In many Tribune autopsies yesterday, there was some suggestion that Sam Zell was feeling the company's pain: He put $315 million of his own money into the buyout, after all ($315 million of $13 billion of debt), and surely he had just lost it. Well, don't go crying for Sam just yet.
Sam's $315 million didn't go to buy Tribune stock, which will likely end up nearly worthless. Sam's $315 million went for subordinated debt with a warrant to buy 40% of the company if and when he chose to do so. For obvious reasons, Sam hasn't chosen to do so. This means that Sam is standing far ahead of common shareholders in the line as the company gets chopped up.
And who are those common shareholders?
Tribune employees, of course.
And how did Tribune employees end up owning the stock?
Because Sam Zell financed the buyout deal partially by borrowing against the employees pension plan and using this money to buy them stock. Tribune employees will now get demolished, while Sam and the company's other creditors divide up the assets. Sam probably won't get out whole, but he could end up not losing much, either. Especially since the Tribune is still generating cash (the bankruptcy was triggered by the company's earnings falling below a specified level, not by a default).
The NYT's Andrew Ross Sorkin explains:
Mr. Zell financed much of his deal’s $13 billion of debt by borrowing against part of the future of his employees’ pension plan and taking a huge tax advantage. Tribune employees ended up with equity, and now they will probably be left with very little. (The good news: any pension money put aside before the deal remains for the employees.)
As Mr. Newman, an analyst at CreditSights, explained at the time: “If there is a problem with the company, most of the risk is on the employees, as Zell will not own Tribune shares.” He continued: “The cash will come from the sweat equity of the employees of Tribune.”
And so it is...
Mr. Zell isn’t the only one responsible for this debacle. With one of the grand old names of American journalism now confronting an uncertain future, it is worth remembering all the people who mismanaged the company before hand and helped orchestrate this ill-fated deal — and made a lot of money in the process. They include members of the Tribune board, the company’s management and the bankers who walked away with millions of dollars for financing and advising on a transaction that many of them knew, or should have known, could end in ruin.
It was Tribune’s board that sold the company to Mr. Zell — and allowed him to use the employee’s pension plan to do so. Despite early resistance, Dennis J. FitzSimons, then the company’s chief executive, backed the plan. He was paid about $17.7 million in severance and other payments. The sale also bought all the shares he owned — $23.8 million worth. The day he left, he said in a note to employees that “completing this ‘going private’ transaction is a great outcome for our shareholders, employees and customers.”
Well, at least for some of them.
Tribune’s board was advised by a group of bankers from Citigroup and Merrill Lynch, which walked off with $35.8 million and $37 million, respectively. But those banks played both sides of the deal: they also lent Mr. Zell the money to buy the company. For that, they shared an additional $47 million pot of fees with several other banks, according to Thomson Reuters. And then there was Morgan Stanley, which wrote a “fairness opinion” blessing the deal, for which it was paid a $7.5 million fee (plus an additional $2.5 million advisory fee).
On top of that, a firm called the Valuation Research Corporation wrote a “solvency opinion” suggesting that Tribune could meet its debt covenants. Thomson Reuters, which tracks fees, estimates V.R.C. was paid $1 million for that opinion. V.R.C. was so enamored with its role that it put out a press release.
See Also: Tribune Toast
