Wednesday, March 28, 2007

TribCo. ESOP One Zell of a Deal

In the grey world of commerce, Sam Zell is what passes for a free spirit. He sports a beard, wears open-collared shirts and drives motorcycles. Oh yeah, he's also pretty good at making a buck, amassing a personal fortune of over $4 billion and counting.
Right now, it looks like Zell is close to making a deal to acquire the publicly-traded and shell-shocked Tribune Co., which has been on the auction block for about six months. The real estate mogul's plan: Acquire TribCo.'s outstanding shares and take it private in a transaction valued at nearly $8 billion, or $33 per share. That's a 6 percent premium over Trib's stock price.
To do this, Zell will basically invest about $300 million of his own treasure, while installing a newly-created Employee Stock Ownership Plan (ESOP) that will presumably be used as a vehicle to borrow money from lenders, or other sources, and finance the bulk of the buyout.
An ESOP is not without its risks and problems, but right now the Tribune Co. could do alot worse than go with Zell's plan. Indeed, the only other viable option appears to be busting up the joint, selling it in parts, suffering some hefty tax bills and ultimately getting little back in return.
Here's a quick assessment of the good, bad and ugly of this potential Zell deal.
The Good: Let me hear you shout, "Freedom!" Going private gets Wall Street off the Tribune Co.'s back and that will enable management to accelerate plans to invest and take the company's newspapers, TV and radio stations into the digital age. As a private concern, management gets elbow room to expand, experiment and, yeah, make mistakes without being crucified on CNBC by industry analysts and fund managers. Moreover, the very unhappy Chandler family (which holds about 20 percent of Tribune stock and ignited the company's auction meltdown) gets paid off and goes away. What's more, the Zell plan keeps the company intact, at least in the short run, and that minimizes the needs for wholesale head-chopping and other cost reductions.
The Bad: Debt, debt, and more debt. Right now, TribCo is sitting on $9-billion in debt (about $4 billion in longterm debt) and has a market capitalization of around $7-to $8 billion. That's already rocky. The Zell plan calls for adding even more debt from borrowing (even though there are tax advantages to having the ESOP do it) and that's going to be a much heavier load.
Frankly, I don't see how TribCo takes on much more debt (and pays a one-time dividend to shareholders that's also part of the Zell plan) without recouping cash by spinning off some properties, like the Chicago Cubs. Heck, they're standing in line to buy the Cubbies, so why not sell them for nearly a cool billion and, as part of the deal, work something out with the buyer so that WGN radio still gets to broadcast the games for the next decade or so?
Another concern: An ESOP only works well if the Tribune Co.'s profits grow. However, should the company's earnings continue to erode, then the ESOP-related debt burden is twice as heavy because it hurts the corporation's credit ratings and smacks employees, who shoulder the burden of being majority shareholders.
Also, employees should know what they are getting into (not that they may have a great deal of choice). It is possible that workers will have to make concessions in order to get the ESOP up and running. While I doubt that means massive job cuts, it may require cutting current compensation packages by reducing benefits like contributions to retirement plans, or raising health care co-payments. There's also the issue of fairness in terms of how an ESOP is administered and while there are federal guidelines overseeing plans, there's still a possibility of some workers getting short-changed or screwed.
To learn more about the impact an ESOP might have on TribCo workers go to the National Center for Employee Ownership and click on the Hot Topic story regarding the Tribune's possible ESOP. Good stuff.
The Ugly: Bear in mind, this deal may not go through. Lots of potholes can trip up Zell's ride. One of the most dangerous is the possibility that federal regulators will not allow the new TribCo owners to keep the waiver that allows it to own a newspaper and TV station in the same market. If the feds say no, that dilutes the value of the deal considerably.
The press likes to wax poetic about how great employee ownership can be. That may be so, but it's very tough for a large company to convert to employee ownership. Too many internal changes are needed. Management and workers have to relate to each other in different ways and at different levels.
That was one of the major problems at United Airlines, which was also employee-owned, until it went bankrupt. (It's out now, but as a traditional publicly-traded company)
Now, the Tribune is not highly unionized and that could work in its favor. Still, should factions form and internal strife grow, an ESOP is doomed.
Yet despite all this uncertainty, Zell is tossing the Tribune a lifeline.
Sure, it's going to be messy. And sure, he's going to make his millions and then some. And he will likely sell out in a few years.
But right now, the free-wheeling Zell is the man with the plan and enough cash in hand to steer the Tribune Company out of this very rough patch.

(Full disclosure, I regularly contribute to Chicago Magazine, which is owned by the Tribune Co.)

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