Less than a year ago, Tribune Co. employees first began to hear from their new partner, Sam Zell. Partner in this case having an Orwellian twist. Usually bringing up visions of marching hand-in-hand into an uncertain future with the risks and the rewards shared by the two, the filing in Bankruptcy Court Monday makes it clear that this was a fixed game. We could even say that there was a pre-nup that most employees were never aware existed.
The agreement I'm referring to, ironed out by the outgoing management team, allowed Zell to purchase warrants for a 40 percent interest in the Tribune Co. without putting his capital at risk. That filing Monday indicates that Zell owns nothing, currently, at Tribune Co., except warrants. They were purchased through a deal that created even more liability for the already leveraged company. On Monday, Zell and his true partners joined with the banks and the bond holders to get their hands on the company's money before the employees. The employees may end up owning nothing when the blood is finally cleaned up.
It was a rude realization that the truth was hidden in the California suit by five current and former members of the Los Angeles Times filed weeks ago. Searching through the Chapter 11, reorganization filing, a list of limited liability companies owning warrants appeared. Each with an address at Zell's headquarters on Riverside Dr.
Now EGI-TRB was easily identified as the company that was in control. It has already been identified in the media as a financial creature Zell created for his benefit. But the other companies, none of which is listed as being registered with the Illinois Secretary of State (but perhaps the server at the State of Illinois is down today) are a mystery. Tower MZ, LLC, Tower JP, Tower LZ, Tower JB... 21 limited liability companies, all presumably benefiting investors and hidden from the view of the ESOP “partners.”
This isn't the way to treat partners.
Zell purchased a company whose most valuable asset is the trust created in prior generations by people who earned awards called Pulitzers, among other recognitions. Yet Zell has a distinct distaste for journalists. I agree with many of the things he has said about journalists.
I suppose the experience Zell had with journalists made him biased. After all, the managers who had sold Zell this new company were all former journalists.
And, Zell was the grave dancer. He gloried in the caricature of himself, swooping in on a distressed industry, wringing the value from it and transforming it.
That image, it was created of Zell by a writer, a business journalist.
In former days, I've heard, as a Roman general lead the newly conquered and newly enslaved through the streets of Rome, as the flowers flew and the maids giggled, a slave would whisper in his ear, “Sic transit gloria.”
You imagined yourself a master of the universe. But to throw some cold water on this vision, you have often been in the right place at the right time. Some, but not all, of your success was due to random movements of the market, of government policies and other macro economic events that worked in your favor. Not this round.
On Monday Zell wrote to his “partners” "So, how did we get here? It has been, to say the least, the perfect storm. A precipitous decline in revenue and a tough economy have coupled with a credit crisis, making it extremely difficult to support our debt. All of our major advertising categories have been dramatically impacted.”
Actually, I think that a closer look would say that the company was over leveraged, including allowing Zell and other “partners” to obtain debt in exchange for minimal financing agreements. At the time, many analysts, I'll admit I was not one of them, said the deal put to much strain on a company that was experiencing an industry-wide downturn.
Since then, the downturn has turned into a rout.
The trustee of this thing should explain, but never will short of a court demand, why they allowed the ESOP to go forward under these conditions. It was a play in which you and your true partners had limited downside risk, that was transferred to the ESOP, and nearly unlimited upside potential.
“Over the last year, we have made significant progress internally on transitioning Tribune into an entrepreneurial company that pursues innovation and stronger ways of serving our customers," said Zell. "Unfortunately, at the same time, factors beyond our control have created a perfect storm, a precipitous decline in revenue and a tough economy coupled with a credit crisis that makes it extremely difficult to support our debt.''
None of this was foreseen by the great grave dancer. None of it is his responsibility. But fortunately, he structured the deal so he wasn't hurt anyway.