Tribune Aftermath

The NYT’s Andrew Ross Sorkin has an excellent column today on Tribune. He slams a list of players, including the company’s board for knowingly putting the company—and especially its employees—at serious risk by selling to a man with no newspaper experience who planned to load it to the gills with debt, an utter fiasco:

With one of the grand old names of American journalism now confronting an uncertain future, it is worth remembering all the people who mismanaged the company before hand and helped orchestrate this ill-fated deal — and made a lot of money in the process. They include members of the Tribune board, the company’s management and the bankers who walked away with millions of dollars for financing and advising on a transaction that many of them knew, or should have known, could end in ruin.

It was Tribune’s board that sold the company to Mr. Zell — and allowed him to use the employee’s pension plan to do so. Despite early resistance, Dennis J. FitzSimons, then the company’s chief executive, backed the plan. He was paid about $17.7 million in severance and other payments. The sale also bought all the shares he owned — $23.8 million worth. The day he left, he said in a note to employees that “completing this ‘going private’ transaction is a great outcome for our shareholders, employees and customers.”

Well, at least for some of them.

Tribune’s board was advised by a group of bankers from Citigroup and Merrill Lynch, which walked off with $35.8 million and $37 million, respectively. But those banks played both sides of the deal: they also lent Mr. Zell the money to buy the company. For that, they shared an additional $47 million pot of fees with several other banks, according to Thomson Reuters. And then there was Morgan Stanley, which wrote a “fairness opinion” blessing the deal, for which it was paid a $7.5 million fee (plus an additional $2.5 million advisory fee).

On top of that, a firm called the Valuation Research Corporation wrote a “solvency opinion” suggesting that Tribune could meet its debt covenants. Thomson Reuters, which tracks fees, estimates V.R.C. was paid $1 million for that opinion. V.R.C. was so enamored with its role that it put out a press release.

And he’s right to point out that Zell had almost no skin in the game:

Granted, Mr. Zell, 67, put up some money. He invested $315 million in the form of subordinated debt in exchange for a warrant to buy 40 percent of Tribune in the future for $500 million. It is unclear how much he’ll lose, but one thing is clear: when creditors get in line, he gets to stand ahead of the employees.

The Tribune-owned LA Times explains what bankruptcy means for operating the business:

During a Chapter 11 bankruptcy reorganization, major management decisions must pass muster with a bankruptcy judge, and the ultimate fate of a company — including whether it remains intact or is sold off in pieces — could be decided in part by its creditors…

With Tribune now in bankruptcy protection, its creditors will have to decide whether they’re willing to restructure the debt, as Zell hopes, or try to get at least some of their money back another way, such as by a sale of its assets.

A breakup seems unlikely, however. Even if buyers were to emerge for some of the company’s media properties, financing such purchases could be a major stumbling block given that credit remains tight.

In many bankruptcies, creditors exchange debt for an ownership stake in the business, in the hope of eventually selling that stake at a profit. Barring a breakup of the company, the issue facing Tribune’s creditors could come down to how much of a debt load to leave on the company’s balance sheet and how much of an equity stake to demand.

This is good reporting by the LA Times here that others should have had. The key for the future of Tribune will be how much debt the reorganized company gets to offload:

The big losers in the Tribune bankruptcy may be banks and bond investors that funded Zell’s buyout.

The credit analysis firm Fitch Ratings said Monday that the bank lenders that provided the bulk of the financing might recover as little as 31% of the investments.

For other debt holders, Fitch said, “0% recovery is realistic.”

The bond market had anticipated Tribune’s looming distress. As recently as two weeks ago, some Tribune bonds were trading as low as 14 cents on the dollar.

The NYT points out that ex-employees are getting the shaft, too:

A note on an internal Tribune Company Web site said, “All ongoing severance payments, deferred compensation and other payments to former employees have been discontinued and will be the subject of later proceedings before the court.” That made it apparent that employees who recently were laid off or took buyouts would join the long list of unsecured creditors.

The Journal says Zell will be wiped out:

Last year, Mr. Zell’s firm invested $315 million in Tribune in exchange for a subordinated note and a warrant entitling it to acquire 40% of the stock. He now says he assumes his investment is worthless.

The Chicago Tribune’s story is a good roundup that hits most of the issues, and this is useful:

Douglas Baird, a bankruptcy specialist at the University of Chicago Law School, agreed that Tribune Co.’s Chapter 11 filing is much less complicated than other big ones such as United Airlines. Since the company’s papers and TV stations generate cash flow on their own, the bankruptcy court will focus on restructuring the balance sheet, not operations, he said.

But Baird and others also said that the bankruptcy process tends to accelerate any sort of operational restructuring that is under way.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.