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 memo we will never see:
To: Tribune Company employees
From: Sam Zell
As you all know, we are facing a perfect storm in the newspaper business. The Internet has fragmented both audiences and advertising, and now the recession has driven advertisers under cover.
This is an unfortunate situation because we have a lot of debt here at the Tribune Company, and, as you know, it is YOUR debt, not mine. We bought this company by leveraging your pension plan. Nonetheless, I am committed to ensuring that the Tribune weather these economic storms.
To this end, I am announcing today that the Chicago Cubs are going to play two players short of a full payroll next year. I invested $118 million in the team last year, and they couldn’t get through the first round of the playoffs.
I can get a better return for my money by investing it in the newsrooms of our newspapers. In consultation with the Cubs management, I have decided to lay off two players, Henry Blanco and Derek Lee. Together, they made $16.4 million. I estimate that this money will pay the salaries of 234 journalists, roughly 23 additional people at each of our newspapers.
Blanco failed to get on base two-thirds of the time he batted, and I paid him $55,000 for every game he played. I paid Lee $85,500 for each game he played, and he drove in only 90 runs.
I expect these 234 journalists to be much more productive. In turn, I expect them to attract more readers, which will attract more advertisers. I am happy to support our journalism.
Posted by Daryl Moen on Tue 9 Dec 2008 at 05:31 PM
As a senior secured bond holder with a note due 12/08/08, my account was credited for the amount owed to me, then the next day the redemption was reversed taking the 30,000 that was put into my account back out. How this happened is a huge question but a bigger question is what should I expect? Its amazing the maturity date turned out to be the same date that the bankruptcy was announced. My account was funded moments before the bankruptcy was filed and then the next day my account was debited with a notation redemption reversed. Should I have any recourse becasue the $30,000 was entered into my Pershing account and and then the next day (24 hrs later) it was taken back out.
Posted by Calvin Bradley Klein on Tue 9 Dec 2008 at 07:55 PM