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How Zell's offer for Tribune might work

Experts say an employee stock ownership plan could be key -- with some risk involved.

March 29, 2007|Thomas S. Mulligan | Times Staff Writer

As the clock ticks down on Tribune Co.'s self-imposed deadline of Saturday for auctioning off the big media company, much is unknown about the apparent favored bid from Chicago real estate magnate Sam Zell and how it would be structured.

Zell, 65, has said little publicly except that he would invest $300 million in cash and become the minority partner of a newly created employee stock ownership plan that would buy up the company's shares and take Tribune private. Zell declined an interview request Wednesday.

A Tribune spokesman said Wednesday that the board of directors was expected to make a decision by Saturday on the fate of the Chicago-based company, the parent of the Los Angeles Times, KTLA-TV Channel 5, the Chicago Tribune, the Chicago Cubs baseball team and many other newspapers and TV properties.

An executive within Tribune said the board was scheduled to meet Friday and was expected to announce a deal with Zell that day. Financial news site TheStreet.com reported Wednesday that Los Angeles billionaires Eli Broad and Ron Burkle, who complained last weekend that Tribune was giving their bid short shrift, had resumed talking with Tribune and could make a counter-bid before the deadline. Broad and Burkle did not return phone calls seeking comment.

"The situation is very fluid," said another person close to the negotiations.

Some hints about the structure of the Zell bid have surfaced in conversations with several people familiar with the auction, all of whom declined to be identified because the process is supposed to be confidential. Those hints, together with comments from finance and legal experts, suggest ways that a Zell buyout could work. Until Zell or Tribune supplies more details, however, any picture is speculative.

Zell values his bid at $33 a share, according to a person familiar with the bidding. With 240 million Tribune shares outstanding, that implies a price of nearly $8 billion, not counting the nearly $5 billion in debt on Tribune's books.

The debt could be assumed or replaced with new debt, but either way, Zell and the new employee stock plan would have to raise about $12.5 billion to pull off the buyout.

Lenders would demand at least $2 billion of equity and probably more, meaning that $10 billion is about the maximum amount that could be borrowed, according to a New York-based investment banker who declined to be identified because his firm has worked with some of the parties involved in the auction.

Where would the $2 billion or more of equity come from, if Zell plans to contribute only $300 million?

One possible source is the McCormick Tribune Foundation, which, with 13% of the stock, is the company's second-largest shareholder, behind the Chandler family. If the foundation reinvested its proceeds from the buyout into the private successor company, that would provide about $1 billion of additional equity.

However, such a move probably would attract criticism because the foundation has been under pressure to diversify its investment portfolio, about 75% of which consists of Tribune shares.

Reinvesting in the new Tribune would not change the 75% figure but would probably increase the foundation's risks because the private company would be more laden with debt. A spokesman for the foundation declined to comment Wednesday.

Zell has said he would keep Tribune's top executive corps in place, according to a person familiar with the negotiations. Typically in a going-private transaction, management is encouraged to invest cash of its own, which would account for another chunk of equity but probably only a couple of million dollars.

Another possible source: Tribune's defined-benefit pension funds, which held assets of $1.76 billion as of Dec. 31, according to a company regulatory filing. The plans -- including one covering employees of Times Mirror Co., The Times' corporate parent before its 2000 sale to Tribune -- have mostly been frozen, meaning that no new beneficiaries are being added or new contributions being made. With the phasing out of the pensions, Tribune employees' main source of retirement savings is 401(k) investment plans, to which the company contributes.

Robert Willens, a tax and accounting expert with Lehman Bros. in New York, said the company could decide to invest a portion of the pension assets in the new Tribune without seeking the beneficiaries' permission.

The advantage of using an employee stock ownership plan, or ESOP, in a buyout is primarily that it would allow the new Tribune to escape taxes on principal and interest payments on its loans. Typically, only interest payments are deductible.

In exchange for its role as the borrowing vehicle, the ESOP would receive a significant ownership stake in the company.

The stock would be pledged as collateral for the loans and would be released into the employees' accounts as the loan was paid down. Because the shares would no longer trade on a public exchange, an appraiser would be hired to make an annual valuation of the stock.

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