Tribune Company: It's a Done Deal

A recent Financial Times article totally ignores the 8% interest payment to current Tribune (TRB) shareholders starting 01/01/2008. Obviously, current debt holders have a vested interest in claiming that the Tribune can continue to operate indefinitely as a half privatized company. The fallacy in this argument is that legally this is impossible.

Financial Times 09/06/2007

“It is collective wisdom that no one wants to see that last USD 4.2bn come out,” said one lender, adding that its looming presence is partially reflected in the trading levels.

Even those that are dead against the Tribune adding $4.2 billion in debt to its books admit that the Tribune is well within the 9 x EBITDA requirements according to the credit agreement, as stated in the FT article. Note that in reality the sale of the Cubs is a cushion that has yet to be factored in. In other words, the reported 5.9% YOY drop in revenue hasn't pushed the Tribune over the 9 x EBITDA level.

The Tax Angle

Ironically, the concept of using an employee ownership tax shelter is a Board & Berkle game plan. I can just imagine the expression on the faces of Board & Berkle when they first learned that the original Zell offer was based on a play taken from their game book.

Naturally, Board & Berkle immediately amended their own offer to reflect ESOP ownership. In any event, this did not help and the Tribune went with Zell even though the two offers were very similar. The estimated savings or increase in retained earnings is about $120 to $150 million a year, assuming the Tribune maintains 2006 P&L levels.

The latest news item that shows that this deal is on track pertains to the tax angle. A Tribune Press Release states that Arnold & Porter are amongst Zell's leagal advisors. Going through the list of advisors it is obvious that Arnold & Porter are the advisors dealing with tax implications regarding the privatization and employee ownership.

Tribune Press Release 04/02/2007

The financial advisors to the company and its board of directors were Merrill Lynch and Citigroup. The financial advisor to the special committee was Morgan Stanley. Legal counsel to the company and its board of directors were Wachtell Lipton Rosen & Katz, Sidley Austin LLP and, for ESOP matters, McDermott Will & Emery. Legal counsel to the special committee was Skadden Arps. Duff & Phelps served as financial advisor to the ESOP trustee and its legal counsel was K & L Gates. The financial advisor to Zell was JPMorgan Chase , and legal counsel to Zell were Jenner & Block, Arnold & Porter, Morgan Lewis, and Dow Lohnes.

Now here is how you get inside information. Who would know better than anyone else if the deal was going through or not? Obviously the answer is Zell's legal counsel. If you could get a straight answer from them that would be great, but you know they are not going to talk to you about the deal. The next best thing is if one of them does something that indicates the deal's status. Guess what, Blake Rubin just played his hand!

Washington Business Journal 09/05/2007

McDermott adds 3 tax partners from Arnold & Porter

Washington Business Journal - 10:32 AM EDT Wednesday, September 5, 2007

by Neil Adler

Staff Reporter

The growing tax department at McDermott Will & Emery LLP has hired three lawyers from Arnold & Porter LLP.

Blake Rubin, former head of Arnold & Porter's tax practice, Andrea Whiteway and Jon Finkelstein have moved to McDermott's D.C. office as partners.

Rubin worked at Arnold & Porter in D.C. for seven years, and before that he was at Steptoe & Johnson LLP in D.C. for 13 years. Whiteway also worked at Steptoe & Johnson with Rubin. Finkelstein joined the two of them at Arnold & Porter in 2002.

Rubin said he's known people at McDermott for more than 20 years. The opportunity to work for an expanding, and larger, tax group appealed to him, Rubin said. McDermott "is going in the right direction," he said, adding that the tax department is "very strong substantively already."

Thomas Milch, chair and a partner with Arnold & Porter, said the move to McDermott is a "great opportunity" for Rubin, Whiteway and Finkelstein. Milch said his firm had been looking for people to add to its tax department, which currently has about 25 lawyers, even before Rubin, Whiteway and Finkelstein left for McDermott.

Milch said that from the end of 2002 until the end of 2006, the number of lawyers at Arnold & Porter decreased from 710 to slightly more than 600. However, Milch said that from July through the end of 2007, Arnold & Porter will hire about 80 lawyers, including some that already have come aboard.

Rubin said that Arnold & Porter's lawyer base has been shrinking, while McDermott's is expanding. That was a factor in his decision to head to McDermott.

Rubin specializes in federal taxation, with a particular emphasis on matters relating to partnerships and other pass-through entities, as well as real estate taxation. His clients include real estate mogul Sam Zell, who is buying the Chicago-based Tribune Co., as well as Bethesda-based Host Hotels & Resorts Inc.

Whiteway focuses on partnership and real estate taxation. She regularly advises clients on, among other things, issues involving tax advantaged dispositions, acquisitions of real estate, structuring of private real estate investment trusts and corporate mergers and acquisitions.

According to McDermott, Rubin is founder and president of the Washington, D.C., Center for Public Interest Tax Law, a nonprofit corporation that provides pro bono representation to low-income taxpayers before the U.S. Tax Court. Whiteway is executive director of this organization.

Finkelstein practices primarily in the area of federal taxation, with an emphasis on tax matters related to partnership and corporate transactions. He has experience advising clients on issues such as joint venture and fund formations, acquisitions, dispositions, recapitalizations and reorganizations.

McDermott's tax department has more than 100 lawyers, including close to 40 in the District. The law firm's D.C. office has added 13 lateral partners since January, said Bobby Burchfield, co-head of McDermott's District office. The firm's lateral partners include several tax and benefits lawyers beyond the three latest hires from Arnold & Porter.

Rubin said "it's possible" that other lawyers from Arnold & Porter could come to McDermott. He said that his new employer treats its homegrown lawyers and lateral partners equally, and that's enticing to him.

Overall, McDermott has more than 225 lawyers in D.C., where it opened an office in 1978 with two lawyers. Burchfield said that 40-plus lateral partners have come to McDermott firm-wide since the beginning of the year. McDermott has about 1,200 total lawyers at numerous offices in the U.S. and abroad.

You don't make partner at a top notch firm like McDermott unless you bring with you a client base that provides a sufficient revenue stream. If Rubin had lost Zell as a client, he wouldn't be moving. In this case, Rubin took with him another two zealots (as in Zell supporters); Andrea Whiteway and Jon Finkelstein.

Perhaps it would be enough just having Zell as a client for Rubin to make partner at McDermott. But for all three to make partner…give me a break. One $8.4 billion deal is not enough, so I'm wondering what other megabucks deal the three have going. The Cubs need to get sold and a couple of Tribune buildings over the next 12 months; all providing a steady revenue flow, however we are talking about three new partners, not one.

It is so obvious that without the income from the Tribune deal this would not be happening that it just doesn't get any better.

Disclosure: Long TRB again (see previous article).