Zell/Trib Analysis: Be Afraid. Very Afraid.

When you think about it, what went down with the Tribune Co. and Sam Zell is not unlike an episode of The Sopranos. Or maybe I just have Tony on the brain because the series begins its death rattle this Sunday. After all, the Chicago real estate tycoon didn’t give himself the nickname “Grave Dancer’ for nuttin’, right? (Specifically, for buying up assets that others had given last rites.) This morning, Tribune Co. chairman Dennis J. FitzSimons sent an email around to employees telling them about Trib’s choice of Zell to buy the company. That’s basically the equivalent of Tony’s errand boy making calls to his mob from his Escalade on the way to the social club. If any of the Trib workers had any hope left that L.A. billionaires Ron Burkle and Eli Broad were still in the running, or believed all those articles and updates that the duo’s bid was being taken seriously, fuhgeddaboutit. The Broad/Burkle offer slept with the fishes a long, long time ago because Broad had done so much bad-mouthing of the LAT‘s Chicago bosses in concert with editor Dean Baquet. (“The Trib guys hated Eli Broad,” I’m told by an insider. “They thought he was a piece of shit.”) Then, later today, FitzSimons followed up the email with a video hook-up where he answered questions from the worker ants. Someone asked FitzSimons what’s “the vision” for the Trib’s newspapers under Zell. “Basically, we never got around to discussing a vision for the papers,” FitzSimons replied. I’m told a visible shivver went through the Los Angeles Times newsroom among reporters and editors listening to those words. In all the news about Zell buying Tribune Co., I find this the most troubling. The reason is clear: this was a deal all about money, not about journalism or television or sports or any of the infotainment product that the Trib owns. Instead, the greed was palpable in the Chicago and L.A. air. Zell only had to put up $315 mil of his own moolah in the $8+ bil deal and in return gets the chairman title as well as the option to buy 40% of the newly taken private company anytime over the next 15 years. FitzSimons alone is supposed to personally pocket $21+ mil, remains CEO and snags a board seat. The other top four Trib execs get big pay days as well. The disgusting Chandler family gets a hefty payout, and a hefty tax liability, for their 20% stake in Trib, thus ignobly ending 120 years in the newspaper biz. I told ya — these guys are no better than Tony et al. On the HBO series, the mob boss often takes out a fat wad of dollars from his pants’ pocket, then turns to his underlings and says, “Let me figure out how to take care of you.” When Tony really means, “Let me figure out how to take care of me first, and then you.” That’s what happened here.

Talking to LA Times staff today, I’m hearing similar responses to the Zell/Trib deal: “Horrifying”. “Scary”. “My resume is out”. “My resume isn’t out because I don’t want to leave L.A.” As a senior editor told me, “You can argue it both ways. People say, well, anything’s better than what we’ve got now. Then there are others who say, wrong, wrong wrong, because things can always get worse.” So it’s with a long sigh that, based on my reporting today, I come to this conclusion: the deal is wonderful for the Chicago billionaire and media managers, and terrible for the 20,000 Trib grunts suddenly at risk because of the Employee Stock Ownership Plan. Now, that the bosses spent a lot of envisioning. You’ve already read the bare facts of the deal online and in print. But let me try to put them into context. The new company is going to take on a crushing amount of debt. Trib has only about $5 bil in debt now: but, after the deal is completed, it will have about $13.4 bil in net debt. Whether that debt can be serviced depends on your vision of Old Media and its future prospects in the short and long term. None of that would matter if Zell were gambling only with his own money. But, not only did he get in on the cheap, he’s going to be the preferred stock holder, which should entitle him to elect a large number of directors to the board (and maybe even the whole board). His ability to run the company will be a function of how many seats he controls. But, in order to make this deal work, the trustees of the employees’ pension plan of Tribune Co. must agree to put up 15%, or about $250 million, of their $1.7 billion. (Also, the nature of the company’s 401K plan will change in the company’s favor.) It’s also entirely possible that the company will need an additional investment from that pension fund in the future. So what happens to the blanace sheet over the next couple of years is key.

But then you have to take into account that the same Tribune management who’ve been making all those bad decisions — FitzSimons et al — are still going to be in charge. At least, if Zell’s affirmations to keep current management in place are to be believed. And why not? By all accounts, Zell is in this deal for the money — not to micromanage the media outlets. Zell just isn’t interested in power and influence. He cares only about cold hard cash. (Zell describes himself as “an opportunist” going after Tribune only “as an investment. I’m not interested in becoming op-ed editor or publisher or anything like that.” Instead, the same people who want to cut the bejesus out of the personnel and budgets of the Los Angeles Times will continue to have free rein under Zell, too. And the excuse proffered will be the need to trim all that damn debt the company took on. I anticipate that’s going to force management to make even more cutbacks than they had previously anticipated. So it looks likely now — hell, probable — that the Trib guys will take the money and run and yet stay on to still run the place, that the Chandler family (which became the largest shareholder after their 2000 sale of Times Mirror Co. to Tribune) will receive the premium they’s always demanded, and that Zell will make some bucks three- to four-years down the line. But the Trib employees could be left holding the proverbial bag if things go south. Not only could LA Times staffers lose their jobs or work at a much leaner paper, but they could also lose their pensions in a worst-case scenario. Again, it’s all a factor of that damn debt. And, since this deal is divided up into a bizarre two-step process whereby Zell gets control of Trib first, and then the company turns into a Sub Chapter S corporation (what, you don’t have a Harvard MBA to make sense of it all?), expect this uncertainty about Trib’s future to linger and linger.

Selling the Chicago Cubs baseball team would help because it could fetch, say, $700 mil to $800 mil if Wrigley Field is thrown in. Add another $100 mil for the Comcast SportNet Chicago stake. Then there’s the likelihood that some of the Trib’s TV station group — a license to print money — may have to be sold because they violate federal cross-ownership regs. And the Democratic Congress may crack down on the company’s temporary waiver, plus the still GOP-controlled FCC is re-examining its media ownership rules. (Fortunately, Zell gives to both political parties somewhat equally.) Of course, some media savvy analysts would advise Zell to get rid of the newspapers instead. That said, how adorable that Newspaper Guild prez Linda Foley says she’ll be looking out for Trib employees coming up against big bad Zell, FitzSimons, etc. That’s like Meadow Soprano trying to give orders to Paulie Walnuts. But there’s no one on the immediate horizon who even looks like a white knight to save the Los Angeles Times unless, as I reported today, David Geffen throws $1 billion into a joint venture with his Malibu pal Zell that lets the Hollywood mogul run the paper. All I can say is that someone had better start thinking about the “vision” thing for the infotainment product.

This article was printed from https://deadline.com/2007/04/zelltrib-deal-be-afraid-be-very-afraid-1798/