Zell looks back—and forward—on his debt-heavy takeover of media giant Tribune Co. Yes, the deal might be in trouble. But he has no regrets
Sam Zell has owned a lot of things since he began investing in real estate 40 years ago: radio stations, cruise ships, pay phones, mobile-home parks, barges, wire and cable factories, and power plants that generate electricity from garbage. Last December, he added nine daily newspapers, 25 TV stations, about 50 Web sites, and the Chicago Cubs to his portfolio when he took over media conglomerate Tribune Co. The deal hasn't gone nearly as well (BusinessWeek, 7/30/08) as the billionaire had hoped. With newspaper revenue plunging two to three times faster than he had forecast, and big debt payments looming, Zell has laid off more than 1,100 employees, or 6% of personnel, and sold a string of assets including one of Tribune's biggest papers, New York's Newsday, which fetched $650 million. Now, he's analyzing bids for the Cubs and Wrigley Field that may hit $1 billion.
Zell, 66, recently reviewed what he's called "the deal from hell" with BusinessWeek Senior Correspondent Michael Arndt and Senior Writer Emily Thornton. They met in Zell's sixth-floor office in downtown Chicago, which looks onto his own private garden, where he often ducks out for a smoke. He wore his trademark work duds: a collarless white shirt open at the neck, crisply ironed blue jeans, and slip-on leather shoes. Here are excerpts from their conversation:
Will this be your best or worst deal?
If I knew the answer to that question, I wouldn't have to waste time talking to you. I think the way this deal is put together, we could get very lucky. On the other hand, if current trends in advertising are permanent, we have a really serious problem.
You've said you met with every publisher in the country before you did this deal, like Brian Tierney and Mortimer Zuckerman. Is there anything they forgot to tell you?
Yeah, that advertising revenue was going down 20% in the first quarter of 2008. Not one of them told me that.
And that it would continue to go down in the second quarter?
They didn't tell me that either.
How have you had to change your plan because of this falloff?
We started out saying, "big Christmas and a slow January." Then we started seeing trends we didn't expect. We started pulling together a crisis strategy to go forward to implement our programs, but much more quickly than we had anticipated.
The speed at which we did the Newsday deal was a response to that. But the acceleration of all of our 2010 plans is about as big a response as you can possibly imagine. What we're doing right now in reformulating all of the newspapers—we would have preferred to have done that slower and over a much longer period of time. The original timeframe was 2010. Basically, we've taken those plans and brought them forward to 2008.
You paid 9 to 10 times annual cash flow for the company. Looking back, was that overvaluing Tribune?
Oh, looking back, for sure it was overvaluing it.
Knowing what you know now, would you still have done this deal?
The way I answer everyone with questions like that is that my head doesn't do a 180. I only look forward. I have no remorse about anything.
You have said that you see Tribune becoming more of a broadcasting company with fewer newspapers.
I think Tribune, in terms of revenue, is about two-thirds newspapers and one-third broadcasting. Our goal would probably be to make it much more 50/50. You can make it 50/50 by selling newspapers. You can also make it 50/50 by making broadcasting a lot more valuable and a much bigger earner.
Which method do you foresee taking?
Longer term, it's very hard to see growth in the newspaper business.
What do you think of Tribune's newspapers?
I think they are generally decent papers. Some of them are much better than others. And I believe they all can be better.
Are there any pieces of Tribune that you feel you need to keep or Tribune loses its essence?
I've never sat down and said I won't do this, I will do this. It's just not the way we think about it. There are a lot of pieces that are holy grails. I can't imagine us ever selling the Chicago Tribune.
Is anyone interested in the Los Angeles Times?
As far as I know, there have always been people interested in the L.A. Times. Even now. I could sell all of the newspapers if I wanted to. If you remember, all the savants suggested we would get $300 million for Newsday. They were wrong. I think they will be wrong again, and again, and again, and again, and again.
Some bankers and analysts estimate you have about $1 billion of real estate assets as well.
I haven't done that kind of analysis. Your number sounds light. It could be significantly more.
What's your No. 1 revenue-growing opportunity going forward?
I think there's little doubt that percentage-wise the Internet will be a bigger part of our future. We also believe WGN America, our superstation, represents a massively underused asset. There are only two superstations in the country: TBS and WGN. TBS has operating cash flow that is five times what WGN has. It's unjustifiable. That represents an enormous amount of future growth for this company.
How are you viewing the criticisms of you on the Internet?
No. 1, I don't go on the Internet. So that makes it easy. I don't go to YouTube. I don't go to these blogs. No. 2, I knew going in that this was a monstrous job. I knew that I needed to act as both the grenade thrower and the bomb deflector if we were going to get from here to there. I also had to decide that I would take the flak that came with it. I'm still sitting here.
When you closed this deal, you described it as the deal from hell. Is it still the deal from hell?
Of course, it's the deal from hell. And it will continue to be the deal from hell until we turn it around.
Back in high school, you sold Playboy magazines to classmates, is that right?
You could call that my first media experience. It was much more profitable than this one, and a much higher and faster return on investment.