June 8: Zell to lose control of Tribune?: San Zell's adventure in the print newspaper business may be coming to an end, as the Tribune Co. and its senior creditors are reportedly in the early stages of working out a deal that would transfer control of the bankrupt Chicago media conglomerate to its senior lenders. - George White

Tribune said Dec. 12 it foresees completing the sale of the team, the Wrigley Field stadium and related assets in the first half of 2008 (which didn't happen). The news came nearly two weeks after Zell, a Chicago real estate magnate, won approval from the Federal Communications Commission for his buyout of the media conglomerate. The team went on the block in April when the buyout was announced, and proceeds will be used to pay down debt.

New York Times' DealBook pointed out in mid-September that things could get messy for the auction, citing a Chicago Tribune article, given that for the seller, the bottom line is reportedly price and for Major League Baseball, the best fit.

As far as bidders go, an earlier Tribune piece Aug. 2 said Madison Dearborn's Canning, an 11% owner of the Milwaukee Brewers, was busy putting together a group of several Chicago business elites for a bid. (The paper later singled him out as the front-runner.) Among the players, Tribune said at the time were McDonald's Corp. chairman Andrew McKenna, restaurateurs Larry Levy and Richard Melman, CDW Corp. founder Michael Krasny and Chicago PE firm GTCR Golder Rauner's David Donnini. Others reports have indicated as interested in the sluggers include: Cuban; real estate developer and former Illinois State Senator William Marovitz; Tom Begel, the founder of Chicago private equity firm TMB Industries; and Don Levin, the owner of minor league hockey team the Chicago Wolves.

THE AUCTION

A Cubs auction may never have transpired even if Zell hadn't won Tribune.

Zell won the bidding in April, which won shareholder approval in August, and in November, the FCC's OK. Days later, the company went to court to appeal the commission's rejection of its request for indefinite waivers of cross-ownership rules -- which prevent companies from owning both a broadcaster and newspaper in the same market. The waivers it was granted affect four markets and, the company argued, should have been permanent. The suit, however, is also a legal maneuver to do away with the cross-ownership ban altogether, The Deal's Ron Orol wrote.

Closing the buyout by year's end is critical for Tribune because establishing the deal's 2008 tax status is a crucial element of the financing. Also, the $34 a share offer will begin increasing at an 8% annualized rate after Jan. 1.

The company also said Dec. 6 it would use $500 million of its available cash to trim borrowings in connection with the buyout.

The deal looked nearer to closing Oct. 24 after Tribune passed another hurdle: The company unveiled its third-quarter results, which, as a source told Nolter, gave the impression the company would likely meet its "covenant threshold," one of the last barriers to getting the deal done. (A solvency option is the third, Nolter noted.)

The deal won shareholder approval Aug. 20 but looked as if it could still face hurdles given the state of credit markets. More broadly, it serves, Nolter wrote, as a bellwether for the entire newspaper industry.

Favor reportedly fell to Zell's $8 billion buyout proposal in late March, and then California billionaires Ron Burkle and Eli Broad were said to have matched his offer, ahead of the quarter's end deadline. Zell's offer, which has at its core an employee stock option plan, reportedly gave Tribune's sellers pause because of the risk involved in employees converting their retirement interests to Tribune stock, which had fallen from more than $50 a share in early 2004 to $31.10 a share March 27. In March, Zell altered the mix of debt and equity and boosted his offer, a move to put to concerns to rest, Bloomberg reported. The agreed-to offer carried a $25 million breakup fee, which left room and opportunity for another bid to trump Zell's.

Meanwhile, Burkle and Broad complained in a letter to the company's board March 24 that they weren't given a fair shot, the Journal said. Then, on March 29, the bidders sent a letter to Tribune's board offering an ESOP plan valued at $34 a share, including $500 million cash in exchange for a 40% stake, the Journal said.

HELPING THEMSELVES

Concurrently with its auction, the media company was weighing a so-called self-help restructuring strategy, the WSJ said March 16, which includes taking on debt, paying a dividend to shareholders and spinning off the Chicago Cubs and Tribune's television stations. But given the state of the newspaper industry and continued declines in print advertising revenue, the Journal said, Tribune could have moved to scale it back, take on less debt and pay a smaller dividend to shareholders, whose unrest sparked the auction in the first place.

Shortly after wrapping up the sale of his Equity Office Properties Trust in a $39 billion leveraged buyout, Zell confirmed March 1 that he had made a go for Tribune, Crain's Chicago Business reported. He said his interests were "100% economic," and had nothing to do with owning the Chicago Cubs or Tribune's dailies the Los Angeles Times or the Chicago Tribune.

