Zell’s bid for Tribune said to be favored
Chicago real estate mogul Sam Zell has become the leading suitor for Tribune Co., owner of the Los Angeles Times and KTLA Channel 5, with an $8-billion bid for a company buffeted by new-media challengers, a person familiar with the talks said.
Investment bankers are working to strike a deal, but many details remain to be ironed out. The company may not be able to meet its self-imposed deadline to conclude deliberations by the end of the month, the person said.
Another person following the bidding closely said that Los Angeles billionaires Ron Burkle and Eli Broad planned as early as this weekend to present a counteroffer for the company. Tribune did not accept their previous proposal, which called for paying stockholders a $27-a-share dividend.
It’s possible that Chicago-based Tribune will take yet another route: adopting a plan to reorganize the company without an outside investor and pay shareholders a large dividend.
Zell would form an employee stock ownership plan and partner with the ESOP to make his offer of $33 a share, the person familiar with the Zell-Tribune talks said. The offer price is 8% over Tribune’s closing share price Friday of $30.53.
Wall Street has bid up Tribune shares over the last two sessions in heavy trading, including a 3.5% increase Friday. Several traders cited a belief that the company was making headway in negotiations with Zell.
“This is far from a done deal, but Zell has improved his offer substantially,” said the person familiar with the talks, who declined to be named because they were confidential. “Many people would argue it is the best solution for shareholders.”
Tribune spokesman Gary Weitman declined to comment, and Zell did not respond to a telephone call.
A special committee of corporate directors received details of Zell’s offer Wednesday evening.
Zell was estimated by Forbes magazine to be worth about $4.5 billion even before the recent sale of then-publicly held Equity Office Properties Trust, which Zell controlled, to a private equity firm for $39 billion. Barron’s magazine estimated his personal take from the deal at $900 million.
Other billionaires who have expressed interest in acquiring all or part of Tribune have cited their favorable view of the public service role played by newspapers. But the 65-year-old Zell has said his motives for owning the company -- which includes 11 newspapers, 23 TV stations and the Chicago Cubs baseball team -- are “solely economic.”
Tribune’s representatives want Zell to sweeten his offer, partly by increasing the amount of cash he would pump into the company. Zell proposes putting $300 million into Tribune and paying off debt with the assistance of the ESOP -- a tool that would yield considerable tax savings to Tribune.
The committee of seven independent directors who are to review the proposal has other concerns as well. According to the person familiar with the negotiations, the directors want to ensure that Zell would:
* Protect the pensions of Tribune’s 21,000 employees, in a highly leveraged deal for a company whose revenue is declining. “It looks like the employees will be protected with some excess pension funds, but they want to make sure of that.”
* Guarantee his offer over the nine months or more it could take to win regulatory approval for the deal. The Federal Communications Commission must approve the continuation of cross-ownership of television stations and newspapers in Tribune’s top markets, including Los Angeles, New York and Chicago -- a practice normally prohibited under federal laws designed to diversify media ownership.
The Chandler family of California triggered the auction for the company last summer when it protested against Tribune’s management and its plan to buy back $2 billion in stock. The onetime owners of the Los Angeles Times hold 20% of Tribune’s shares -- the largest single stake.
The company agreed in September to review its strategic alternatives, a process that it had hoped to conclude by the end of 2006. But lackluster offers from a handful of private equity firms and others caused Tribune to extend the auction until a week from today.
Members of the special committee have become concerned that the deadline is not helping the company in its negotiations with Zell.
“This public deadline has been offered up, but the committee is more concerned with getting it right,” the person said. “There might be some embarrassment in missing that deadline, but that’s not the most important thing.”
The special Tribune committee continues to consider the company’s so-called self-help plan, under which Tribune would spin off its television properties, borrow a substantial sum and pay shareholders a dividend, most recently set at $15 a share, according to two people inside the company.
It has been suggested that the McCormick Tribune Foundation, a charity that is the company’s second-largest shareholder, would use proceeds from the dividend to buy shares from the Chandlers. That would not eliminate the disgruntled family’s stake entirely, but it would begin to ease the Chandlers out.
That approach, however, could be in jeopardy because Tribune -- already highly leveraged with about $5 billion in debt -- has scaled back the proposed dividend from the previously offered $20 a share.
At least some of the directors reviewing the self-help proposal wonder whether it still entails too much borrowing. “The question has been, ‘Why in the world would you take on that much debt just to get rid of the Chandlers?’ ” said the person following the deal.
Tribune Chief Executive Dennis J. FitzSimons and other company managers have argued that the family and its three representatives on the board have been “disruptive and counterproductive,” according to the insider.
Jay Harris, a former publisher of the San Jose Mercury News and professor of journalism at the USC Annenberg School for Communication, said that although he didn’t mean to be “indelicate,” the Chandlers had “become like a tumor for the company, and I would excise the tumor because it’s already difficult enough to manage one of these media companies in these unpredictable waters.”
But another investor who did not want to be named said the partnership had been an unhappy one since the Chandler family sold Los Angeles-based Times Mirror Co. to Tribune in 2000. The synergies that were expected from the marriage of the two companies’ newspaper, broadcasting and digital properties failed to materialize.
Newspaper investors have become increasingly alarmed at revenue declines reported in recent months -- the first such drops for the industry during a period of economic growth. New York Times Co., Gannett Inc. and McClatchy Co. each reported that revenue fell 3.6% to 5.2% in February from a year earlier.
Tribune this week reported its revenue fell 3.4% to $385 million in February, with an even steeper decline of 5.1% for just its newspapers. Real estate advertising, which had been among the few strong segments, slumped 14%.
Much of the lost advertising revenue has been siphoned off by Internet sites and other new media. Even longtime newspaper investors said they weren’t sure when -- or whether -- the slide would level off. “It seems, to tell the truth, to be accelerating. I just watch this in horror,” one Tribune shareholder said.
Once it has a recommendation, the special Tribune committee will present it to the full board of 11 -- which includes FitzSimons and three representatives of the Chandler family.