Tribune Co.'s board of directors negotiated into early this morning on a deal aimed at handing control of the Chicago Tribune, Los Angeles Times, The Sun and other major media properties to maverick Chicago billionaire Sam Zell for $13 billion.
If the two sides can work out last-minute details, which might include the final bid price, one of the most buttoned-down corporations in America would be controlled by Zell, who has relished a life and career as an outsider with a contrarian investment philosophy and a full-throttle lifestyle.
Zell's bid seemed positioned to trump an 11th-hour offer from rival Los Angeles-based billionaires Ron Burkle and Eli Broad. Though Zell's $33-a-share bid fell short of the Burkle and Broad offer of $34 a share, as of late yesterday, Tribune's board was confident that Zell's offer was more concrete.
The situation was still fluid, and sources cautioned that a deal might not be completed. Tribune directors were hoping to compete an agreement before markets open this morning.
Tribune, which owns 11 newspapers and 23 broadcast outlets, has been on the auction block since September.
Zell, who did not submit a bid before the company's initial deadline, seemed to jump into the driver's seat in mid-February by suggesting his offer could be financed with the help of a tax-efficient employee stock ownership plan. Broad and Burkle countered with their own ESOP plan late last week as the Tribune's self-imposed Saturday deadline loomed.
The deal, which would return Tribune to private ownership, would make the company one of the most heavily indebted enterprises in the media industry at a time of falling readership and declining advertising revenues. But Zell likes to say a true entrepreneur has unending self-confidence - that he doesn't see risk; he sees only solutions.
That might explain why the flamboyant Chicago real estate magnate believes he can transform Tribune Co. even while the industry is an unprecedented state of flux from the Internet.
The fact that Tribune's auction dragged on for nine months with a dearth of serious bidders speaks volumes about how the rest of the world views the outlook for traditional media properties in an increasingly digital world. Zell hedged his own bet by limiting his personal investment in the deal to $300 million and relying on the ESOP as the backbone of his $8 billion purchase price. Tribune's $5 billion in existing debt will remain on the books.
Even some industry rivals are dumbfounded by what Zell has planned.
"The amount of debt Tribune is going to have blows my mind," said one of them, noting that he's expecting three years of cash flow declines as once-loyal advertisers rush to get online. "It seems very dangerous to me."
Many observers have speculated that Zell's only exit from the danger zone will be to continue the cost-cutting, job slashing and asset shuffling that has caused so much angst in the newspaper industry. Critics note that his recent operating results as a manager have been less than encouraging: Although he cleared $1.1 billion when he sold his Equity Office Properties Trust to Blackstone Group in February, that company's returns underperformed its peers' over the past decade.
But Zell has said repeatedly he has no intention of breaking up Tribune. He might find it tempting to ease the debt burden by selling a prize like the Chicago Cubs, but those who know him believe a strategy that depends on huge cost-cutting or asset sales isn't Zell's style. The 65-year-old Chicago native, they say, earned his $4.3 billion fortune not by tearing things down but by building them up.
"His job is looking over the horizon," said a person who used to work with Zell. "You won't necessarily find [what he sees] in the annual report right now."
Short, balding and pugnacious, Zell is among Chicago's most iconoclastic business figures. A born outsider, he rides motorcycles, smokes, parties hard and talks like a truck driver.
But no one would care about any of that if he weren't so good at buying low and selling high.
In the case of Tribune, Zell has already shown off his financial agility. At least seven private equity firms kicked the tires at Tribune but couldn't make a deal work for more than $30 a share. The board concluded that the four other deals that did develop were too tentative or too debt-heavy, including two versions from Burkle and Broad.
But then Zell emerged in early February with his offer. He made it work by building his proposal around an ESOP, which should slash Tribune's tax bill and boost the company's cash flow enough to make a much larger debt load manageable.
As creative as the deal is, however, adding $7 billion in new debt to Tribune's balance sheet puts the company under enormous pressure to perform. That may be risky, but according to Zell's worldview, it may also force a conservative, bureaucratic company that is stuck in the past to dig deeper to find some innovative solutions to help it start embracing the future.
Tribune's fate will depend on Zell's ability to inspire better performance from a beleaguered management team led by Tribune Chief Executive Officer Dennis FitzSimons. Sources close to Zell said current executives will get their chance to turn the ship around. But sources on the management team are well aware that Zell is known for making changes if he doesn't get results.
Most close Tribune observers agree that the Internet holds the key to the company's future. Sources close to Zell say he believes the company's potential online is being badly undervalued by the stock market.
While Tribune's long-term strategy of profiting from owning both television stations and newspapers in the nation's three biggest markets was long-ago discredited, its reach from Los Angeles through Chicago to New York is an essential component of its Internet strategy. The national reach of Tribune's 11 metropolitan dailies, combined with those of partners Gannett Co. and McClatchy Co., is what powers a set of national online networks anchored by job-search site CareerBuilder.com.
A close reading of Tribune's annual report shows that there are also some opportunities others might have missed. The company's real estate may be the sort of hidden asset Zell relishes. Next January, Tribune Co. has a right to purchase the L.A. Times building, Newsday's headquarters, The Sun's building and five other properties for $175 million from the Chandler family, the company's largest shareholder. That's $51 million less than the appraised value those properties had more than a decade ago.
Michael Oneal and David Greising write for the Chicago Tribune.