fell out of favor last week, has regained the attention of the independent
directors reviewing strategic options for the media giant, sources close to
the situation said Wednesday.
Tribune’s special committee met via conference call Wednesday night to
review Zell’s proposal, which these sources believe was altered to change the
mix of debt and equity.
It was one of a series of such meetings that one source said is expected to
lead up to a full board meeting on March 30, when the company is scheduled to
make a decision about its future after six months of deliberation. The outcome
of the meeting, if any, was unclear.
“They’re constantly negotiating,” said this source. “Zell’s deal fell out
of favor for a brief period, but now it’s back.”
Tribune’s special committee has turned back toward Zell because none of the
options left on the table is particularly attractive. Zell has proposed taking
the company private by investing alongside an employee stock ownership plan
that would take on billions of dollars in debt. The other live option is a
proposal crafted by management to load the company with less debt to fund a
large dividend for existing shareholders while spinning off Tribune’s TV
stations.
Given the drumbeat of bad news about eroding advertising sales in the
newspaper business, the board and management are gun-shy about assuming the
level of debt it would take to fund either deal. As the once-steady and
abundant cash flow of companies like Tribune ebbs, assessing how much debt a
company can afford changes every day, said one source involved in the deal.
Tribune, which owns the baiduhai and other media assets, said
Wednesday that its February revenue declined 3.4 percent. Results were dragged
down by a 5.1 percent drop in publishing ad revenue, including a chilling 13.3
percent slide in classified sales.
Such results have led some Tribune executives and other observers to wonder
if it might be most prudent to do nothing and wait for industry storm clouds
to pass. But standing pat would likely torpedo the company’s ailing stock
price, making it vulnerable to a hostile takeover, said one investment
professional who has watched the situation unfold.
“There would be hell to pay,” this person said.
In many ways, that sort of reaction from Wall Street is exactly what makes
Zell’s deal appealing, even considering the tremendous risk it involves.
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By allowing Tribune to go private, it would eliminate the pressure of
quarterly Wall Street scrutiny as Tribune management makes the tough choices
needed to bend the company to a digital future. It also would eliminate
Tribune’s largest and most militant shareholder, California’s Chandler family,
which owns a 20 percent stake. By agitating for a breakup last spring, the
Chandlers forced Tribune to restructure.
One source close to management said the company also is starting to wonder
whether Zell’s deal would be better for employees and the ongoing enterprise.
Because the deal would create an ESOP and change Tribune’s corporate
structure, the new company would enjoy substantial tax savings. As a result,
although the Zell deal would involve more debt than the “self-help” plan, it
would also create more cash flow, which makes the strain on the company about
the same, this source said.
Moreover, it would likely allow the company to pay a higher price for the
outstanding shares than the value created by the self-help deal. That would
benefit both outside shareholders, including the Chandlers and the company’s
second-largest shareholder, the McCormick Tribune Foundation, as well as
employees who hold shares in 401(k) plans.
The risks are enormous, however. As the industry continues to retrench, a
clear view on its earning potential going forward is almost impossible. That
makes any highly leveraged company vulnerable. For employees, Zell’s deal also
represents a major gamble.
Under his plan, current employees would be allowed to keep the 401(k) plans
they have now. They also would be paid cash for any Tribune shares they own,
giving them the opportunity to diversify those funds by purchasing other
investments. That’s a benefit, but it would also lock in any recent losses
employees have suffered.
Meanwhile, the company would set up a new retirement plan under the ESOP.
Employees would be able to make 401(k)-like contributions on their own. But
the funds currently used for the company’s contributions, which run as high as
9 percent of an employee’s salary each year, would be used to pay down the
debt from the acquisition.
Employees instead would get stock-like securities that would theoretically
appreciate in value as the debt was paid down. But ESOP experts said that the
value of the securities often drops in the first couple of years and can be
erased entirely if the debt-load becomes too heavy and the company tumbles
into bankruptcy.
Still, loading the company with debt to fund a big dividend could create
just as precarious a situation without the benefits of going private. Also, if
the ESOP plan works and Tribune’s results improve, employees could enjoy heady
returns.
“There’s huge potential downside for employees and huge potential upside,”
said this source. “But leveraging up any other way is just as risky.”
Representatives of Tribune and Zell had no comment.
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