(For all of the attention paid to Obama's defense of the rights of the
workers sitting in, the bigger issue is how workers as a whole will fare
under circumstances described below in which the corporation is
following the letter of the law. Citigroup, Robert Rubin's firm, advised
Zell how to screw his workers. Now that he has Obama's ear, Rubin will
have a much wider playing field to wreak his damage.)
NY Times, December 9, 2008
Dealbook
Workers Pay for Debacle at Tribune
By ANDREW ROSS SORKIN
Sam Zell acknowledged from the start that his deal for the Tribune
Company was flawed.
“I’m here to tell you that the transaction from hell is done,” Mr. Zell
said last December when he sealed his $8.2 billion takeover of the
publisher of The Chicago Tribune and The Los Angeles Times.
But just how hellish this deal was, particularly for Tribune employees,
became painfully clear on Monday when the 161-year-old company filed for
bankruptcy.
There is a lot of blame to go around, and much of it will be directed at
Mr. Zell, the real estate baron whose knack for buying when everyone
else is selling earned him a fit sobriquet for the news business these
days: The Grave Dancer.
Advertising is in a free fall, and every newspaper is suffering. But Mr.
Zell literally mortgaged the future of Tribune’s employees to pursue
what one analyst, Jack Newman, at the time called “a childhood fantasy.”
Mr. Zell financed much of his deal’s $13 billion of debt by borrowing
against part of the future of his employees’ pension plan and taking a
huge tax advantage. Tribune employees ended up with equity, and now they
will probably be left with very little. (The good news: any pension
money put aside before the deal remains for the employees.)
As Mr. Newman, an analyst at CreditSights, explained at the time: “If
there is a problem with the company, most of the risk is on the
employees, as Zell will not own Tribune shares.” He continued: “The cash
will come from the sweat equity of the employees of Tribune.”
And so it is.
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.
Mr. Zell isn’t the only one responsible for this debacle. 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.
In some corners of the world, you could arguably applaud Tribune’s board
for selling the company when they did. The Chandler family, which owned
12 percent of Tribune through its previous sale of Times Mirror,
campaigned for a sale and eventually won, though the family accepted a
much lower price than they had hoped.
You could even call them prescient, having sold before the financial
crisis and economic downturn that has put so many companies in harm’s
way. And at $34 a share, Tribune shareholders did well. The share price
of the company’s closest rival, the McClatchy Company, has tumbled 84
percent since the Tribune deal closed.
But what about those employees? They had no seat at the table when the
company’s own board let Mr. Zell use part of its future pension plan in
exchange for $34 a share.
Mr. Newman, the analyst who predicted the trouble, said in an interview
on Monday, “The employees were put in a very bad situation.” He added
that while boards are typically only responsible to their shareholders,
this situation may be different. “There has to be a balance,” he said,
“to create sustainability for all the stakeholders.”
Dan Neil, a Pulitzer Prize-winning columnist for The Los Angeles Times,
led a lawsuit with other Tribune employees against Mr. Zell and Tribune
this fall. The suit contended “through both the structure of his
takeover and his subsequent conduct, Zell and his accessories have
diminished the value of the employee-owned company to benefit himself
and his fellow board members.”
If the employees win, they will become Tribune creditors — and stand in
line with all other creditors in bankruptcy court.
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