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Call It Aesop Or ESOP, It’s Still A Fable With A Moral Ending – Tribune Staffers Are Going to Be Paying Back Debt For The Rest Of Their Lives, But Chairman Dennis FitzSimons Gets To Take $21.3 Million To The Bank

Philip M. Stone April 5, 2007

If someone is now going to beat Chicago billionaire Sam Zell out of taking control of Tribune it will cost the company a mere $25 million, so anything is possible, but whatever the final deal it looks like Tribune staffers – those who will be left – will be paying back debt for the rest of their lives and praying their pension funds will remain okay. But chairman Dennis FitzSimons and President Scott Smith won’t have such worries – Fitzsimons will be able to cash in shares worth close to $24 million and Smith a bit more than $10 million.
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FitzSimons and Smith are going to be in fine shape because they, like most smart American senior managers who see that their public company might get sold out from under them, made sure beforehand they would be well taken care in such an eventuality. So back in October the Tribune board saw to it that their long-term bonus plans and supplemental retirement plans for senior managers would be paid in lump-sum payments should there be a change in control or ownership. 

In addition, top Tribune officials will reap millions more if they stay at least 13 months after the deal is completed.  One of the October provisions provides executives a cash payment of two to three times their highest yearly salary in the past three years, plus 200 percent of their bonus in the year the company changes control. For FitzSimons that means if he stuck around another 13 months he would get at least another $2.95 million, triple his 2006 salary of $985,000.

But what of the staffers who, by the time the smoke will have cleared, will be the owners of about 60% of the company via a employee stock ownership plan (ESOP), which means their responsibility for some $12-$13 billion in debt? And what about  Sam Zell who will hold about 40% of the company and be named chairman for his $315 million investment (and you wonder how billionaires become billionaires – by investing as little as they can for possibly very big rewards).

The first question to get asked, of course, is how a privately held company handles that kind of debt and still remains whole and not fire staffers, in fact actually invest in having more journalists to do a better editorial job. Answer: It can’t.

With ”just” $5 billion in debt before the deal, management was firing right and left – and fired an editor and a publisher (Dean Baquet and Jeffrey Johnson of the Los Angeles Times when they said no to more firings) so now with around another $8 billion of debt how is that going to get paid back? The company says that apart from selling its Chicago Cubs baseball team and its holdings in a radio sports network, nothing else goes, so if that is really true, and since current earnings alone probably won’t cover the increased debt then what else is left? Obvious answer: the people working for the company.

If Tribune staffers thought the cutbacks being asked by management were bad before, they ain’t seen nothing yet.

And what about the ESOP? How safe is that? Ask the pilots at United Airlines. They had an ESOP. They later had a bankruptcy. Most of their pensions went out the door. Staff got cut, union contracts flushed down the toilet; it’s a whole new United Airlines to what existed before.

The only upside to all this – apart from shareholders getting as much as they could out of Tribune but they’re still not real happy – is that as a private company Tribune will no longer be answerable to the whims of Wall Street that keeps asking for short-term measures to increase shareholder value.

But the absolute downside has to be that $12-$13 billion debt. Whatever positive cash flow the company might have will surely be used to pay down debt. And if that cash flow isn’t enough then management will do what is necessary to cut costs to ensure that it becomes enough.

And the pension risk is very great. The ESOP plan offers several tax advantages but involves employee pensions to do it. Instead of Tribune contributing to the 401k type of pension plan at most companies that allows employees a free choice of how that money is invested for their retirement, an ESOP requires the employer to put that retirement money into it, and the ESOP in turn invests in the shares of the now privately held company, with stock dispersed at retirement age to the employees.

The ESOP contributions are treated as paying off principal, so both principal and interest can be deducted from Tribune’s taxes, rather than just interest. Very clever, but if Tribune drowns under all of that debt then where are the employee pensions? Answer: They’re not! If Tribune does really well under private ownership then the value of those shares will increase and it will truly be one big happy family. How would you feel gambling with your retirement future in such a situation? And the employees don’t even have a promise of a seat on the board of directors.

A salesman often talks about the high peaks and deep valleys when it comes to sales. And so it is with the media. Remember back before the Internet bubble burst. Companies were paying ridiculous prices just to own a piece of the Internet – it was the highest of peaks. With traditional media today it’s the opposite, the lowest of valleys.

