Newspapers, leveraged buyouts and the dismantling of the Fourth Estate

Around the time of O’Shea’s appointment, a Merrill Lynch banker placed a phone call to Sam Zell to discuss the distressed media property. The Tribune Company’s revenues were declining. Investment bankers circled the company like sharks, smelling fee-laden packages of loans that could be converted into securities and peddled to big institutional investors or hedge funds. Like everyone else in finance in 2007, they kept their sights on their fees and thought little about any ramifications that might follow.

Zell was known for constructing complicated deals, especially ones in which he personally had very little at stake. For the Tribune deal, Zell put a paltry $315 million of his own money into a purchase offer of $8.2 billion. To raise the other $7.9 billion, he proposed making Tribune an S corporation owned by a nonprofit ESOP (Employee Share Ownership Plan), which would be exempt from federal income taxes. The ESOP could then borrow the rest of the money needed to buy the stock owned by the Chandlers, the McCormick Trust, employees, and other shareholders in order to complete the sale and take the company private. If the deal went through, Tribune managers would be rewarded with large “success bonuses.” The investment bankers and advisors, for six months of work, would take in about $160 million.

The deal would saddle the company with $12-13 billion in debt. In other words, everyone stood to gain except the newspaper, the company, and their employees, all of whom were risking a great deal and, in the case of the employees, without their consent. The deal from hell went through. Exactly 12 months later the company would file for the largest bankruptcy in the history of the American media industry. Over 4,200 people lost their jobs in the three years that followed.