Maybe I just have Tony on the brain because The Sopranos begins its death rattle this Sunday. But what went down with the Tribune Co. and Sam Zell is eerily similar to an episode of the HBO series. After all, the 65-year-old Chicago real estate tycoon who is worth $5 bil didn’t give himself the nickname “Grave Dancer” for nuttin’. Rather, it aptly describes his bada-bing-bada-boom style of buying up “distressed” assets after others had given them last rites. And that’s what the Los Angeles Times is considered right now: dead meat.
On Monday morning, Tribune Co. chairman Dennis J. FitzSimons sent an e-mail around to employees telling them about Zell buying the embattled company and taking it private. That’s the equivalent of Tony, through his errand boy, making calls to his crew from the Escalade. Then FitzSimons followed up later in the day with a video teleconference during which he answered questions from the disgruntled grunts. Someone asked the goombah what’s “the vision” for Trib’s newspapers under Zell. “Basically, we never got around to discussing a vision for the papers,” FitzSimons replied. I’m told a visible shudder went through the Los Angeles Times newsroom.
The reason is clear: This deal was all about money ($34 a share for more than half the outstanding 250 mil Tribune shares, or a 5.9 percent premium over the closing stock price on March 30) and not about the 11 newspapers or the 25 TV stations (including L.A.’s KTLA) or the Chicago Cubs or any of the other infotainment products the Trib Co. owns. On The Sopranos, Tony 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.” What Tony really means is, “Let me figure out how to take care of me first, and then you.” And that’s exactly the strategy of the Trib’s board and Zell toward the 20,000 employees involved in this deal.
Zell only had to put up $315 mil of his own moola for a subordinated note and warrant that entitles him in the highly leveraged $8 bil-plus deal: In exchange, he gets the chairman title as well as an option to buy 40 percent of the private company’s common stock anytime over the next 15 years. As the preferred stock holder, Zell will elect a large number of directors to the board and therefore gain control. FitzSimons for his part is supposed to personally pocket $21 mil-plus, and still remain CEO and retain a board seat. The other top four Trib execs get big bucks too, and stay on. For all these suits now, running the newly private company is suddenly akin to those no-show construction jobs reserved for Tony’s mob: They’re in it only for the pay and the perks.
As for the rebellious Los Angeles Times, it’s as much an afterthought as one of Tony’s whacked rivals. Zell’s own experience in publishing is little to none: Legend has it that, as a kid, he would buy Playboy magazines in downtown Chicago and resell them to his classmates in the suburbs for a 200 percent markup. By all accounts, Zell won’t micromanage the media outlets. Zell even describes himself as an opportunist and the Tribune Co. as an investment. “I’m not interested in becoming op-ed editor or publisher or anything like that,” he says in interviews. So the same Tribune mob who’ve been kicking the crap out of the Los Angeles Times from afar are still going to be in charge, at least if Zell’s promise to keep current management in place is to be believed.
If anyone still hopes that L.A. billionaires Eli Broad and Ron Burkle can save Spring Street, fuhgedaboudit. My sources say the Broad/Burkle offer slept with the fishes a long, long time ago because Broad, in cahoots with then-editor Dean Baquet, had done too much badmouthing of the L.A. Times’ Chicago bosses. (“The Trib guys hated Eli Broad,” an insider told me. “They thought he was a piece of shit.”)
That leaves only David Geffen.
How fitting that a Hollywood mogul is eager not just to take on Big Media’s version of The Sopranos but to actually get in bed with them. I can report that Geffen is by no means out of this. Sources tell me that Geffen and Zell came to know each other in Malibu, where both billionaires have their de rigueur beach houses, and consider themselves friends. Geffen believes Zell is a straight shooter and an honest guy who can be taken at his word when he says he won’t interfere in the running of the newspapers. So Geffen has been talking to Zell about doing a joint venture for the Los Angeles Times that would circumvent the expensive tax consequences of an outright sale. Geffen would buy 50 percent of the Los Angeles Times from Zell for $1 billion and get to operate the paper. (That figure makes sense since Geffen had already offered Tribune Co. $2 bil for the paper.) If he doesn’t come in, then the L.A. Times will stay under present Trib management — and that’s the worst situation possible for the paper’s future and, ultimately, for the employees.
“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.
Once, when a deal went down wrong, Tony Soprano quipped, “I’m like King Midas in reverse. Everything I touch turns to shit.” Surely, Trib employees can only hope that’s where the similarities between this sale and The Sopranos end.
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