Nearly a year ago, William Stinehart, a Tribune Co. director and the lawyer for its largest shareholder, stormed out of the company's boardroom and slammed the door, according to two people who were there.
The company's share price was sluggish, the newspaper industry's prospects were dim, and the Chandler family, his client, wanted action. But the company's management and its board rebuffed the family's recommendations. Mr. Stinehart began to agitate for change, writing a public letter demanding something more than the stock buyback that had been proposed.
What he got was one of the most wrenching auctions in the history of newspapers -- a seemingly endless process that featured tepid buyers, unhappy employees and angry investors. As the process dragged on, the landscape shifted constantly, and the entire industry lurched into decline as fears of Internet pressure on advertising and circulation mounted. In the end, the Chandlers had to settle for less than they had hoped to receive.
Yesterday, the Chicago Tribune, Los Angeles Times, several other newspapers and 23 television stations fell into the hands of an unlikely newspaper baron, iconoclastic real-estate magnate Sam Zell, whose bid had come at the eleventh hour. Mr. Zell's plan suggests that he has some degree of confidence in the beleaguered newspaper business. He has told people he sees promise in the company's Internet assets. But the deal leaves many unanswered questions about the future of Tribune.
"It's generally not wise to sell your house when the market is going to hell in a handbasket," says Barry L. Lucas, an analyst with Gabelli & Co., whose parent company, Gamco Investors Inc., owns shares in Tribune Co. "I certainly hope no one else is thinking of doing what Tribune has done. It's a mess."
Complex Deal
Early yesterday, following a weekend of negotiations, the company's board accepted a revised $34-dollar-a-share proposal from Mr. Zell to take the company private. The complex deal is structured around an employee stock-ownership plan, or ESOP. When it is completed, most of the company's shares will be held by Tribune employees. Although he has no background in journalism, Mr. Zell will become chairman of a media company that will be carrying a heavy debt load, which will force its new owners to face tough questions.
The company said yesterday morning that Mr. Zell will invest $315 million in the deal in a two-step process. In the first step, Tribune will stage a tender offer, at $34 a share, for a bit more than half of the company's shares. To fund the offer, the company will use $250 million of the $315 million pledged by Mr. Zell, plus additional borrowed money. It will return $4.2 billion to shareholders.
If the deal is approved by regulators, a second step will follow: the ESOP will buy the rest of the shares at $34 a share and Zell will put in $65 million, the rest of his pledge. The ESOP then will hold all of Tribune's remaining stock outstanding, and Mr. Zell will hold a subordinated note and a warrant entitling him to acquire 40% of the common stock for a price initially set at $500 million. The deal values the company at roughly $8.2 billion.
Mr. Zell will get a seat on the company's board and will be able to appoint one other member. If the deal is approved, he will become chairman. The board will have five independent directors, a majority. Dennis FitzSimons, the company's current chairman and chief executive, will remain on the board and continue as CEO. Although Mr. Zell will not control a majority of the stock, he is expected to exert considerable influence over decision-making.
The deal will spell the end to the Chandler family's involvement in Tribune, ending a period of open warfare between the family and the company. Yesterday, Mr. FitzSimons referred to the letter in which the Chandlers originally attacked the company's board, which was filed with the Securities and Exchange Commission, as "the most bogus filing of all time."
A spokesman for the Chandler family trust said: "We are pleased with the outcome" of the auction process.
Tribune kept open the possibility that a rival bidder might jump in with a higher bid. The company set a relatively low "breakup fee" of $25 million, which it would have to pay Mr. Zell if it abandoned yesterday's deal. Among those who could try to extend the auction are Los Angeles billionaires Ron Burkle and Eli Broad, who tried to outbid Mr. Zell late in the auction.
How Mr. Zell will be received remains to be seen. He has said he doesn't intend to break up the company, but Tribune said yesterday it will sell off the Chicago Cubs after the completion of the current baseball season. One person who has spoken to Mr. Zell about his plans says he is likely to seek further budget cuts, a move that will likely be unpopular with staff, particularly at the Los Angeles Times, where the editor and publisher both stepped down last year to protest budget cuts ordered by Tribune's headquarters. (See related articles on the Cubs and the ESOP.)
Billionaire entertainment executive David Geffen, who had earlier made an offer for the L.A. Times, said yesterday he was still interested in the paper. "I hope to meet with Sam Zell sometime in the future," he said.
Mr. FitzSimons told Tribune employees yesterday in a town hall meeting at the company's headquarters that Mr. Zell "has identified...assets that he views as undervalued, and that's his track record as a contrarian investor. He sees things, he's been successful in identifying assets that others think are out of favor..."
The newspaper industry certainly fits into that category. Last summer, a dramatic decline in newspaper advertising revenue forced many newspaper executives to re-evaluate their businesses. A drop-off in print ad revenue has plagued Tribune's biggest markets -- Chicago, Los Angeles and New York -- undermining the rationale for its 2000 merger with Times Mirror Co. That merger was designed to bring newspapers and TV stations together in large markets to amplify ad revenue. The strategy has proved disastrous for Tribune, and the merger has turned into a huge disappointment for the company and its investors.
A Quiet Offer
Mr. Zell, 65 years old, made a quiet offer for Tribune last October, when the company was having trouble scaring up bids. Private-equity firms had been looking and walking away. Potential buyers, including Los Angeles billionaires intrigued by the L.A. Times, only expressed interest in parts of the company, or were making lowball offers. The company was cobbling together a "self-help" deal to recapitalize the company and to spin off its TV stations, which would have paid a dividend to the Chandlers and other shareholders.
