Zell’s zeal leads him to Tribune

If Tribune’s board can work out the last-minute details on a revised bid
that raised Zell’s price to $34 a share, one of the most buttoned-down
corporations in America would be controlled by Zell, who has relished a life
and career as an outsider from his contrarian investment philosophy to his
full-throttle lifestyle.

Zell’s bid seemed positioned to trump an 11th-hour offer from rival
billionaires Ron Burkle and Eli Broad of Los Angeles. Though Zell’s initial
$33-a-share bid fell short of the Burkle and Broad offer of $34 a share, Zell
matched them late Sunday and Tribune’s board seemed to be leaning his way.

The situation was still fluid, and sources cautioned that a deal might not
be completed. Tribune directors were hoping to finalize a pact before markets
open Monday morning.

Zell, who did not even submit a bid before the company’s initial deadline,
seemed to jump into the driver’s seat in mid-February by suggesting his offer
could be financed with the help of a tax-efficient employee stock ownership
plan, or ESOP. Broad and Burkle countered with their own ESOP late last week
as the Tribune’s self-imposed March 31 deadline loomed.

The deal, which would return Tribune to private ownership, would make the
company one of the most heavily-indebted enterprises in the media industry at
a time of falling readership and declining advertising revenues. But Zell
likes to say a true entrepreneur has unending self-confidence–that he doesn’t
see risk; he sees only solutions.

That might explain why the flamboyant Chicago real estate magnate believes
he can transform Tribune Co. even while the industry is an unprecedented state
of siege from the Internet.

The fact that Tribune’s auction dragged on for nine months with a dearth of
serious bidders speaks volumes about how the rest of the world views the
outlook for traditional media properties in an increasingly digital world.
Zell hedged his own bet by limiting his personal investment in the deal to
$300 million and relying on the ESOP as the backbone of his $8 billion
purchase price. Tribune’s $5 billion in existing debt will remain on the
books.

Even some industry rivals are dumbfounded by what Zell has planned.

“The amount of debt Tribune is going to have blows my mind,” said one of
them, noting that he’s expecting three years of cash flow declines as
once-loyal advertisers rush to get online. “It seems very dangerous to me.”

Many observers have speculated that Zell’s only exit from the danger zone
will be to continue the cost-cutting, job-slashing and asset-shuffling that
has caused so much angst in the newspaper industry. Critics note that his
recent operating results as a manager have been less than encouraging:
Although he cleared $1.1 billion when he sold his Equity Office Properties
Trust to Blackstone Group in February, that company’s returns underperformed
its peers’ over the past decade.

But Zell has said repeatedly he has no intention of breaking up Tribune. He
may find it tempting to ease the debt burden by selling a prize like the
Chicago Cubs, but those who know him believe a strategy that depends on
massive cost-cutting or asset sales that merely scrounging through Tribune’s
assets for what he might sell at a profit isn’t Zell’s style.

The 65-year-old Highland Park native, they say, earned his $4.5 billion
fortune not by tearing things down but by building them up. “His job is
looking over the horizon,” said a person who used to work with Zell. “You
won’t necessarily find [what he sees] in the annual report right now.”

Short, balding and pugnacious, Zell is among Chicago’s most iconoclastic
business figures. A born outsider, he rides motorcycles, parties hard, talks
like a truck driver and may be keeping Marlboro in business.

But no one would care about any of that if he weren’t asn’t so good at
buying low and selling high. Though his self-imposed nickname, the Grave
Dancer, implies death and destruction, Zell’s fortune is built on finding life
a pulse where others don’t. His talent, people say, is exploiting assets in
ways most never would have thought of.

In the case of Tribune, Zell has already shown off his financial agility.
At least seven private equity firms kicked the tires at Tribune but couldn’t
make a deal work for more than $30 a share. The board concluded that the four
other deals that did develop were too tentative or too debt heavy, including
two versions from Burkle and Broad.

But then Zell emerged in early February with his offer. He made it work by
building his proposal around an ESOP, which should slash Tribune’s tax bill
and boost the company’s cash flow enough to make a much larger debt load
manageable.

As creative as the deal is, however, adding more than $7 billion in new
debt to Tribune’s balance sheet puts the company under enormous pressure to
perform. That may be risky, but according to Zell’s worldview, it may also
force a conservative, bureaucratic company that is stuck in the past to dig
deeper to find some innovative solutions to help it start embracing the
future.

