One man plays, many pay.
Sam Zell acknowledged from the start that his deal for the Tribune Company was flawed. But just how hellish this deal was, particularly for Tribune employees, became painfully clear on Monday when the 161-year-old company filed for bankruptcy.
This is the Zell who was a wizard in real estate. But this time he didn't do well. Or maybe he did; what is doubtless is that workers got screwed royally.
Mr. Zell financed much of his deal’s $13 billion of debt by borrowing against part of the future of his employees’ pension plan and taking a huge tax advantage. Tribune employees ended up with equity, and now they will probably be left with very little. (The good news: any pension money put aside before the deal remains for the employees.)
How is it possible for an investor to borrow against the pension of workers? Well, it is legal, even if utterly unethical. The workers wound up having their future pension exchanged for equity in a company that is now bankrupt because Zell messed up.
Yet there is more blame to hand out. Zell isn't the only vulture in this deal.
With one of the grand old names of American journalism now confronting an uncertain future, it is worth remembering all the people who mismanaged the company before hand and helped orchestrate this ill-fated deal — and made a lot of money in the process. They include members of the Tribune board, the company’s management and the bankers who walked away with millions of dollars for financing and advising on a transaction that many of them knew, or should have known, could end in ruin.
Ah, investment bankers, the very ones that are now getting government bailout cash. Nice work if you can get it.
It was Tribune’s board that sold the company to Mr. Zell — and allowed him to use the employee’s pension plan to do so. Despite early resistance, Dennis J. FitzSimons, then the company’s chief executive, backed the plan. He was paid about $17.7 million in severance and other payments. The sale also bought all the shares he owned — $23.8 million worth. The day he left, he said in a note to employees that “completing this ‘going private’ transaction is a great outcome for our shareholders, employees and customers.”
So the then-CEO got 45 million dollars. Nice deal, for him. Wonder what made him change his mind about the privatization. No need to wonder why bankers liked the deal.
Tribune’s board was advised by a group of bankers from Citigroup and Merrill Lynch, which walked off with $35.8 million and $37 million, respectively. But those banks played both sides of the deal: they also lent Mr. Zell the money to buy the company. For that, they shared an additional $47 million pot of fees with several other banks, according to Thomson Reuters. And then there was Morgan Stanley, which wrote a “fairness opinion” blessing the deal, for which it was paid a $7.5 million fee (plus an additional $2.5 million advisory fee).
Merrill is now owned by BofA, which got $25 billion of US capital. Citi got even more billions so it would not implode. Both got fees, then lent money for the deal to go through. And Morgan did fine, too. But, how is the advisory fee earned by a firm that writes a “fairness opinion”?
On top of that, a firm called the Valuation Research Corporation wrote a “solvency opinion” suggesting that Tribune could meet its debt covenants. Thomson Reuters, which tracks fees, estimates V.R.C. was paid $1 million for that opinion. V.R.C. was so enamored with its role that it put out a press release.
Thus, at least $131 million in fees was paid by the Tribune Company so Zell could borrow money and short the workers's pension fund to acquire the company.
But what about those employees? They had no seat at the table when the company’s own board let Mr. Zell use part of its future pension plan in exchange for $34 a share.
They don't count.