Tribune and other newspaper properties are worth more than their current market value but there is such a pessimistic view of newspapers on Wall Street today that who knows what it will take to get valuations up. One big Tribune shareholder, according to Chicago Business, thought a year ago Tribune would go in the mid $40s, rather than the $34 a share the Zell offer is worth. Another larger shareholder said the sale price was far less than what the fund expected to earn when it first made its investment, and yet another investor said one of his funds will have made a 15% profit on the deal, and the other will lose about the same percentage.

The New York Times Company announced a couple of weeks ago it was raising its June dividend by 31% -- how does it pay for that, more debt? – but still the company’s share price languishes just a couple of dollars above its 52-week low, and that’s in an up market. It really seems Wall Street no longer has faith in newspaper companies until their digital revenues become a respectable part of the overall income.

And the debt ratings companies don’t have anything positive to say about the deal either. Fitch Ratings and Standard & Poor's cut their ratings on Tribune’s debt even deeper into junk territory and Moodys said it was considering a similar move.

Fitch downgraded Tribune's to three steps below investment grade and warned it could go lower. Standard & Poor's also lowered it two notches and if the sale goes through it will lower it another two notches so it will end up five steps below investment grade.

But for the senior management none of those worries really matter. They’re taken care of. It’s the American way!

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They’ve Seen The Light – FitzSimons and Scott Opt Out Of Special Tribune Bonus Pool – April 30, 2007

Chief Executive Dennis FitzSimons and Tribune Publishing President Scott Smith have both opted out of the special bonus pool that had been set up for senior executives overseeing the sale of Tribune, now in the process of going private under the $8.2 billion Sam Zell deal.

But the original plan, that covered 32 executives, has been expanded to now cover 39, although amounts have now been reduced and with FitzSimons and Smith opting out the total payout is reduced from $6.5 million to $5.5 million.

Those payouts, an incentive for executives to stick around until the Zell deal is complete, come at a time when Tribune announced a first quarter loss, a 12% decline in cash flow, Tribune newspapers in Chicago, Los Angeles, and Baltimore have been asked for another 300 job reductions, 11people were laid off at corporate headquarters in Chicago and another 15 are to go.

Thus far only FitzSimons and Smith have had the good sense to say this is not the time for such financial lavishness and, besides, management also has a big stock incentive plan in the new company that really makes this type of buyout unnecessary.  John Reardon, Smith’s broadcast counterpart, for instance, is still on to collect a $200,000 bonus, although the original amount had been set at $350,000.

To coin a phrase by former British Prime Minister Ted Heath -- get rid of 300 plus employees but give $5 million plus bonuses to senior executives -- is that an acceptable face of capitalism?

Sam Zell To Join Tribune Board May 9 - April 26, 2007

Sam Zell has already sunk an initial $250 million into Tribune and is set to join its board May 9. By the  end of the year, when he has completed his personal investment said to be between $300 million to $500 million, he will be named board chairman.

Zell has bought a $200 million note from Tribune which is exchangeable into Tribune shares at $34 each.  He has also spent $50 million buying 1.47 million shares of newly issued  Tribune stock at $34 each. Tribune shares closed  Wednesday at $32.78.

Meanwhile the ChicagoTribune, Los Angeles Times and The Baltimore Sun have all announced they are looking to reduce staffing by about 5%. It’s probably just the beginning  if Tribune suffers another disastrous quarter like Q1 when it lagged behind most of its peers and not only posted a loss but saw its cash flow decline 12%.

The company says it has launched its $4.3 billion stock buyback plan as part of the Zell $8.2 billion takeover bid.

Tribune has offered to buy back 126 million shares -- more than 50% of its outstanding shares -- at $34 each.

Oops, A Little Problem In Tribune’s Selling Two Newspapers to Gannett - April 11, 2007

While Tribune’s board was still deciding to whom to sell the company, the board  also agreed to sell two New England newspapers – The Advocate  and the Greenwich Times of Stamford, Conn to Gannett for $73 million, but apparently without a clause in the sale contract that Gannett had to accept the union newsroom agreement in place covering 36 reporters and photographers. Gannett apparently has indicated it doesn’t wish to honor that agreement for the combined 39,000 circulation newspapers.

“Not right”, cried the the union to an arbitrator, and he agreed. He ordered a stop to the sale transfer until the sale includes the union contract,  according to court papers filed by the union.

Gannett has not said anything publicly. Tribune says it is trying to figure out what’s going on. “We’ll continue to work with the union to resolve the problem,” a Tribune spokesman said.