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The Media Deal From ZellBehind the real estate mogul's crappy offer for Tribune.

By Jack Shafer
Posted Monday, April 9, 2007, at 6:07 PM ET
Sam Zell. Click image to expand.

If the New York Times' Floyd Norris weren't such a gentleman, he'd come out and call real estate billionaire Samuel Zell's crappy offer for the Tribune Co. what it is: a steal for Zell, an undeserved bonanza for the company's current management, and an exit for the panicked Chandler family, which owns 20 percent of the firm.

Meanwhile, the "creative" financing that is the deal from Zell screws Tribune's 21,000 employees like wing nuts.

In two pieces published late last week—"Zell Gets Veto Power at Tribune" and "The Deal Is Encouraging and Absurd" (subscription required)—Norris lays out the deal's complex details. Zell's offer has been approved by the board and can be derailed only by a superior offer, a lawsuit, or the regulatory interference of the Federal Communications Commission, which must approve any change in ownership of the company's two dozen broadcast outlets.

That Tribune stock is down about 40 percent from its January 2004 price says reams about Wall Street's view of Tribune management and its assessment of the future of the newspaper business. Tribune owns the Los Angeles Times, the Chicago Tribune, the Baltimore Sun, Newsday, and several others, which are a drag on the profits of its 23 television stations. That no serious corporate media bidder emerged, no Viacom, no News Corp., no Disney, and no Washington Post Co., speaks volumes about how old-media industry insiders view Tribune's condition—as well as how they view their own future.

Zell and management intend to take the $8.2 billion publicly traded company private by creating an employee stock ownership plan, or ESOP, that will borrow the needed billions to buy back shares. According to Los Angeles Times reporter Michael A. Hiltzik, Zell's investment of $315 million will give him the right to buy 40 percent of the company. Meanwhile, Zell has what Norris calls "veto control" over the company's operation.

What's in it for current management, the ding-a-lings who are to blame for Tribune's stock woes? As in many of these leveraged buyouts, the ding-a-lings get to keep their jobs, hence their enthusiasm for the deal. When the Los Angeles Times' Hiltzik asked Tribune Chairman and Chief Executive Dennis J. FitzSimons in so many words if the deal wasn't a bit too sweet for Zell, FitzSimons mouthed the corporate cliché that the deal was about "maximizing shareholder value." Maximizing shareholder value includes, writes Norris, an 8 percent stake in Tribune for managers and key employees "via phantom stock." These stockholder minimizers will also qualify for $6.8 million in bonuses. (FitzSimons is declining his.)

Zell's restructuring Tribune as an ESOP has nothing to do with a desire to partner with employees or give them a say in how he runs Tribune. Zell digs ESOPs because they're exempt from hundreds of millions of dollars of taxes on paying down principal and interest payments. Profits—if there are any—are tax-exempt, too. In his Reflections of a Newsosaur blog, Alan D. Mutter notes that "tax losses also can be valuable to investors like Sam Zell, who may want to reduce the taxes owed on gains from other projects with certain near-term losses generated by Tribune Co."

It's worth mentioning that ESOPs got their start as a way to give labor a stake in companies and to give unions incentives to work with management on benefits, etc. But there's none of that here. Zell is just flexing the ESOP as a financial tool.

Believers in "fair taxation" recoil at the tax favors lavished on ESOPs. In this case, they may ask why one profitable media company, say, Gannett, should have to pay a whole slew of taxes while its profitable competitor Tribune dodges them.

What's in it for employees? Louis Uchitelle of the New York Times writes that the trustee who represents the ESOP is usually appointed by the owners at the outset and need not ordinarily consult the employees on the company's operation. A Chicago Tribune piece reports that the Tribune ESOP would distribute a "stocklike unit" to employees based on the company's performance instead of the cash contributions that currently go to their retirement accounts. According to Norris, most employees won't be able to cash out unless they've retired or are over 55 and have worked for the company for 10 years. But what about the holders of "phantom stock," those key personnel given 8 percent of the company's shares? They'll be allowed to start tapping their money much earlier and with fewer conditions, Norris writes.

If I worked for Tribune, I'd say forget the ESOP and begin looking for a new job. I'll bet the company's best journalists are already packing their keyboards. The last good journalist out won't have to turn out the lights. The electric utility will already have shut off the power.

I suspect that Zell has another ESOP card up his sleeve. Tribune owns both television stations and newspapers in four markets—Los Angeles, New York, Hartford, and South Florida. The sale will require Zell to obtain "cross-ownership" waivers from the FCC if he wants to keep all of his overlapping properties, which he very much does for now. Just by postponing the consummation of the Tribune deal, the FCC could cause it to unravel. Identifying the new Tribune Co. as an employee-owned entity would give Zell's legal team political leverage: "If you deny us our waiver, we'll kill this struggling multibillion-dollar media company!"

And what if the whole deal collapses? Zell has that covered that possibility creatively. Tribune will owe him a $25 million breakup fee.

******

Columbia University President Lee C. Bollinger just won nomination to the Washington Post Co. board of directors. As a Post Co. employee, I think I'd be a much better corporate steward. Please second my self-nomination by sending e-mails filled with praise to . (E-mail may be quoted by name unless the writer stipulates otherwise. Permanent disclosure: Slate is owned by the Washington Post Co.)

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Jack Shafer is Slate's editor at large.
Photograph of Sam Zell by Jose More/Chicago Tribune/MCT.
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Remarks from the Fray:

Isn't it likely that other "media conglomerates" aren't bidding because they would be even less likely than Zell to get the FCC waivers the story mentions?

Why would the Trib's employees agree to this? They don't have to, do they?

Last I looked the Trib was profitable, although not at the 25% margin the industry thinks is required. Why in the world is such a margin required for investors to invest? There aren't many industries that can claim such margins.

--JackD

(To reply, click here.)

(4/12)

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