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— Backstory —
That Zell has so many Tribune-ownership partners goes to the suit's core. Since December 2007, after an $8.2 billion take-private transaction paid $34 for each outstanding Tribune share, the media conglom has been run as an employee stock ownership plan, or Esop. Esops, as conceived, were given tax breaks to motivate employees to share ownership at companies where they worked. With ownership comes empowerment, presumably, although that has not been the case at Tribune.
In fact, even before becoming an Esop, plaintiffs complain they weren't asked if they wanted stakes in their Chicago-based parent. They also claim their new status has been bereft of such ownership perks as a voice on the board or a say in management. And they're apoplectic about being denied a role in the decision to finance the transaction by having their Esop take on $11.2 billion in debt. By comparison, Zell's contribution to the buyout was $315 million. This consisted of a $225 million subordinated note and a $90 million warrant, giving its holder the right to acquire 40% of Tribune for $500 million. Hence the suit's claim: "Using a structure allegedly designed to benefit employees, Zell took over a highly valuable company, imposed on it the most encumbered balance sheet in the newspaper industry and avoided any real personal risk or responsibility, all while enjoying the benefits of a tremendously valuable tax structure and letting employee 'owners' bear the damaging consequences going forward." Further frustrating the plaintiffs, a group of six award-winning journalists, is their contention that an Esop could have been avoided altogether. Los Angeles billionaires Eli Broad and Ron Burkle made a joint bid in March 2007 of $34 per share, only to be rebuffed, the complaint states, "purportedly because it was not structured as an Esop." But when the billionaires came back with an offer featuring an Esop, the suit says, "the Old Tribune Board -- in order to keep its promise to Zell -- cut short the so-called bidding process." The reason wasn't apparent, allegedly, until December 2007: "The company's Securities and Exchange Commission filing indicated that Zell and the company created a $25 million pool for a management equity incentive plan to provide incentives for Tribune executives to complete the going-private transaction and retain them over a transition period." Legal and accounting sources doubt the suit's incentive-pool theory will hold up in court as a motive worthy of injunctive relief. Yet there's no denying that, in an iffy environment, the old Tribune board left the company in a precarious position. A research report from Goldman, Sachs & Co. -- dated Dec. 20, 2007 and entitled "Good-bye and good luck" -- calls Tribune's take-out price "a very rich valuation," one leaving newly private company with about $13 billion in debt. "With estimated annual interest expense (before adjustments for asset sales) of $1 billion and 2008 Ebitda of $1.147 billion," the report says, "the transaction leaves very little room for error, particularly given the extremely challenging industry backdrop." That the industry has been even more challenged than anticipated appears, for now anyway, to have imbued Zell with considerable sympathy. A Web site called Not The Los Angeles Times responded to the suit with a satirical jest, under the headline of "L.A. Times Writers Sue Readers," that began: "On the heels of a class-action lawsuit accusing L.A. Times owner Sam Zell of wrecking the newspaper, dissident Times writers are now suing 425,000 former subscribers for 'failing to appreciate our bodacious journalism.' " But playing to public opinion -- as opposed to relying on lawyers and accountants for validation -- isn't all that different from grave dancing. Both are subject to violent change. As Zell himself puts it in a quote from 1976 that the complaint resurrects, "One must be careful while prancing around not to fall into the open pit and join the cadaver." Richard Morgan covers media for The Deal. |
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