Be Afraid. Be Very Afraid

“Horrifying,” “scary,” “my résumé is out”... just a small sample of the reaction coming out of Spring Street. The L.A. Times staff has every reason to be terrified. Even before this, there’s been a steady exodus out the doors. Sure, this is a great deal for Zell and Trib’s media managers, but it’s a terrible one for the Trib masses whose jobs and pensions suddenly become at risk because of the Employee Stock Ownership Plan, which will put 60 percent of the new company’s common stock into workers’ hands. What’s wrong with that?

This is a better con job that any Tony Soprano ever pulled off. Here’s why: To make his deal work, Zell decided that the trustees of the Tribune Company’s employee pension plan must agree to put up 15 percent, or about $250 million, of their $1.7 billion. It’s also entirely possible that the company will need an additional investment from that pension fund in the future. And in return for that beneficence, the workers don’t get any more say in running the place. Even those moronic Wall Street analysts, little more than math geeks who get orgasmic about crunching numbers, are warning that this ESOP arrangement leaves little room for error. The Wall Street Journal used the headline “ESOP’s Fables.” That’s because these moves are filled with risk for the employees: It’s fantastic if the company does well, troubled in an economic downturn, and disastrous in a situation like Enron Corp. (where more than half of worker retirement-plan savings were invested in company stock — including an ESOP). Putting all the eggs in one basket is exactly what financial planners tell people not to do with their portfolios. Tony Soprano may have warned his mob crew many times, “There’s no retiring from this.” But for the Trib employees, there may be no retirement, period.

What makes the Trib’s ESOP even more dangerous in this case is that employees will be the majority owner of a highly leveraged company now. After the deal is completed, Tribune will have a crushing $13.4 bil in net debt, compared to only $5 bil now. Of course, Zell would argue that by turning the company into a Subchapter S corporation, it’s now exempt from paying federal income tax, which will greatly increase its cash flow, thus helping it pay down the mountain of debt it is taking on. How quickly or efficiently that debt can be serviced depends on Old Media’s future prospects in the short and long term. But, faced with uncertainty looming ahead, bond-rating services downgraded Tribune’s standing after this deal was announced.

The Chicago mob will use the debt as another excuse to make even more severe personnel and budget cutbacks. FitzSimons already said as much during his electronic town meeting with the masses. And L.A. Times publisher/CEO David Hiller admitted this week that the newspaper is going ahead with planned staff reductions, which are expected to cut $7.5 million in costs but will add more drama to the ongoing theatrics between that paper’s management and newsroom. Little wonder, then, that the Tribune Co. was so eager to run a private company to “get us out of the glare of the public markets,” as FitzSimons said. After all, pressure from the relentlessly prying eyes of Wall Street led to the breakup of Knight Ridder Co. Tribune is now the second of this country’s three largest publishers to be sold in less than a year.

That said, the recent announcement by Newspaper Guild prez Linda Foley that she’ll help Trib employees coming up against muscle like Zell and FitzSimons was laughable. That’s like Meadow Soprano trying to give orders to Paulie Walnuts.

How did things get so bad so quickly? Start with the boundless avarice of the Chandler family. Tribune purchased Times Mirror Co. from the Chandler family in 2000 for about $6.5 billion. In the years following that deal, Tribune’s stock began to fall, dropping about 50 percent from early 2004 until last spring. Since then, it has languished just above $30 per share, down from an all-time high above $60 in 1999. That wasn’t good enough for the Chandler family trusts, now Trib’s largest shareholder and prone to bitch and moan about money matters. They get a hefty payout, and a hefty tax liability, from the sale in exchange for their 20 percent stake in Tribune Co., worth about $1.6 billion.

To help raise cash, Zell and the Trib are selling the Chicago Cubs because it could fetch, say, $700 mil to $800 mil with Wrigley Field thrown in. Billionaire entrepreneur Mark Cuban, actor Bill Murray and columnist George Will are among those rumored to have interest, along with numerous Chicago business figures. If they put up the company’s Comcast SportsNet Chicago stake, that’s another $100 mil.

At a meeting at the company headquarters in Chicago Tuesday, Zell told some assembled senior execs from Tribune-owned newspapers and TV stations that he had every incentive to keep the those assets together for at least 10 years, if only to avoid a punishing tax bill. But that may not be the company's choice and depends on whether it can hold on to its hard-fought waivers of federal cross-ownership rules (forbidding companies from controlling both TV stations and newspapers in the same media markets). It doesn’t look good. There’s now a Democratic-controlled Congress and a Republican-controlled FCC both determined to re-examine media-consolidation issues. Already, consumer advocates are vowing to ask regulators to block the Trib/Zell deal on the grounds that it will give Zell too much clout in cities where Tribune owns both a major newspaper and TV station, including Los Angeles, New York, Chicago, Fort Lauderdale and Hartford.