The approach was vintage Zell. It allowed him to take control of an asset-rich company by using maximum debt and minimum equity, which would limit Zell's initial risk but magnify his potential return.

The ESOP also satisfied another of Zell's investment goals: aligning the interests of a company's employees and management by giving all of them an ownership stake in its success. The deal would use up the $60 million Tribune Co. had laid aside to match contributions to employee 401(k)s. But as employees received new shares in the ESOP each year, the potential upside could be huge as Zell gradually paid down the debt.

Some employees embraced the idea while others worried that the ESOP exposed future company retirement contributions to enormous risk. They also complained that despite the fact employees ultimately would own more than 60 percent of the equity, they would have no representation on the board.

But Zell's team expressed every confidence that the deal would pay off and had the potential to make employees wealthy.

"I've seen a lot of heavily leveraged transactions," Zell told potential investors at the April 2007 lenders conference in New York. "This is the only one I've ever seen where the value of the assets is measurably greater than the amount of leverage we intend to put on it. ... We expect to help make one plus one equal six, which is basically our historical methodology."

A bridge too far?

For the many bankers involved — and hoping to get involved — in the Tribune Co. transaction, Zell's appearance on the scene was energizing. The stalled auction had meant the loss of another golden opportunity to earn big fees from the credit boom. Zell's emergence restarted the engines.

Julie Persily, formerly co-head of Citigroup's leveraged finance unit, was intrigued when Larsen called in early 2007 to ask about financing the deal. She knew nothing of Larsen, but his boss was a Wall Street celebrity.

"I was in awe of him," Persily said of Zell in a 2010 court deposition.

Persily's job at Citi was to make highly leveraged corporate loans, collect big fees, then slice the debt into pieces that could be sold to outside investors. Zell was a high-volume borrower whom Citi had courted unsuccessfully for years. This was a chance to get on his A-list.

Yet the more she examined what the Zell team had in mind, the more she began to wonder what the bank might be getting into, according to court documents. The Zell deal was so complex that she feared investors might balk, leaving Citi exposed to losses.

Despite the gloom hovering over the traditional media business, Zell planned to take out billions in new debt to fund the buyout while investing only a few hundred million himself, the equivalent of a 2.4 percent down payment.

"I am unequivocally not on board," Persily wrote in an email to a colleague a week after her initial contact with Larsen, now CEO of Tribune Co. broadcasting.

The structure of Zell's deal, she wrote, seemed "silly."

Documents show that other deal participants also had misgivings. Jeffrey Sell, former head of JPMorgan's special credits group, noted that the deal was "another step in the 'irrational exuberance' you see at the end of the cycle."

But Persily, Sell and the other doubters were eventually swept up in the deal's momentum. They would have front-row seats to the misadventures about to unfold.

smmills@tribune.com

mdoneal@tribune.com