninc@msn.com), a former newspaper reporter, is president of a consulting firm that analyzes newspapers and other media properties.     

After months of uncertainty, the Tribune Co. drama seems headed to the best possible outcome for the company, its employees and especially its journalism--going private.

Of course, something still could happen to upset this scenario, since the agreement with Chicago investor Sam Zell to take control leaves a door open for competing bidders until the deal becomes final late this year.

But already Tribune Co. has announced an offer to buy more than 50 percent of outstanding shares at a cost of $4.3 billion, a move provided for in the agreement with Zell, with $250 million put up by him. The egg is starting to get scrambled, making it increasingly unlikely another bidder will emerge.

When all this began last fall, there was widespread speculation that the company would be broken up. There was concern, too, over what it said about the newspaper business that no other newspaper company wound up bidding for Tribune Co. In the end, only Zell, who made his fortune in real estate, and a couple of Southern California billionaires stepped up.

It is easy to understand why no other newspaper companies were interested, except in one or two individual properties. Newspaper companies buy newspapers because they see an opportunity to improve efficiency, thereby contributing to the bottom line. But Tribune had already squeezed out most of the fat in the Times Mirror dailies it acquired in 2000 (the historic Tribune papers had always been leanly operated), so there was little opportunity for gain.

From the beginning, I doubted that Tribune's management and its Chicago-centric directors (all those except for Chandler family directors who came with the Times Mirror acquisition) intended to see the company broken up by selling it off in parts or to sell to an outside interest that might do the same thing.

Instead, I was convinced that those who controlled the board intended that the company remain largely whole with news-papers, television stations and Web sites in major markets, out of the conviction that in the future the company with the most media outlets in any given market would be the most successful.

Zell has said that he has no intention of selling off any media properties. Of course, that could change once he is in control. But with the immense amount of debt that Tribune will incur in the transaction, it would be unseemly to dispose of the properties with high cash flow, especially at a time when big media properties are not fetching premium prices.

The $34 share price Zell agreed to values Tribune Co. at $8.2 billion; with the assumption of Tribune's existing debt, the total value of the deal is about $13.2 billion. Thus Zell will gain control of one of the nation's largest and most storied media companies for very little cash--the $250 million pledged for the initial stock tender and $65 million later when the rest of the shares are bought.

Central to the transaction is an Employee Stock Ownership Plan (ESOP) that initially will own 100 percent of Tribune's stock. However, Zell will have an option to buy 40 percent of the stock, along with getting two seats and the chairmanship on the board of directors.

Also central to the deal is the conversion of Tribune Co. to Subchapter S corporate status. S corporations do not pay corporate income tax. Instead, earnings flow to shareholders, in this case the ESOP and, if he exercises his option, to Zell and to a few members of management who also will have shares. Since an ESOP is a pension plan, it does not pay taxes either, so in effect the ESOP will be able to use tax-free income to finance its acquisition of Tribune Co.

ESOP ownership can be highly advantageous to a company's operations, since it usually imbues employees with a sense of ownership that often translates into more diligent work and fewer disputes with management. That was certainly the case with an ESOP I was a consultant to, at the Peoria Journal Star in Illinois.

But there is a downside for employees if the company does not do well, since typically employees are required to hold their shares until they meet certain age or employment requirements and thus are unable to diversify their investments (think Enron). Zell, at least, is confident about the future, having told reporters that he is "not quite as bearish as most people about the print side of the business."

While going private is the best possible outcome, since it will eliminate the fractious Chandlers (they have agreed to accept the tender offer) and the scrutiny of Wall Street, it will not be a panacea. Being privately owned imposes strictures of its own, particularly for a company heavily laden with debt.

Still, debt holders tend to have a longer-term outlook than Wall Street investors. Management of a private company can tell debt holders, "Look, we need to make a large investment right away to ensure the long-term health of the company."

If the argument is persuasive, chances are the debt holders would go along.

If Tribune Co. were to announce such an investment as a public company, its stock price would drop sharply the very next day. Such is the essential difference between being private and being beholden to the short-term interests of Wall Street.