While Zell won’t comment until the deal is officially done, he has pledged
that he has no intention of inserting himself in the editorial process at
Tribune’s media outlets. He will, however, play an active role on the business
side. Executives running other companies he has invested in say Zell doesn’t
micromanage or presume to know more than his managers do about operations. But
by constantly asking questions and testing assumptions, he tries to guide them
toward more-effective strategies.

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Tribune’s fate will depend on Zell’s ability to inspire better performance
from a beleaguered management team led by Tribune Chief Executive Dennis
FitzSimons. Sources close to Zell said current executives will get their
chance to turn the ship around. But sources on the management team are well
aware that Zell is known for making changes if he doesn’t get results.

Internet efforts to intensify

Most close Tribune observers agree that the Internet holds the key to the
company’s future. Sources close to Zell say he believes the company’s
potential online is being badly undervalued by the stock market.

While Tribune’s long-term strategy of profiting from owning both television
stations and newspapers in the nation’s three biggest markets was long-ago
discredited, its reach from Los Angeles through Chicago to New York is an
essential component of its Internet strategy. The national reach of Tribune’s
11 metropolitan dailies, combined with those of partners Gannett Co. and
McClatchy Co., is what powers a set of national online networks anchored by
job-search site CareerBuilder.com.

Tribune plans to broaden that partnership to build out other national
networks, possibly by using established properties like Tribune’s online
entertainment channel, Metromix. Zell also sees opportunities in further
expanding what’s there. CareerBuilder is the dominant job site in the U.S. but
is dwarfed by Monster.com internationally. Zell, who is an avid investor in
Asia, Mexico and South America, will likely push harder on an international
expansion, sources with knowledge of his plans said.

Tribune and other newspaper companies are also deep into discussions with
Google Inc. and Yahoo to figure out ways to tap the value of the powerful
brand power and distribution clout of their local dailies. National
advertisers complain that it is too complicated and inefficient to buy ads in
local newspapers or on their Websites around the country. But by banding
together with a technology provider like Google or Yahoo, newspaper companies
are hoping that technology will allow those same advertisers to buy ads on
relevant pages across a national network of local Web sites. The impact would
be more targeted and the results would be more measurable.

At the moment, the industry is divided into at least two camps, with
Tribune and Gannett lined up against a consortium of smaller chains led by
Denver’s Media8News and New York’s Hearst Corp. The MediaNews group is working
closely with Yahoo while Tribune and Gannett haven’t committed yet beyond a
small deal with Google. Eventually, however, most industry executives hope to
see substantial revenue from these strategies.

Zell’s challenge will be to extract this Internet value while somehow
finding a way to energize print products that have been losing readers and ad
dollars in ever greater numbers. Zell doesn’t have an immediate answer to that
question but is confident he can help management find one with some fresh
thinking, sources said.

While that sort of ambiguity hardly inspires confidence, Terry Diamond,
Zell’s friend and co-investor since college, said it is typical of Zell.

“Sam is intensely curious and he’s not restrained by conventional wisdom,”
said Diamond. “He likes to figure out puzzles and he’s very good at it. It’s
in the puzzles that there’s opportunity.”

A close reading of Tribune’s annual report shows that there are also some
opportunities others might have missed. The company’s real estate may be the
sort of hidden asset Zell relishes. Next January, Tribune Co. has a right to
purchase the L.A. Times building, Newsday’s headquarters, the Baltimore Sun’s
building and five other properties for $175 million from the Chandler family,
the company’s largest shareholder. That’s $51 million less than the appraised
value those properties had more than a decade ago.

Zell is, above all else, a real estate specialist. Actively managing
Tribune’s properties could yield big profits as could taking advantage of real
estate like the parking lot behind Chicago’s Tribune Tower–an idea Tribune
management has considered but never executed. One source noted that Tribune’s
Freedom Center printing facility is in the middle of an area that is
gentrifying rapidly. Would it make more sense to build elsewhere and lease
that space for development?

It’s also true that the ESOP isn’t the only tool available for reducing
Tribune’s corporate taxes. Tribune offers Zell the chance to deploy one of his
favored techniques: using losses from prior years to offset profits from
current operations. Tribune carries $823 million in so-called operating loss
carry-forwards, and current management believes $37 million of those will
expire unused. Zell’s track record indicates he would hustle to find ways to
use every penny of that $823 million.

Executives at Zell’s other companies said his efforts to find value from a
company’s assets don’t usually involve abrupt moves. They evolve from
countless conversations with management in which Zell constantly challenges
assumptions and pushes to make decisions. Zell is known for his explosive,
often profane outbursts, but colleagues say he is typically calm, focused and
to the point.

