Published: June 23, 2007
So I went to Chicago this week to see Sam Zell, the billionaire real estate mogul who not all that long ago sold one of his major holdings, Equity Office Properties Trust, to the Blackstone Group for $39 billion.
In all of human history, there has never been a larger private equity deal. But was I interested in interviewing him about this great triumph? Nah. As a cog in the wheel of the struggling newspaper industry, I wanted to hear what Mr. Zell had to say about his recent — how to describe it? “Takeover?” “Bear hug?” “Assumption of control?”— of the Tribune Company, owner of The Chicago Tribune, The Los Angeles Times, a handful of television stations and the Chicago Cubs, among other assets.
As Zell deals go, this hardly ranks among his biggest; he’s putting up a “mere” $250 million to gain control of a company with $5.5 billion in revenue last year. But what it lacks in economic heft, it more than makes up for in complexity. When the deal closes, probably at the end of the year, the Tribune Company will go from being a public company to a private S corporation, meaning it will pay no corporate taxes. Its sole owner will be an employee stock ownership plan, which is essentially a fund, owned by employees, which owns the company’s stock. ESOPs also pay no taxes, meaning that both the company and its owner will no longer be taxpayers. Mr. Zell, who will become chairman of the company, will immediately recoup his $250 million and then reinvest an additional $315 million (don’t ask). He’ll have an option to buy 40 percent of the company for another $500 million to $600 million. (If he does so, he will become the one taxpayer in the deal.)
The Tribune Company will be laden with debt, $13 billion in all, which it plans to pay down in part with the extra cash flow that is generated from not having to pay taxes. If the company does well — or even just decently — everyone will make out, starting with the employees whose stock in the ESOP will be worth a lot more than $28 a share, the discounted price the ESOP paid for it.
But if it continues to sink — and just this week, the Tribune Company announced that May revenue fell 11.1 percent — then the company could wind up in default, which would hurt everyone, starting, again, with the employees, who would lose the value of their ESOP shares.
This state of affairs means that all hands at the Tribune Company have a powerful incentive to figure out some way to stop the bleeding, and start growing again. And all of us who work at the country’s other newspaper companies, which are also bleeding to greater or lesser degrees, have a rooting interest in Tribune’s experiment. Which is not to say we all ought to be racing to set up ESOPs. As is so often the case, one man’s meat is another man’s poison.
A VISIT to Mr. Zell’s Chicago office is always a bit of a trip. A short gruff man with a trim white beard, Mr. Zell, 65, tends toward gold chains, brightly colored shirts and jeans. He is joyously blunt-spoken and quite funny. And his office is festooned with extravagant music boxes he designs each year and sends out at Christmastime. Last year’s version, for instance, features a Frank Sinatra soundalike singing lyrics, written by Mr. Zell, that lampoon Sarbanes-Oxley, while two sculptured hands moved forward, as if to throttle American capitalism. (You can see and hear most of the collection at www.yegsz.com; it’s worth a visit for the sheer entertainment value.)
But back to the Tribune Company. The newspaper industry, as has been documented ad nauseum, is hurting because the Internet has wreaked havoc on its business model. The once-lucrative classified ad business has been largely destroyed, while circulation has fallen sharply as people have either stopped reading the paper, or taken to reading it online free. Advertising on the Internet, meanwhile, generates only a fraction of the revenue that ads in a newspaper bring in. The trick, which no one has yet solved, is to figure out how to grow as readers and ads continue to gravitate to the Internet.
As it turns out, Mr. Zell doesn’t have a silver bullet either. He seemed to take the view, for instance, that all it would take for the Tribune Company to start generating more ad revenue was a smarter advertising sales approach. And while he said he had ideas he wasn’t ready to unveil until the transaction closed, he didn’t seem to believe, as so many do (myself included), that the news business is going to have to find a different model if it hopes to thrive again. “It is a 160-year-old business that has a lot of history and an opportunity to do a much better job,” he said, speaking of the Tribune Company.
Mr. Zell also made it plain that he did the deal not because he harbored some deep feelings about the role of newspapers in a democracy, but because he was getting a good asset on the cheap. “I looked at this as a business transaction,” he told me. “That’s just who I am. My entry point is $34 a share”— and that low price is why he jumped in. (The ESOP trustee negotiated the lower $28 a share for the employees.) He was just doing what he’s done his entire career: buying an out-of-favor asset.
What most seemed to excite him was the ESOP itself. And why not? As the Lehman Brothers tax expert Robert Willens said, “He is using it in a way that no one has ever done before.” Mostly, ESOPs are set up when family owners want to cash out of privately held companies and turn them over to their employees. Mr. Zell, by contrast, is using it to buy out the shareholders of a large public corporation —and turn it into a tax-free private company.
“If I do it right,” Mr. Zell said, “the Tribune will offer a new kind of example. If I can get people to focus on the fact that they own it, we can make progress towards creating value.” He continued: “Being a private company will be beneficial.” Righting the ship, he thought, would be easier if the Tribune Company no longer had to worry about the pressures of Wall Street.
In that case, I asked him, should Dow Jones and The New York Times Company —two companies where revenue and the stock price have declined in recent years —follow him into ESOP-ville? More broadly, if going private made sense for the Tribune Company, did it therefore make sense for other media companies? This is an idea that gets talked about a lot these days among journalists, who fear that the nonstop cost-cutting demanded by Wall Street will damage even the best newspapers — and who see private ownership as a panacea.
Mr. Zell quickly dismissed Dow Jones from the discussion; its “point of entry” was too high, thanks to Rupert Murdoch’s $60-a-share offer. But for the Times Company, and many other media companies with depressed stock prices, it might well make sense, he said.
But I’m not so sure. The notion of taking a struggling company private is an appealing one on the surface. Brian Tierney, the Philadelphia advertising executive who led a consortium of local investors who bought The Philadelphia Inquirer and The Daily News from Knight Ridder last year, told me that running them as a private enterprise has made a world of difference. “We are spending $14 million to boost marketing and circulation,” he said. “Knight Ridder spent $300,000. If we were publicly traded, we couldn’t do this.” Of course, going private didn’t prevent Mr. Tierney from calling for big layoffs when the papers turned in some dismal numbers shortly after he took them over.
The truth is, the problem is the same for all newspaper companies, whether private or public. They all have to continue groping toward an uncertain future until they find a way to start growing again. If they don’t, they’re doomed. “Badly run newspapers will fail,” said Merrill Brown, a media industry consultant. The Tribune Company may no longer have to face pressure from Wall Street, but it is going to have an enormous amount of debt to service, and that is going to create short-term pressure at least as onerous as anything Wall Street could devise.
However much Mr. Zell admires his ESOP, it’s worth remembering that the Tribune Company acted out of desperation. It had put itself up for sale and had come up empty. Other newspapers companies, despite their problems, aren’t in the same dire place. In the case of The New York Times Company — which has been facing off with an activist investor from Morgan Stanley, who has gained considerable support for his view that the company needs to do much more to bolster its share price — the company has a different kind of shield. Its supervoting Class B shares are held by a family, the Sulzbergers, that is completely united in its desire to continue to own the company, and to see it through to better times.
As infuriating as it may be to the company’s public shareholders, that unity offers just as much insulation as Mr. Zell’s ESOP — without the burden of all that ESOP debt. At Dow Jones, the company ran out of time when the controlling Bancroft family became divided. Indeed, the pressure of the public marketplace might actually be a net plus for the Times Company, because it means that management is constantly being reminded that it doesn’t have time to waste in finding ways to start growing. Otherwise it will end up in the same place as Dow Jones. As it turns out, there are worse fates than having to deal with Wall Street analysts.
“Quality and profitability go hand in hand,” Katharine Graham used to say. These days, that notion is precisely what’s in question — and what is so scary to so many in the newspaper business. If Sam Zell can use an ESOP to prove her right, God bless him. But until then, I’m not jumping on the ESOP bandwagon.
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