The Deal from Hell (38 page)

In the newsrooms, Tribune journalists, blissfully ignorant of the behind-the-scenes skirmishes, worried about whether we would restore an editor or two to a depleted news or copy desk rather than about the very real threat of how the company's heavy debt would trigger the need for drastic budget cuts. Even FitzSimons and Smith, who viewed budget cuts as a simple matter of fact, worried about employee reaction. But Zell was a rock star, a new face that appealed to news junkies in newsrooms. Everyone liked the idea that Zell had eclipsed FitzSimons.

Zell, too, started to get pumped as the deal developed the kind of rhythm that made his heart beat. When Costa, the Tribune's banker, expressed his disappointment to Pate that Zell's bid wouldn't command more than $30 a share, Zell upped the ante to $33 per share. Sweetening the pot didn't immediately win over big Tribune shareholders like the McCormick Foundation, which favored a “self-help plan,” a leveraged buyout in which the company's management would line up the loans to buy the company and continue to run it as a private entity. Truth be told, Madigan and FitzSimons, like many in the Chicago business establishment, viewed Zell as a crude, uncouth maverick who was tolerated because of his billions.

The McCormick Foundation also raised a legitimate issue. Any plan would require approval by the Federal Communications Commission (FCC) because broadcast licenses would have to be transferred and Zell's initial offer would take nine months to close, a long time in which anything could happen to derail the deal. On this point, the Chandlers actually agreed with the boys from Chicago. But Zell had an answer: To minimize the risks to Tribune's existing shareholders, he would split the proposed deal into two phases. His deal called for acquiring 50 percent of the stock in May 2007 (thereby giving the company's shareholders a chance to cash in on half of their earnings soon), and the other 50 percent by December 2007 after the company got approval from the FCC.

Mohr recalled how FitzSimons and the Chicagoans were hot and cold on the two-phase ESOP deal: “It wasn't as if we all looked at Zell and said let's do it. We thought about it, pushed back among financing teams and adviser teams. This was something that had not been done on this scale.... People got up some mornings and were comfortable, other mornings people said they were uncomfortable with the risk.... It was live, dead, live, dead, dead, live.”

At one point, the back and forth that plagued Tribune Company also frustrated Zell, who called Tribune General Counsel Kenney and demanded,“So do you think I'm some sort of schmuck?” When Kenney said, “No,” Zell barked, “Well then, why are you treating me like one? Do you have anyone there who knows how to do a deal?” FitzSimons also got frantic phone calls, not from Zell but from Tribune's longtime New York lawyer, Marty Lipton of Watchell & Lipton, who had built the company's anti-takeover defenses: “Marty called me one morning and said, ‘You know, I was tossing and turning all night, I couldn't sleep, and I think we really have to think about this very, very carefully given the scrutiny that it's going to receive down in Washington.'”

Tribune Company had already received terrible press when it misread the depth of the opposition to an earlier FCC rule change, one that it had pushed to ease the level of media concentration permitted
under federal regulations. “The press,” FitzSimons said, “loves boardroom drama, and they love it even more when you have a media company involved.”

FitzSimons had all but abandoned the Zell proposal until Osborn, who chaired the Special Committee, told him that he had called Zell and asked him to revive his bid. “Bill Osborn told me, ‘Look, we need to fully explore this,'” FitzSimons said.

By March 2007, the intramural sniping among the bankers was in full swing. Morgan Stanley had quietly prepared a proposal that would have financed management's self-help scheme, while Merrill Lynch had swung its full support behind the Zell plan. Merrill Lynch advisers who had once questioned the Zell deal had learned more about the ESOP, liked the higher price Zell had offered, anticipated improved Tribune cash flows due to synergies, and had confidence in Zell's ability to do something he had implied to employees he would not do—impose deep cost cuts.

But Morgan Stanley's Whayne said that Costa and Kaplan became big fans of the Zell deal because “they would make a lot of money—more debt, more fees.” Indeed, when Kaplan told Costa that Merrill could expect to earn $33 million to $35 million on fees from the Zell deal, Costa pushed back saying they should be “more aggressive.” When Kaplan questioned what his colleague meant, Costa replied, “More money.”

“The banks were climbing all over themselves to get into this deal,” said Kenney, “so much that Merrill Lynch, who was the strategic adviser to Tribune, resigned as the strategic adviser because . . . if you're advising on the strategic alternatives, you can't also be playing in the financing role, and at one point, Merrill said, ‘If we have to choose between being the historic adviser to the company or participating in this financing, we will leave you at the altar [because] we want to go plan the financing because there's more fees.'”

In late March, Zell broke the logjam when he increased his bid to $34 a share and upped his personal investment to $315 million, part of an incredible deal in which the grave dancer would get a ten-year option to buy about 40 percent of the company for no more than $600 million. The Chandlers swung behind the Zell deal once they figured out that they could minimize their capital gains taxes. Even skeptics like Persily at Citigroup began to understand that the enhancements to the Tribune's cash flow enabled by Zell's unique structure made the finances of Zell's deal comparable to management's self-help plan, despite the higher debt levels. “That's how I got comfortable. At the end of the day, there wasn't that much difference between them,” said Persily. At the last minute, Zell also cut into the deal another big player—Bank of America, an institution that had a track record with Zell and Tribune and one he had been secretly courting since early March. To make room for Bank of America's fees, he reduced the other banks' share of the take, particularly Citigroup, with whom he had no relations. The Zell team also tucked into its proposal a provision that would reward key Tribune managers with a hefty “success” bonus if the deal worked. The Tribune Special Committee, elated to have found a complete solution to its problems in a single deal, approved of Zell's deal with the company's board on April 1, 2007.

