Tribune Declares Bankruptcy, Other Newspaper Companies Are Selling Or Pawning The Family Silver – Will It End?

Philip M. Stone December 9, 2008

It was the shock that everyone thought would somehow be avoided – surely billionaire Sam Zell of all people would be able to lift Tribune above the bankruptcy abyss. Apparently not, and its Chapter 11 for the owner of eight major US newspapers and 23 TV stations. So the buzz word now is “domino” – how many more newspaper companies will take the fall now that Tribune has led the way? If Tribune had to do it because debt covenants couldn’t be adhered, then can the likes of McClatchy, let alone even the New York Times Company, be far behind?

And talking of McClatchy, word came out over the weekend that its largest newspaper, the Miami Herald, is on the market. Probably Gary Pruitt and company now see The Herald as one of their big mistakes – they should have dumped Miami when they dumped 12 other Knight Ridder newspapers after buying the group two years back. But to be fair, who could have seen  what would happen to newspaper revenues in those two intervening years.

With so many major metropolitan newspapers now on the market (think San Diego, think Denver, think Austin, think … well, there’s so many the list just goes on), and with newspaper company share prices priced as if to say it is just a matter of when they go bankrupt, then who is going to buy, and if someone does offer, at what price -- $1 plus debt?

It’s said that McClatchy has been quietly letting it be known for some time it could be persuaded to part with Miami but it appears there have been no takers. No doubt the company would like to do what it did in Minneapolis a couple of years back – sell at what then looked like a fire sale price, but when tax advantages were added the value of the deal increased by some $200 million and no doubt McClatchy would love to have something like that for its 2008 tax year, let alone get some loot to pay down debt.

And talking of Minneapolis where debt payments have already been missed the last word from there, although not confirmed, is that if management can come up with another $20 million in annual savings over the $10 million already achieved from the non-union side then the banks holding the debt might be willing to swap around half of that  for equity ownership (is that really the better of two evils?), buying out  Avista Capital Partners who would be real happy to get out of the deal with at least its shirt on.

What has changed in the buying of newspapers these days is that all of those local syndicates that wanted to be newspaper proprietors in their own home town seemed to have slinked away in to the darkness with very few exceptions such as a possible deal for the Blethen newspapers in Maine if financing can be finalized. The locals no doubt took note of what happened in Minneapolis and Philadelphia where newspapers were bought on the basis that cash flow would take care of debt and provide for running costs, but no one can have foreseen what has happened in those two years. That’s not a trap to fall into now.

Even that great business pro, Jack Welch, former head of GE, must be thanking God every night that the Sulzbergers were so proud they didn’t sell to him and his syndicate a couple of years back the Boston Globe and other New England newspapers for what was then thought to be a low price of around $600 million.  Value today is likely well less than half.

And talking of the Sulzbergers now comes word the New York Times Company  either needs to take out a mortgage on its brand new headquarters of which it owns 58% or do a sell and lease back so it can raise some $225 million it needs because the credit markets are still so tight it can’t raise enough cash for next year  via regular means with shrinking profits not really enticing lenders. If Jack Welch made a much reduced offer for the New England properties now, would the Sulzbergers still be so proud?

There are many analysts out there saying the financial problems facing the Times right now are more serious than most people realize. It has a $400 million debt payment due in five months and that $225 million it is seeking to raise doesn’t cover it and it’s really not clear how management believes it is going to have the necessary cash on hand for the next 12 months to run the business. Maybe there is a good reason the share price last week sank below $5 before rising as did the general market.

The dust is still clearing on the Tribune bankruptcy filing but some analysts seem to think that it may just be a ploy to  make debt holders more compliant in revising their loan arrangements. That line of thinking says  the financial community doesn’t really want more billion dollar debt losses on its books. Tribune owes around $3.5 billion to the likes of JP Morgan Chase, Deutsche Bank, Citigroup, Bank of America and Goldman Sachs and the company owes some $8 billion more to a slew of private equity firms. On the other hand, investors have taken the bankruptcy seriously with Tribune debt selling between three to six cents on the dollar. Tribune had reported a $124 million loss for Q3 with advertising at newspaper properties down around 20% from a year earlier.

Sam Zell says, of course, that no one could have predicted the newspaper revenue fall in the past year. But in one area he may well have outsmarted himself. It was always the plan to sell the Chicago Cubs baseball team and its Wrigley Field, but Zell spent a great deal of valuable time this year  trying to do a deal separately with the state to take on Wrigley Field and a separate deal to sell the Cubs but it, and all the tax advantages of such a deal – Zell is the absolute master in taking advantage of tax law --  all fell apart and right now nothing is sold. But Tribune’s debt payments and various debt covenants haven’t changed with $1 billion in interest payments for this year and a $512 million debt payment due next June.  

In the meantime the credit crunch has hit and figures like the $1 billion that had been floating around for the team’s sale are now being considerably lowered and it’s now thought Zell may sell just a part ownership in the Cubs. Interestingly, the baseball team was not part of the bankruptcy filing (it is not mandatory that subsidiaries be part of a parent company’s bankruptcy filing), so a possible sale should not be hindered with bankruptcy dealings.

ftm warned when Zell pushed forward his ESOP takeover plan (Employee Stock Ownership Plan) that if things went wrong it would be the employees who would get nailed, not Sam Zell. “There are great tax advantages to an ESOP,” we wrote at the time, “but the prime disadvantage is that if things go bad, if the debt cannot be repaid, then it is the employees and their pensions who are left holding the bag.

“That’s why the Teamsters Union, which represents some 2000 Tribune employees, warned investors, employees and creditors at the shareholder meeting (to approve the $34 a share  buyout)  about the financial risks but all the investors cared about was getting their money. 

“An ESOP offers several tax advantages but puts employee pensions at risk. Instead of Tribune contributing to the 401k type of pension plan at most US companies that allows employees a free choice of how that money is invested for their retirement, an ESOP requires the employer to put that retirement money into it, and the ESOP in turn invests in the shares of the now privately held company, with stock dispersed at retirement age to the employees.

“The ESOP contributions are treated as paying off principal, so both principal and interest can be deducted from Tribune’s taxes, rather than just interest. Very clever, but if Tribune drowns under all of that debt then where are the employee pensions? Answer: They’re not! If Tribune does really well under private ownership then the value of those shares will increase and it will truly be one big happy family. No wonder the Teamsters and other unions are not wild about this buyout!”

Zell wrote to employees after Monday’s bankruptcy filing, “The (employee stock-ownership plan) is part of the ownership structure, so its value and role long-term will be determined in the restructuring. We believe the structure is a valuable asset to the company and that there are strong reasons to preserve it.” Not exactly a 100% endorsement that all will be safe and well with current ESOP valuations!

At the end of the day, however this turns out, Sam Zell will remain a billionaire. The financial well-being of Tribune employees, on the other hand,  may well be a whole other story.