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Sam Zell is not having a good year. There was an excellent article this summer in BusinessWeek on Zell's "Deal from Hell" in regards to his purchase of Tribune. [Jul 30 BusinessWeek: Sam Zell's Deal from Hell] (a great read if you want to learn about this sort of thing)

Well yesterday, hell arrived and Tribune filed for Chapter 11.

  • Media conglomerate Tribune Co. has filed for bankruptcy protection, pressured by high debts. Tribune, the privately held publisher of the Chicago Tribune and Los Angeles Times, in recent days hired Lazard Ltd. as its financial adviser and a legal counsel for a possible trip through bankruptcy court, the Wall Street Journal reported, citing people familiar with the matter.
  • The Wall Street Journal said Tribune has been on wobbly footing since last December, when real-estate mogul Sam Zell led a debt-backed deal to take the company private. It said that the company's cash flow may not be enough to cover nearly $1 billion in interest payments due this year, and Tribune owes a $512 million debt payment in June.
  • One of Tribune's most pressing concerns is that the company is likely to be in violation of debt terms that limit borrowings at the end of the year to nine times its adjusted profits, the paper said.

While this is a rich individual, and you may or may not care about Tribune, this is a symptom of a disease I expect to hit the greater private equity world in 2009, and I believe it's worth readers' attention to understand the "system". If you are not familiar with this game - basically you buy cyclical companies with money from your investors, load them with debt, take a lot of fees for your "expertise" as a buyout maven, get rich and laugh to the bank.

The problem is the whole "debt" part [Nov 3: New York Times - Debt Linked to Buyouts Tightens the Economic Vise]. If the companies go bust based on your 'expertise' later down the road? No worries - you made your riches and your 'financial engineering' assures you are loaded to the gills no matter the eventual outcome of your target company. If I remember the Zell story from this summer correctly, he has it structured so his exposure is minimal even if the company goes up in flames. (Heads we win, tails we win - notice a pattern?)

If you are intellectually curious about this type of thing, I'd read the above link from Nov 3rd, and another item that opened my eyes to this game a few years ago [BusinessWeek - April 10 2006: Where's the Beef?] about how the game is played, in this regard specific to Burger King. That's one of my favorite stories period in terms of learning what exactly is going on out there in the highest reaches of the fiefdom. While the serfs... err sheep are oblivious to it all.

It really is eye opening and shows you how the greater good (existing companies that were just fine until these "titans" came onboard) is sacrificed so a few can extract a ton of money out of these situations. This is part and parcel of our economic system - risk the many for the riches of the few. If the company goes bust, who cares - many of the peon class (workers) lose their jobs, but those who played the game win as they extracted their fees (management consulting fees and others) for doing the deal. If a lot of people lose their jobs and homes - that's ok - the big money made their scratch. Even Chapter 11 bankruptcy is not really losing anymore.

Anyhow, it really is amazing how the "titans" have gamed the system - heads we win, tails we win - not much different than the corporate executives compensation system. Cramerica - for the corporation, by the corporation. Just a sign of the times - as the tide rolls out, the dirty underwear is showing its skid marks all over America. Expect a lot of these in 2009. (no worries - the government will fix it).

Source: Tribune Files for Bankruptcy, More Dirty Laundry