Running Tribune—On Empty

The buyout by Chicago real estate mogul Sam Zell of a hugely indebted old media company raises more questions than it answers

So ends Tribune (TRB ), the publicly traded company. So begins Tribune, the extraordinarily leveraged privately held company.

How leveraged? The just-announced deal orchestrated by investor Sam Zell leaves the company with more than $13 billion in debt. To put that in its proper perspective, Tribune's cash flow in '06—earnings before interest, taxes, depreciation, and amortization, or EBITDA—was $1.3 billion. Thus its debt exceeds last year's EBITDA by about ten times. This is an angina-inducing multiple even for veteran media players accustomed to playing with debt, some of whom get nervous above six. And Tribune's cash flow comes in large part from big-city Old Media properties, which are not noted for their stability right now. (Tribune's revenues declined by more than 5% in February.) There will be tax benefits to the deal, thanks to Zell's use of an employee stock ownership plan. This also means that said employees take on more risk. Fortunately for them, the deal won't touch previously accrued Tribune pensions, but even so, doubters are not hard to find. "I can hardly wait to share in Tribune's future success through our ESOP," e-mails one sarcastic editor at a Tribune newspaper. (He may have already known that Tribune will stop contributing to employees' 401(k)s.) As for Zell, who isn't discussing the deal: He bought a massive media conglomerate for over $8 billion by paying $315 million down. In the mid-'90s, Tribune was one of the newspaper sector's darlings. In 2007, it's a company that dragged through a six-month sale process so patently lacking in any enthusiasm that its deadline had to be extended twice, before being sold to a guy who's nicknamed "Grave Dancer."

WE ARE ABOUT TO SEE how smart Sam Zell is and whether an outsider can better remake an industry suffering through serious challenges. (He's made an enormous fortune as a Chicago real estate investor, which makes him the latest iteration of the old saying that the local newspaper's buyer of last resort is a local developer.) However, Zell will run Tribune with so much debt it's hard to imagine he'll have room to invest even in the most necessary new ventures—like, say, a modernized Web site for the company's single largest asset, the Los Angeles Times, which in December was the subject of a lacerating internal review. (A "lack of financial flexibility could make the company lag its better-capitalized peers that might be able to make such investments," says Mike Simonton, a senior director at credit analyst Fitch Ratings; observers might consider how slowly said better-capitalized industry peers have made these investments.)

The Times has failed to perform to Tribune's profit expectations—unrealistic ones, staffers there would say—and it has been rent by a series of conflicts with corporate executives that resulted in the departures of two consecutive top editors and one publisher. This led to the oft-expressed wish among Times staffers—sometimes in print—for private ownership, and relief from Wall Street's merciless quarterly profit demands. But what Zell will need to do just to service the debt may end up making staffers nostalgic for public ownership. When asked where Zell may find cost-cutting opportunities, two executives immediately pointed to the Times and its 900-plus newsroom employees.

"We think this is a very good result," says John Rogers, chairman and chief executive of Ariel Capital Management, a major Tribune shareholder. "We still believe there is an upside in newspaper stocks." The market obviously disagrees with him on that last point. Meanwhile, the deal leaves Tribune with massive debt obligations for a premium that ends up being not quite $2 per share above where the stock closed before negotiations with Zell went into their endgame in late March. Should Rogers be right about the stock market, there are many current shareholders who won't make out well on a deal that takes Tribune private. Most notable among them: the Chandler family, the prickly, tax-averse faction whose vocal dissent last June started the landslide.

For Jon Fine's blog on media and advertising, go to

By Jon Fine

    Before it's here, it's on the Bloomberg Terminal.