The news came a day after Warren Buffett penned his annual letter to shareholders of Berkshire Hathaway Inc., which counts the Buffalo News as a subsidiary, and offered a warning for newspaper investors across the board, cautioning noneconomic individual bidders in search of prestige or trying to bring local ownership to papers for civic-minded reasons to beware of high fixed costs and the diminishing importance of newspapers. He wrote:

We hope that some combination of print and online will ward off economic doomsday for newspapers, and we will work hard in Buffalo to develop a sustainable business model. I think we will be successful. But the days of lush profits from our newspaper are over.

The Chandler family, which became Tribune's largest shareholder when the company acquired the Chandler-led Times Mirror Co. in 2000 for $8.3 billion, also put forth an offer and said it would hold onto the 11 newspapers and spin off the 23 broadcast stations as their own entity. In December 2006, The New York Times said the Chandler family had engaged private equity firms about teaming up on a bid for part of the company -- to reclaim ownership or possibly instigate a bidding war. The Chandler family aired its grievances against the company in June 2006, but at the time, the NY Times report said, wasn't interested in taking over the company.

Final bids in the auction, which officially kicked off in September 2006, came due Jan. 17, and according to reports along the way at many times, it didn't seem to be going too well. Zell was a late-game entrant.

Just ahead of the deadline Jan. 16, a New York Post report indicated that prospective private equity bidders that had reviewed the company, including Providence Equity Partners, Madison Dearborn Partners and Apollo Management, weren't planning to submit final proposals, unable to contemplate a viable, near-term exit strategy.

On Jan. 4, the McCormick Tribune Foundation, which controlled 11.7% of Tribune shares, along with the Cantigny Foundation, which held 1.3%, said that it had hired Blackstone Group LP to weigh their alternatives as they related to their investment. The team was the second shareholder group to come forward during the auction, which suggested a growing belief that the company's vast media assets were likely more valuable if sold off in parts, as one source told The Deal.

Early bids from private equity suitors came in the last week of October 2006 and according to reports were "disappointingly low." So, the company sought to gauge market interest in some of its assets individually. According to Reuters, a group of Baltimore investors were eying The Baltimore Sun, while Connecticut's Chase family expressed interest in the Hartford Courant, the paper said Nov. 8, 2006. Other private equity suitors were thought to include a Thomas H. Lee Partners and Texas Pacific Group duo, and possibly Carlyle Group and Bain Capital, Reuters said.

HARDBALL

Two developments early in 2006 at the L.A. Times suggest Tribune was exercising even greater control over the paper, firing editor Dean Baquet and replacing him with Chicago Tribune managing editor James E. O'Shea, weeks after Banquet publicly resisted job cuts in his newsroom alongside publisher Jeffrey Johnson, who was removed in October, and replaced with former Chicago Tribune publisher, David Hiller. The regime change raised questions about layoffs, but in an interview with the Times, the company's publishing president Scott C. Smith said he "hoped the management change would help put an end to speculation that the company intended to sell The Times," the paper said Oct. 6, 2006.

The news came just weeks after Tribune announced a committee to explore its options. It was just three months after the Chandler family detailed its issues with management and the direction of the company in a June 2006 regulatory filing.

The stakeholder took issue with:

• a $2 billion stock buyback initiative spearheaded by Tribune's then-chief executive Dennis FitzSimons
• the approach management took moving to concentrate its operations in its top three markets: Chicago, Los Angeles and New York and divesting holdings in smaller markets
• Tribune's underlying strategy to own multiple types of media outlets in one city -- the Chandler trusts argued it hadn't worked. The alternative they favored was:

  • to split off the newspapers, possibly through a tax-free spinoff
  • to find a private equity backer for the 26 Tribune broadcast stations

The company promptly responded to the June 14, 2006, filing, quoting FitzSimons on plans for an "aggressive performance improvement plan." He said: "This includes continued expansion of our Internet portfolio, the sale of noncore assets and additional cost saving initiatives."

Meanwhile, some directors rallied behind FitzSimons, according to The New York Times, labeling the call for a breakup as nothing more than a power play.

In the end, Tribune's fate was out of its hands. The company has been slow to rally on its Internet push and saw the devastation peer McClatchy Co. delivered its newest asset, Knight Ridder Inc. After agreeing to take beleaguered Knight Ridder for $6.5 billion in March 2006, McClatchy carved it up, put 12 of the target's papers on the block and proceeded to sell them off.