Under pressure, Tribune Co. to file revised restructuring plan
After 20 months and millions of dollars in attorney fees, time is running short on Tribune Co.'s campaign to control its own destiny in Bankruptcy Court.
Faced with warring creditors and ample evidence that the most powerful among them are eager to take control of the Chapter 11 process, the embattled Chicago media company’s management is scheduled to file a revised restructuring plan on Friday that may prove to be the group’s last, best chance to broker a friendly compromise in the chaotic case.
Thursday’s news that senior creditors are talking with former Walt Disney Co. Chairman Michael Eisner and other candidates about possibly managing the company signaled their willingness to push aside Tribune Chairman Sam Zell and Chief Executive Randy Michaels. And creditors have been blunt about their readiness to file alternate restructuring schemes without management’s support.
The Tribune team’s ability to avoid being marginalized in its own case will likely rest on how many recalcitrant creditors — both senior and junior — it can win over with Friday’s plan.
Tribune owns the Los Angeles Times, Chicago Tribune, KTLA-TV in Los Angeles and other media properties.
A week ago, settlement talks collapsed over several key questions, sources said.
How could a plan acceptable to senior creditors also appease a junior group emboldened by an independent examiner’s finding that the company’s 2007 leveraged buyout may have left Tribune insolvent? And would creditors generally accept provisions protecting Tribune directors and officers from buyout-related litigation?
Several sources said recent talks have focused on solving the first problem with a legal device called a litigation trust that would isolate the company’s financial and operational restructuring from the legal claims that have been bogging down the case.
At the heart of the arguments in Bankruptcy Court is a claim that Zell’s leveraged buyout involved a fraudulent conveyance, which rendered the company insolvent from the start. If that could be proved, claims held by lenders could be wiped out and the estate could seek to claw back payments made to selling shareholders.
Junior creditors also have claimed that Tribune’s directors and officers, including Zell, breached their fiduciary duty to investors.
In April, Tribune and several of its largest creditors crafted a settlement of those potential claims that would have given senior creditors such as JPMorgan Chase and distressed-debt hedge fund Angelo, Gordon & Co. 91.2% of the company’s equity. Junior bondholders would have received a 7.4% stake worth $450 million. The lenders, directors, officers and shareholders would have been given full indemnification against all other potential claims.
Although the plan was billed as a global settlement, it met immediate opposition from a splinter group of senior creditors led by Oaktree Capital Management, a distressed-debt investor based in Los Angeles. Oaktree claimed that it had no exposure to the buyout claims, yet was being asked to fund settlement payments.
In July, court-appointed independent examiner Kenneth Klee issued a massive report supporting some of the claims over the buyout and debunking others. Klee’s findings destabilized the fragile settlement and launched a new round of negotiations.
In recent weeks, sources close to the situation said, JPMorgan, Angelo Gordon and Oaktree finally came together around a plan based on a litigation trust. The junior creditors would get something less than $450 million in value upfront but would be the beneficiaries of a trust containing claims that the Klee report suggested had significant potential value.
While the company tentatively signed on to the plan, the official committee of unsecured creditors in the case demanded adjustments to the trust that would broaden its scope, thereby increasing its potential value.
An important group of junior bondholders led by Centerbridge Partners, meanwhile, never bought in. One big sticking point: how to assign value to the trust and balance it against the amount of equity the junior group would get.
Sources said senior and junior creditors also balked when Tribune Co. asked that the reorganized company be provided with unlimited indemnification for directors and officers, protecting them against potential litigation coming out of the trust. Some feared the provision would leave the company too exposed.
With a multibillionaire such as Zell on the board, plaintiffs could ask for the world in potential lawsuits. Although the probability might be low, Zell’s wealth could make a windfall judgment possible, putting new financial pressures on the company were it locked into an indemnification plan.
All of this raised a broader problem. How could Tribune Co. management and the board negotiate issues involving litigation when members of both groups are potential targets of those claims?
Sources said Tribune plans to deal with that problem by setting up an independent board committee that would make decisions for the estate on issues related to the restructuring plan.
The committee would include directors with no connection to the buyout: Mark Shapiro, former chief executive of Six Flags Inc.; Maggie Wilderotter, chief executive of Frontier Communications Corp.; Jeffrey S. Berg, chairman of International Creative Management Inc., and Frank Wood, chief executive of Secret Communications and formerly chief executive of Jacor Communications, which Zell once owned.
Several sources close to the talks also expected Tribune to stick with the litigation trust idea in the new plan since it is the easiest way to keep the case from getting bogged down in litigation.
“We continue working on a restructuring plan that is fair to the interests of all parties and can be confirmed by the court,” a Tribune spokesman said.
Meanwhile, Michaels tried to focus attention on other matters. Tribune issued a press release Thursday pointing out that it had generated $100 million more in operating cash flow though July this year than it did in 2009.
“There’s been a lot of media speculation lately regarding our Chapter 11 process — and the temptation is to let it distract us,” Michaels wrote in a note to employees. “Try not to pay attention to the outside noise.”