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Zell's past may hint at plan for Tribune

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What kind of a news baron would Sam Zell make?

With Tribune Co. seriously considering the Chicago real estate billionaire's buyout offer, it's no idle question.

Besides amassing the nation's largest collection of office buildings in his Equity Office Properties Trust -- which was sold last month to Blackstone Group for $23 billion -- Zell, 65, has a long history with smokestack industries, having invested in makers of bicycles, barges, mattresses and airplane rivets.

But his only major foray into the media business came with Cincinnati-based Jacor Communications Inc., which he bought out of bankruptcy in 1993 and turned into one of the nation's largest radio-station chains before selling it to Clear Channel Communications Inc. in 1999. Typically, Zell bought smart and sold smart. He claimed in an interview with Barron's to have pocketed $1.3 billion on an initial investment of $70 million.

What happened during his ownership of Jacor may be more relevant to the case of Tribune, the Chicago-based parent of the Los Angeles Times, KTLA-TV Channel 5, the Chicago Tribune, two dozen other TV stations, nine other newspapers and the Chicago Cubs baseball team. Zell is a maverick in his casual dress, blunt language and contrarian investing approach. Unlike some other self-made tycoons, he is far from a lone wolf. Throughout his career, Zell has forged strong relationships with partners and subordinates.

His proposed partner in the Tribune buyout is an employee stock ownership plan, or ESOP, that would be created as part of the deal, presumably to provide tax benefits.

He has not mentioned a price or provided any other details of his offer publicly. But an article in Barron's on Saturday said Zell's offer was valued at $13 billion, consisting of a $300-million cash investment from the real estate mogul and the remaining $12.7 billion in debt.

That would be a slight premium over Tribune's current value: It's stock was worth $7.4 billion on Friday and the company has debt of $5 billion. He declined to be interviewed for this story.

Tribune's board is scheduled to meet Saturday, at which time it could vote on Zell's proposal or to opt for a "self-help" restructuring plan that would include paying a big dividend to shareholders, according to one Tribune executive who requested anonymity because he was not authorized to speak about the process. A Tribune spokesman declined to comment.

At Jacor, Zell gave a free hand to an executive team led by Randy Michaels, a radio industry legend who was every bit Zell's equal as a nonconformist. Michaels was a promotional whiz who often pushed the boundaries of on-air good taste. Once, for example, he pretended to puree a live frog -- a rival station's mascot -- in a blender.

When Zell sold Jacor, one of his stipulations was that Clear Channel retain Michaels as chief executive, a post he held until 2002. The two men remain friends. Michaels was named to head a nine-station TV group that private-equity firm Oak Hill Capital Partners acquired in January for $575 million from New York Times Co. Michaels declined to be interviewed.

"They were both flamboyant but in different ways. Maybe that's why they got along so well," said radio veteran Thom Ferro, head of Broadway Entertainment in Los Angeles and a former executive of Westwood One. Zell's strength was in finance and Michaels' was in operations, so the two complemented each other, Ferro said.

According to radio industry people, Zell provided broad strategic direction and capital and let Michaels and his top lieutenant, Bobby Lawrence, take it from there.

When the Telecommunications Act of 1996 deregulated the industry by easing national ownership limits, Zell gave Michaels and Lawrence the green light for an acquisition binge of 200 stations in less than three years. They tended to cluster stations geographically so that ad sales and other functions could be spread across multiple stations to cut costs.

Because the industrywide consolidation squeezed out smaller, quirkier radio operators and advanced a trend toward programming formats that could be rolled out nationwide, Zell and Michaels are among those often blamed for the homogenization of radio.

Radio doesn't standardize as easily as fast food, and some traditionalists resented the changes, said Jeff Smulyan, chairman of Indianapolis-based radio company Emmis Communications Corp.

"I think people in the culture love the culture," Smulyan said, adding that Zell and Michaels proved themselves "very astute businessmen."

Zell has yet to describe his plans for Tribune. If he sees a growth or consolidation opportunity for newspapers and local TV stations a la mid-1990s radio, he's nearly alone in that view. The five-month-long auction for Tribune has failed to generate any bids offering a premium above where the stock has been trading. Tribune shares closed Friday at $30.55, up 62 cents.

Zell is primarily a real estate investor, so some suspect he's mainly interested in such Tribune holdings as the iconic Tribune Tower on Chicago's Miracle Mile and The Times' headquarters in downtown Los Angeles.

But those who have examined Tribune's books include Los Angeles billionaire Eli Broad, who made his original fortune in real estate, and Chicago-based private-equity firm Madison Dearborn Partners, whose headquarters is a mile from Tribune's. If Zell thinks the real estate is so undervalued that it makes Tribune a bargain, again, it's not a widely shared view.

Zell confirmed his interest in Tribune in a March 1 speech to a Chicago real estate group. Crain's Chicago Business quoted him as saying: "I can guarantee you our interests are 100% economic."

The Tribune executive who asked not to be named believes that Zell would keep the company's top management in place.

Zell is not believed to have used an ESOP as a buyout vehicle in the past, although when he took over bankrupt Los Angeles retailer Carter Hawley Hale Stores in 1991, an ESOP that had held a large block of the company's stock became his minority partner. Zell sold Carter Hawley to Federated Department Stores in 1995.

One way a Tribune deal might work, according to several tax experts, would be for the new ESOP to borrow money that -- together with Zell's investment -- would be used to buy all Tribune shares and retire its existing debt.

At the close of the deal, the ESOP's share of the private successor company would be held in a sort of escrow account and be released incrementally into the employees' individual ESOP accounts as the loan was paid down.

Since the ESOP would have no earnings of its own, the successor company would guarantee the loan and use cash from its operations to indirectly pay it down. The tax advantage is that each year, as a loan payment came due, the company would make a tax-free contribution to the ESOP and the ESOP would turn around and pay that amount to the lending bank.

Normally, businesses can deduct only the interest on their loans, but since the loan payments would be viewed as ESOP contributions, the principal also would be deductible, said Marc Machiz, a former retirement-law attorney with the U.S. Labor Department who is now in private practice in Philadelphia.

ESOP-led buyouts have landed in court in the past over fairness questions, such as whether the ESOP overpaid for the stock it acquired. With no public market setting a price for the shares of the successor company, an independent appraiser probably would be hired to make annual valuations of the stock. The ESOP's interests would be represented by an independent trustee.

For employees, the upside of an ESOP-led buyout is a say in how the company is run. Potential sacrifices include possible suspension of the company's contributions to its employees' 401(k) retirement accounts in lieu of the ESOP contributions used to pay down the loan. Also, for retiring, resigning or laid-off employees, there could be delays in cashing in stock from their ESOP accounts.

thomas.mulligan@latimes.com

Times staff writer James Rainey contributed to this report.

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