Zell on Tribune's Bankruptcy: No Way to Avoid It

 |  Includes: GCI, GHC, MNI, NYT
by: Julia Boorstin

Tribune's filing for Chapter 11 bankruptcy protection earlier this week was the most dramatic sign of the perilous position the entire publishing industry is in.

Real estate mogul Sam Zell took the company private in $8.2 billion dollar debt-backed deal a year ago, and since then it's been struggling with declines in advertising that are hitting newspaper and local TV stations particularly hard. The company includes the Chicago Tribune, Los Angeles Times and ten other newspapers, plus 23 local TV stations.

Bearing $13 billion in debt, Tribune worked with its creditors to renegotiate its debt before filing for Chapter 11 in Delaware on Monday. The company had $1 billion in debt due this year and an $512 million interest payment due in June. With revenue falling, the company struggled with a requirement that debt from going private not exceed nine times the company's profits.

The company is still trying to sell its Chicago Cubs baseball team (see link below), its Wrigley Field stadium, and Tribune's share in a regional cable sports network, which could bring in more than $1 billion dollars. Zell expected to have the Cubs sold by the end of the year, but tight credit markets, among other things, delayed the sale.

Now Tribune says unsecured creditors include JP Morgan Chase (NYSE:JPM), with $8.57 billion in a claim under a senior facility, and Merrill Lynch (MER) with a $1.6 billion claim under a bridge loan facility. And Tribune's employees are also on the hook: the company's employee stock ownership plan owns 56.5 million shares of the company.

Yesterday Zell spoke exclusively with CNBC's Maria Bartiromo. He said if 2008 had been a year like 2007 or 2006, the Tribune company would be okay. Zell said: "This was like a giant tsunami, a giant storm, there was no way to overcome it." His point being that if ad sales had maintained any of their strength from the last few years, the calculations behind his buyout would have worked.

Still, there were questions about this acquisition since the very beginning, before the ad markets really collapsed. Sixteen months ago I blogged about Zell closing in on Tribune and as the Wall Street Journal points out, I mentioned how the company's financial situation could easily get worse. From my July 24, 2007 blog: "The worse the company does, the worse the debt burden for the employee stock ownership plan that Zell’s using to structure the deal. Even if the deal wins approval from shareholders and the government it must borrow $4.2 billion (in addition to the $7 billion it’s already borrowed to buy back shares for the first step of the transaction). And think about the premium!"

This year's economic crisis was certainly a perfect storm -- or tsunami -- for Zell. But there's still no doubt that the newspaper industry has faced a sector shift for a while. Advertisers are shifting more classified ads and the like online, which puts local TV and newspapers in a rough spot.