“If you walk out of a meeting and you don’t know what he wants you to do,
you’re an idiot,” said one former co-worker. “There’s no hidden agenda.”

Energy firm a bright spot

A typical Zell strategy emerged at Covanta Energy Corp., a company that
generates electricity by burning garbage. Zell had just bought the assets of a
failing insurance company in 2003 when he spotted Covanta.

The insurer had hundreds of millions in losses on its balance sheet. To
take advantage of those, Zell needed a company that would spin off
considerable profits. Covanta, just then emerging from bankruptcy, was one of
several companies Zell acquired to do just that.

Just before Zell bought in, Covanta dumped the extraneous units that led to
bankruptcy in the first place: ill-fated investments in hockey arenas, airport
services and movie theaters.

But Covanta was hardly a guaranteed success, and Zell soon faced two major
decisions. The existing CEO, a relatively inexperienced former plant manager
named Anthony Orlando, was untested and made some early mistakes. Orlando’s
hand-picked chief financial officer, for instance, had to be let go because he
couldn’t handle the complexities of Covanta’s business. Meanwhile, Zell
thought Covanta should dump its Asian operations, even though management
wanted to keep them.

Zell decided to give Orlando a second chance–and a chance to prove the
Asian operations could contribute. Both moves turned out well. “He’s not a
micromanager, but you definitely feel his presence,” Orlando says.

Covanta began logging big profits, and Zell sidestepped any taxes by
offsetting the earnings with the losses the insurance company carried on its
books.

Richard L. Huber, who sits on the board of Covanta and several other Zell
companies, said this is vintage Zell: Turning profits from a decidedly unsexy
business, avoiding taxes, guiding outcomes without dictating tactics.
“Certainly, he’s not an absentee landlord,” Huber said. “But Sam’s oversight
is also not pushing every button, pulling every lever.”

As good as Zell has been with vision and broad strategy, prior experience
shows some errors and shortcomings in the course of his career too.

For most of its existence, Equity Office Properties trailed the average
real estate investment trust, and its stock price never fully reflected the
value of the underlying real estate assets. The firm was roiled by
executive-suite tensions, which forced Zell at one point to step in as chief
executive–a more hands-on role than Zell typically prefers to take.

“A REIT that big–with 700 office buildings under one roof, the hypothesis
that there would be an advantage to that in the marketplace just didn’t turn
out,” said one Zell associate. “Managing that many properties just got too
hard.”

Still, the whopping $39 billion sale of EOP seems to stand as evidence that
even Zell’s mistakes have tended to turn out well for him. His other
high-profile calamity, the near-bankruptcy of a department store company
called Broadway Stores, was averted at the last minute. Even as vendors began
refusing to deliver goods to Broadway’s stores, Federated Department Stores in
1995 took the chain off Zell’s hands in an all-stock transaction.

Plenty of moving parts

At Tribune, Zell will face more moving parts, more buttons and levers, than
in perhaps any other investment he has made. The industry’s well-documented
revenue problems are one thing. But the economic pressure has created
management challenges that Zell may not easily fathom. The recent newsroom
rebellion in Los Angeles over cost-cutting demonstrated that operating a
company full of journalists is among the more daunting challenges in business.

Journalists are creative, often non-conformist and dedicated to the social
mission of their craft. They routinely challenge authority, and that can
include their own managers.

Above all else, Zell will have to teach Tribune how to innovate in the way
it did when Col. Robert McCormick broke new ground as head of the Chicago
Tribune. While other publishers tried to stop new emerging media forms, like
radio and television, McCormick embraced it by starting WGN-AM 720 and Channel
9.

Finding answers to today’s old-media woes will require entirely new ways of
thinking. That’s what Zell did at Glenview-based Anixter Inc., and Tribune can
only hope for such a positive result.

Anixter CEO Bob Grubbs explained that in the 1980s, the company was a
low-tech wire and cable distributor that had very little promise. Zell bought
it and over a period of years he and Grubbs transformed it based on two ideas:
First, every building in America is going to need more and more cable as
devices like computers, phones and TV become increasing digital. Second, if
Anixter could convince its customers to let it manage the purchase, delivery
and billing for those products, it could become an essential partner on those
projects. By investing in global expansion and an Internet based system to
manage these complex customer relationships, Anixter has become a worldwide
supply-chain manager, not a mere distributor.

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“He changed an old-line business into a new-line business,” Grubbs said.

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