Mr. Zell got sidetracked on another deal. In November, he announced he would sell Equity Office Properties Trust, a public real-estate investment trust he headed. A bidding war broke out, and Blackstone Group eventually agreed to pay about $23 billion, excluding debt. By some measures, it was the largest leveraged buyout in U.S. history. Mr. Zell, chairman of Equity Office Properties and its largest individual shareholder, walked away with $900 million.
On Feb. 7, the day shareholders approved that deal, he discussed his interest in the Tribune. He provided no details, saying only that he felt the business was undervalued and had prospects for recovery. Civic pride may have played a part. Mr. Zell is a longtime Chicagoan whose office features a bronze cast of Michael Jordan's hands. He is a part owner of the Chicago White Sox, one reason why Tribune is selling the crosstown Cubs. (Mr. Zell wouldn't be permitted to have stakes in both).
In some ways, Mr. Zell is cut from different cloth than the buttoned-down culture of Tribune, which is closely aligned with the Chicago establishment. He prefers blue jeans to suits and is a longtime motorcycle rider. The son of a Jewish grain trader who escaped Poland as the Nazis were preparing to invade, Mr. Zell broke into the real-estate business investing in apartments with his fraternity brother from the University of Michigan. He has called himself the Grave Dancer, in reference to his affinity for buying distressed properties on the cheap. Over the years, he has also invested in a railroad-car company, a cruise line, a bicycle manufacturer and a fertilizer company, among others.
Many of his deals have been successful, but he has had his share of missteps. He was unable to turn around the Schwinn Bicycle Co. in the mid-1990s, and in 2001, American Classic Voyages Co. sought Chapter 11 bankruptcy protection in the wake of a deep dip in tourism after the Sept. 11 terrorist attacks.
Equity Office Properties, the enormous real-estate company he assembled and ran, suffered from some operational problems. Although it dwarfed other publicly traded office companies in scale, it often lagged behind them in performance, with one analyst calling it a "perennial disappointment."
Deteriorating Conditions
After the Equity Office sale was complete, Mr. Zell turned back to Tribune. Conditions in the newspaper industry were deteriorating fast, and the auction wasn't going well. The company's revenue numbers came in lower than anticipated, forcing management to downgrade its internal estimates for the full year.
Messrs. Broad and Burkle already had submitted a bid valued at $34 a share. After the company's internal revenue estimates were lowered, an adviser to the two investors informed a representative of the Tribune's board that they were dropping the value of their proposal to $27 a share. If the company was interested in that new offer, the adviser said, the Broad-Burkle team would put it in writing. That never happened, this person said.
Mr. Zell came in with his own offer.
At that time, the Tribune's board was working on a restructuring it could do on its own: It would borrow money and pay shareholders a big dividend. Then a company-related charity, the McCormick Tribune Foundation, which owns roughly 14% of Tribune, would buy out roughly half of the Chandler family's stake, and the three Chandler board members -- Mr. Stinehart, Jeffrey Chandler and Roger Goodan -- would step down, according to a person familiar with the matter. "The idea was to have peace in the valley," says one person familiar with the negotiations.
But the economics of that idea were problematic. In early March, the company began re-evaluating that plan. The declining performance of some of Tribune's properties made the special committee overseeing the auction uncomfortable with the proposed debt load, according to people familiar with the matter. The plan's proposed dividend had been shaved from more than $20 a share to roughly $18, these people say.
The company's management and the special committee's advisers were uncomfortable with the level of debt in Mr. Zell's proposal as well. By March 9, negotiations with Mr. Zell were at a standstill, according to one person familiar with the talks.
Mr. Zell met Mr. FitzSimons for breakfast on March 13 to discuss his proposal, according to people familiar with the matter. Days earlier, Mr. FitzSimons had met with publishers from some of Tribune's newspapers, who expressed concerns about the trajectory of the business.
After the breakfast, Mr. FitzSimons and the special committee's advisers continued pushing hard for a self-help deal. But later that week, on March 15, William Osborne, Tribune's lead independent director, called Mr. Zell to tell him that he wanted to get a deal with him back on track, according to a person familiar with the call.
Mr. Zell called him back the following day and said: "We aren't going to do anything until you tell us it is worth our time," according to a person familiar with his thinking. Mr. Osborne assured him the company was seriously considering his offer.
The two sides continued talking. The team of advisers included Merrill Lynch & Co. and Citigroup Inc. for Tribune; Morgan Stanley for the special committee; Duff & Phelps for the ESOP trustee, and J.P. Morgan Chase & Co. for Mr. Zell.
By March 21, Tribune presented the outlines of Mr. Zell's proposal to ratings agencies, which eventually said they would grant a double-B-minus rating to the company. That gave the company the push it needed to move forward with Mr. Zell, who had by this point raised the value of his offer to above $33 a share.
At the last minute, Messrs. Burkle and Broad resurfaced, complaining that they hadn't been given adequate information to make a sufficient bid. They said they would be happy to make an offer for Tribune at $34 a share, but needed more information.
A weekend of fevered negotiations followed. Mr. Zell, working from his weekend home in Malibu, agreed to raise the equity in his offer to $315 million, from $225 million, which allowed him to match the Broad-Burkle offer.
The full board of directors, including three representatives from the Chandler family and Mr. FitzSimons, convened via conference call on Sunday night, at 10:30 Chicago time, to discuss the deal. The board approved it shortly before 11 p.m.
