Deal valued at $8.2 billion
Staffers at Tribune-owned newspapers and TV stations went to bed Sunday night awaiting a resolution to the weekend cliffhanger about who would buy the beleaguered parent company.
By sunrise Monday, the Tribune ownership drama appeared to have been settled, at least for the time being, but it’s been replaced for employees by two new burning questions: Who the hell is Sam Zell, and what in the world is an employee stock ownership plan?
Tribune confirmed early Monday that the board has accepted the $8.2 billion buyout offer made by Chicago real-estate kingpin Zell, known in his world as “the grave dancer” for his skill at reviving moribund properties. Zell’s bid for the Chicago-based newspaper and TV giant values the company at $34 per share and includes a $315 million investment from him and a plan to take the company private using a complex financing arrangement known as an employee stock ownership plan, or ESOP.
“We don’t know what it means for us,” said a senior exec at Tribune’s KTLA of the ESOP. “Nobody understands it.”
During a town-hall session Webcast out of the company’s Chicago HQ to its roughly 20,000 employees, Tribune brass sought to stress to employees that Zell intends to keep the company intact rather than sell off some or all of its 11 major daily newspapers and 23 major-market TV stations. (Tribune did confirm Monday its plans to sell the Chicago Cubs baseball franchise, which it has owned since 1981, and its 25% stake in the Comcast SportsNet Chicago regional sports cabler after the close of this year’s baseball season.)
But some observers in showbiz and media circles wondered if the Tribune drama really is over. There was much speculation Monday that other bidders could surface, or that the Trib board’s agreement with Zell was merely the beginning of a series of negotiations for suitors to cherrypick assets, such as the Los Angeles Times — the object of buyout offers from DreamWorks partner David Geffen and the tag-team of Los Angeles billionaires Eli Broad and Ron Burkle.
The pact announced Monday calls for Tribune to pay Zell a $25 million breakup fee if a better offer surfaces before the Zell transaction closes.
The other big unknown lies at the Washington, D.C., offices of the Federal Communications Commission. The FCC has to bless the transfer of the Tribune station licenses to Zell and the ESOP. Tribune has been fighting the FCC for years in several markets where it owns newspapers and TV stations –a violation of the FCC’s decades-old ban on one company owning a TV station and newspaper in the same market.
The FCC, which declined comment on the Trib-Zell deal, could conceivably demand some kind of divestiture in key markets, such as Los Angeles where Tribune owns the L.A. Times and KTLA, as a condition of approval.
After lengthy deliberations this weekend, Tribune’s board reportedly pressured Zell late Sunday to hike his original offer of $33 a share and a $300 million equity investment to match a competing bid from Broad and Burkle of $34 a share and a $500 million investment (Daily Variety, April 2).
The troubles that led Tribune to consider buyout offers began last June, when the company’s largest shareholder, the Chandler Trusts, former owners of the Los Angeles Times, issued a stinging rebuke of Trib management and called for the company to be broken up or sold to boost its flagging stock price. According to Tribune, which acquired Times parent Times Mirror in 2000, the three Chandler Trusts reps on the board abstained from voting Sunday on the buyout offers but have pledged to support the Zell deal.
The buyout announced early Monday also calls for Tribune prexy- CEO Dennis FitzSimons to remain in his post and on the board of directors, along with at least five independent directors and a director affiliated with Zell. If the two-step deal outlined Monday is completed, Zell will become chairman of Tribune and hold warrants entitling him to acquire 40% of Trib’s common stock. Pending shareholder and regulatory approvals, Tribune said it expects the first phase of the buyout to close in the second quarter of this year and the second phase to be wrapped up in the fourth quarter.
In a statement, Zell called Tribune “a world-class publishing and broadcasting enterprise. As a long-term investor, I look forward to partnering with the management and employees as we build on the great heritage of Tribune Co.”
Zell declined an interview request on Monday, as did Broad and Burkle.
Zell is known as an unconventional but savvy investor who made his fortune as a real estate developer. He dove into the Tribune fray in February shortly after completing the sale of his Equity Office Properties Trust, described as the largest owner of commercial office buildings in the U.S., to Blackstone Group for $39 billion. He’s known for preferring jeans to suits and for his passion for high-end motorcycles.
In the mid-to-late 1990s, Zell and a partner amassed a large group of radio stations under the Jacor Communications banner that was sold to Clear Channel Communications in 1998 for $4.4 billion. But other than Jacor, Zell appears to have stayed out of the media sector until now.
The employee stock ownership plan provision of the deal calls for employees to become the ultimate owners of the bulk of the company through their retirement plans. Employees will get shares in the company rather than cash contributions. Those shares are allocated to employees on a tax-free basis, resulting in major long-term savings for the company and allowing it to more easily service the debt it is taking on to create the ESOP.
The deal unveiled Monday calls for Tribune to create an ESOP to repurchase 126 million of its outstanding shares at $34 per share, funded by $7 billion in new debt and a $250 million investment from Zell. In the second phase of the deal, all remaining shares will be bought up at $34 a share, with Zell making another $65 million investment at that time. Overall, Tribune will take on $11.2 billion in new debt to fund the transaction and create the ESOP.
After the ESOP deal is completed, the company would continue to make share contributions to employees. The theory is that the employees will do well if the company does well. But the devil is in the details of an ESOP, according to employee watchdog groups and the Newspaper Guild-CWA, which has been closely watching the Tribune buyout process.
“If this is truly going to be a partnership with employees to have them invest in and help run the company, it could be a very good thing,” said Newspaper Guild president Linda Foley. Questions remain, however, on how much of a seat employees will have at the management table, and how future shares will be allocated and valued as part of retirement contributions, Foley said.
“If it’s just an investment vehicle or financing tool for Zell to take the company private, it may or may not be a good deal for employees. There’s a lot of risk involved in investment in the company you work for, as employees found out at Enron,” Foley added.
Zell did not participate in Monday’s town-hall session. FitzSimons spoke by himself but was joined for a time by a financial expert who attempted to translate what the ESOP plan would mean to employees.
FitzSimons emphasized Zell’s track record as an investor, and he said that the board responded to Zell’s assertion that he saw long-term value in keeping Tribune’s newspaper and TV assets together. FitzSimons also stressed the benefits of taking Trib private at such a volatile time in the media business.
“As a private company, operating outside the glare of the public markets we will be better able to focus on long-term growth as we transform our publishing and broadcasting businesses,” FitzSimons wrote in a memo distributed Monday morning to employees.