Company is $13 billion in debt
Monday’s bankruptcy filing by Tribune Co. has raised speculation that the company’s dire straits will prompt it to focus largely on its TV assets and sell the Los Angeles Times and other newspapers.
The Chapter 11 bankruptcy petition, filed in a Delaware court, came nearly a year to the day after Chicago-based Tribune Co. was taken private in a complex $8.2 billion buyout led by Chi real estate mogul Sam Zell. The deal left Tribune saddled with $13 billion in debt.
Now that Tribune has officially cratered under the weight of all that debt, there’s buzz — possibly more wishful thinking than anything else — that a white knight like David Geffen or Eli Broad could step forward to take the L.A. Times off Tribune’s hands at a fire-sale price.
While Tribune’s stations have been hammered by the local advertising slump, the long-term revenue picture at the stations is not as bleak as it appears to be for the newspapers. Insiders said the regime installed by Zell has come to realize that there’s not as much synergy potential as they initially thought between the company’s newspapers and TV stations that serve the same market, particularly in Los Angeles between the Times and CW affiliate KTLA.
Broad, prominent L.A. billionaire and philanthropist, and Geffen were among those who kicked the tires on the Times two years ago, when the previous Tribune Co. regime put the entire company up for sale.
In early 2007, Broad teamed with fellow L.A. billionaire Ron Burkle on a bid for Tribune, though it was clear at the time that their interest was primarily in their hometown newspaper.
Tribune’s bankruptcy announcement follows a string of bad news for the company and the Los Angeles Times, which has responded to the economic crunch with waves of cost-cutting and layoffs, reducing an editorial staff that stood at 1,200 at the start of the decade to about 650.
Since making his deal for Tribune, Zell has done little to hide his disdain for what he has characterized as the arrogance of journalists and for arguments that newspapers are part of a public trust, as opposed to operating under the rules of any other business.
In announcing the bankruptcy proceedings, Tribune brass sought to emphasize that the company was undergoing a debt restructuring, not a Chapter 7 liquidation process, and that it will be business as usual for all of the company’s operating units. Tribune said it “has sufficient cash” on hand to maintain its existing operations. It also asserted that there would be no immediate layoffs — the company has pinkslipped hundreds of staffers since Zell took the reins.
“This restructuring focuses on our debt, not our operations,” Zell said.
Tribune listed debts of $12.97 billion and assets of $7.6 billion in its filing. What pushed Tribune into bankruptcy was not an inability to make its scheduled debt payments but rather its violation of covenants with lenders specifying that its debt load not exceed nine times its annual cash flow.
Tribune had a $70 million payment due Monday. In recent months Zell and other Tribune brass had sought to renegotiate the terms of that short-term loan as well as its longer-term debt. With banks refusing to budge, Zell opted for the bankruptcy route. The decision was affirmed by Tribune’s board in an ayem conference call Monday.
Tribune, like the owners of other newspapers, has suffered double-digit drops in ad revenues at its papers this year, fueled by sharp declines in key categories like automotive, real estate, retail and financial services.
“Factors beyond our control have created a perfect storm — a precipitous decline in revenues and a tough economy coupled with a credit crisis that makes it extremely difficult to support our debt,” Zell said in a statement.
The bankruptcy filing will “take pressure off our operations,” Zell said, giving Tribune time to renegotiate its debt with lenders.
However, even under Chapter 11 protection, reorganizing that much debt amid the broader financial meltdown will not be easy. The company will undoubtedly have to make some asset sales as part of its restructuring, said longtime newspaper biz analyst Lauren Rich Fine, a Merrill Lynch vet who is now research director at Content Next and a professor at Kent State U.
Asset sales were part of Zell’s game plan from the beginning, but he didn’t move fast enough and then the marketplace for such deals deteriorated, Fine said.
Tribune’s Chicago Cubs baseball franchise was not included in the bankruptcy filing because Tribune has been trying to sell the team for more than a year to help pare down debt. Zell is said to have initially sought $1 billion for the team.
“The sale of the Cubs was supposed to be the short-term Band-Aid for Tribune,” Fine said.
Even the Cubs deal, however, has hit speed bumps. The latest involve unrelated insider-trading allegations leveled against sports/media mogul Mark Cuban, owner of the NBA’s Dallas Mavericks, who has been the most ardent suitor for the franchise. That bid is now under a cloud given the difficulty Cuban could face getting a deal approved by the baseball hierarchy.
One big question surrounding the debt restructuring is what it will mean to Tribune’s employee ownership structure. The complicated agreement Zell reached in April 2007 turned Tribune into an employee-owned entity as a means of financing the deal and realizing significant annual savings on federal taxes, as employee-owned concerns are exempt from corporate income tax.
The employee ownership shares amount to stock options for Tribune’s roughly 20,000 employees. The company’s 401(k) and pension plans remain separate entities and fully funded, according to Tribune.
But in the info Tribune released about the filing, it said only that the fate of the employee ownership plan was subject to the debt-restructuring negotiations with lenders. “The value and long-term role of (employee shares) will be determined in the restructuring,” Tribune said.
Tribune’s employees “need really good representation here,” Fine said. “The scary part of this deal has always been that it is employees’ capital that is at risk here.”
Indeed, Zell himself put up a relatively small amount of his own coin, $315 million, for an equity stake in the company when his buyout deal was struck. He also holds warrants to acquire up to 40% of the company within 11 years of the deal.
Among the major Tribune creditors listed in the company’s bankruptcy filing were most of Hollywood’s majors, through programming deals for Tribune’s TV stations.
Warner Bros. tops the list, with $23.7 million owed, followed by Fox’s Twentieth Television ($8 million), Disney ($6.2 million), NBC Universal ($4.9 million), Sony Pictures ($2.1 million) and Paramount ($1.7 million). Also on Tribune’s major debtors list is Mark Willes, the former Los Angeles Times publisher who became CEO of Times-Mirror Co. from 1995 until Tribune bought the company in 2000. Willes is listed as being owed $11.2 million in pension guarantees and other coin.
But Tribune’s filing brings bad news for Willes and other ex-employees, like the nearly 200 editorial staffers let go from the Times this year, who are owed severance pay or deferred compensation. Those payments will be “discontinued” and subject to later court proceedings, Tribune said.
(Brian Lowry contributed to this report.)