There was no end of whooping and backslapping among the investment banks that won the Tribune lottery. At JPMorgan Chase, Sanjay Jain, the firm's vice president, sent a note congratulating the bank's Tribune team, including Peter Cohen, the bank's Tribune client executive, pointing out that the bank's chairman, Jamie Dimon, who once worked in Chicago, had been watching the Tribune deal closely. Cohen, who had flown to Chicago from a ski vacation in Aspen, Colorado, responded: “Thx dude. Can you say ka-ching!” At Merrill Lynch, Costa and Mohr got several “way to go” messages, including one from an investment banking colleague who colored his note with a tinge of caution: “Guys—truly amazing financial engineering. Even more kudos after reading [about the details.] In terms of applicability, my biggest question is can you (and would anyone really want to) do
this.... Would any management team or Board really want to tighten the screws this much if they weren't effectively forced into it and had no other options.”

But Jieun ( Jayna) Choi, an analyst at JPMorgan Chase, exposed, in a crude e-mail, the attitudes that then prevailed on Wall Street, where the banks had built a billion-dollar business collecting big fees for mega-loans that they made and quickly fobbed off on other investors:

For their work over six months that ended in June 2007, Tribune paid the investment bankers and advisers a total of $146.7 million. Add to that the $14.2 million in other fees related to phase one of the deal and you get to about $161 million, more than enough to fund a newsroom that would bring news to the citizens of Los Angeles for a year and employ more than nine hundred journalists.

By now, FitzSimons had climbed on the Zell bandwagon, too, saying the company had the kind of strong cash flows to help pay down the debt encumbered in the Zell deal and that it would “reengineer” its operations to create more efficiencies. In other words, more cuts, mainly in staffing. Zell praised the deal, although he was singing from a different hymnal. The way he saw it, Tribune's assets were worth
$16 billion, and it was only taking on $12 billion to $13 billion in loans, far more than enough to cover any investors who owned the debt. Tribune shareholders approved the deal, too. Nearly 65 percent of the company's shares outstanding voted, and 97.5 percent gave the deal a thumbs-up.

Even though anyone with an ounce of financial sense could see that the deal would generate inevitable cost cuts, I, and journalists like me, preferred to think otherwise. Hearing someone talk about a future that didn't rely solely on cost cuts was music to our ears. As I listened to the new boss, I foolishly believed that I had just gained a partner in trying to figure out the correct mix of revenues and budgetary discipline to finance journalism. Not too long after the first phase of the deal had closed, my phone rang and the soft voice on the other end of the line threw me. “This is Sam Zell. You wanted to talk to me?” Zell asked. I had called Zell's office after he'd given an interview to the
Chicago Tribune
, and I asked for equal treatment for the
Los Angeles Times
. Zell was polite and solicitous, telling me he was at Stanford University in northern California giving a speech, that he would be glad to talk to the
Los Angeles Times
, and that he would soon be heading my way to spend the weekend at his house in Malibu. To facilitate an interview, I naïvely offered to pick him up at the airport and drive him to his home, but he informed me his personal jet could easily deposit him near Malibu, one of Los Angeles' most coveted, affluent neighborhoods. He said he would get back to me shortly with plans.

About an hour after his call, my phone rang. Zell said he would fly into the Signature Air offices at the Los Angeles Airport, where he had lined up a private room. My reporters and I could talk to him over refreshments. “Does that sound good?” he asked. After I replied yes, his tone assumed the hard, blunt edge I would hear often in the coming months.

“I was going to invite all of you to come to my house in Malibu until you sent a fucking reporter up there and scared the shit out of my housekeeper,” Zell barked. I was unaware that we had sent anyone
anywhere near Zell's house and asked what he was talking about. “Some guy named Lopez,” he responded. “Let me tell you something, you want to talk to me, call me and I'll talk. But you don't fuck with my employees. Got that?” I apologized if any of our reporters has scared anyone, and added that he must be referring to our columnist, Steve Lopez, who, I assured Zell, was a professional. I couldn't imagine him bullying anyone, particularly a housekeeper. I told Zell I would look into it and get back to him, but he hung up after telling me where we would meet early on a Friday afternoon. I asked Doug Frantz to find Lopez and learn what had happened.

A couple of days later, I watched as Zell's huge jet pulled up to the Signature Air hanger and a diminutive, balding, elfish-looking, sixtyfive-year-old man with gray hair and a beard stepped off. He ranked number fifty-two on the
Forbes
list of the four hundred richest Americans and had a personal fortune estimated at $4.5 billion before the latest $39 billion sale of his real estate venture, but you never would have guessed it from his appearance. He wore his signature jeans, an open-collared striped shirt, and a rumpled blue jacket.

Zell may have known a lot about deals and finance, but it soon became clear he didn't know much about the newspaper game. Any columnist worth his salt loves anything that adds juice to a column, and Zell's reaction to a simple inquiry by Lopez had quickly elevated a spat over beach access in tony Malibu from a ho-hum column to an opportunity to publicly needle the new boss. I could see Lopez smiling as he gave his side of his story in his column, in which he affirmed his point of view to the new man in town: