Sam Zell Buys Chicago Tribune

Earlier this month, it was announced that Chicago billionaire Sam Zell is buying the Tribune Co. (parent of the Chicago Tribune, Chicago Cubs, WGN radio and TV, Los Angeles Times, Newsday, etc.) for $8.4 billion.

Since I'm interested in business and success, I found the story about both Zell and the deal itself to be very interesting and inspiring.

Here, I will discuss the basics of the deal. In two other posts, I will discuss Zell himself (the "anti-Trump"), and the deal's S. Corp. ESOP structure.

In 2000, the Tribune bought the Times-Mirror company for $8.3 billion. This gave them Newsday and the LA Times. However, it also got them involved with the Chandler family (which founded the LA Times) and stuck them with an unexpected $1 billion tax liability.

After 6 years of the stock going nowhere, the Chandlers, who became the Tribune's largest shareholders, demanded that the company be sold or restructured.

This put the Tribune "in play". It ended up coming down to the "battle of the billionaires", between Sam Zell on one side, and L.A. billionaires Ron Burkle and Eli Broad on the other side.

Zell was seen as the "hometown guy", while Burkle and Broad were the "L.A. guys", who thought that the Tribune treated the L.A. Times as a step child.

The Burkle-Broad bid was for $34/share, while Zell's was $33. The Tribune board ended up favoring the Zell bid as more financially sound, but they made him come up to $34/share before accepting his bid.

The Zell deal will leave the Tribune loaded with more than $13 billion in debt. This will leave it with the most encumbered balance sheet in the newspaper business - at a time when the conventional wisdom is that newspapers are in trouble due to the internet.

However, Zell (the self-nicknamed "Grave Dancer" who specializes in buying stuff nobody else wants) thinks that Tribune has a lot of untapped potential. For example, Tribune's CareerBuilder.com is the #1 job site in the United States, but Monster.com is #1 world-wide. Zell thinks CareerBuilder could be better marketed abroad.

The plan is for the Tribune to sell the Cubs to help pay down the debt, They want to sell the Cubs BEFORE the deal completes, so that Zell does not have to go through the Major League Baseball ownership approval process. However, Zell (the real estate expert) is keeping his options open with Wrigley Field. He may sell Wrigley separately if he thinks that will maximize the return.

The deal will be structured around an S-corp. ESOP to avoid taxes, thus increasing cash flow. For example, in 2006, if the ESOP had been in place, Tribune would have saved $348 million in taxes.

Zell and Tribune management figure that, as long as the Tribune's cash flow at least stays flat, they should be able to pay off the debt in 10 years, at which time the returns should be huge.

There is still some uncertainty with the deal. The deal calls for a relatively small break-up fee of $25 million, which means that other deals, including revised offers from Broad and Burkle, could be considered. Also, there is speculation that the FCC may consider the deal to be a change of ownership, and revoke the Tribune's grandfathered exemption from media cross-ownership rules (i.e. TV, radio, and newspapers in Chicago).

The main thing to remember is Zell's shrewd deal. Now matter what happens, his personal risk in the deal will be capped at $300-500 million. For that investment, he will be chairman and 40% owner (the employees will own the rest) of a multi-billion dollar corporation.