Tribune/Zell Deal in the Bag: No Longer 'If' - Just When?

It is always a good feeling when common sense, at least what appeared to me to be common sense, comes through in the end. For months now, dozens of articles have been written asserting that the Zell/ESOP Tribune (TRB) deal was running out of ink. In two previous articles, here and here, I spelled out why logically this wasn't true. Finally, here is a Financial Times article quoting Tribune sources. All those nay-sayers and 'deal breakers' (see third article), read and weep; here it is straight from the horse's mouth:

Stand-off threatens Tribune deal

By Stephanie Kirchgaessner in Washington

Friday Nov 2 2007 18:05

Tribune Co (TRB) company and the chairman of the Federal Communications Commission are locking horns over the proposed $8.2bn buy-out of the media group by Sam Zell, the real estate entrepreneur, in a stand-off that threatens to derail the deal.

Tribune has warned the FCC that the takeover is at risk of collapsing if it does not receive regulatory clearance in the next two weeks.

But Kevin Martin, the Republican chairman of the commission, in private conversations, has said he is unwilling to address the matter before December 18, the date he has set for a vote on industry-wide changes to media ownership rules.

If the buy-out fails to close by the end of the year, the newspaper publisher's new owners will not be able to register the company for tax-exempt status next year, a crucial element of the deal.

The price of the $34-a-share offer will also increase because of additional payments based on an 8 per cent interest rate, which would take effect after January 1.

Tribune says it needs at least 20 days between receiving FCC approval and closing the deal.

But Mr Martin is sceptical about Tribune's assertions.

Shaun Sheehan, Tribune's vice-president and a lobbyist in Washington, says: "We're hopeful but we're running out of time."

In order to close the transaction in time, Tribune, publisher of the Los Angeles Times, needs the commission to grant its new owner temporary waivers that will allow it to bypass media ownership restrictions.

Without the waivers, the new owners would be in violation of rules that forbid any single company from owning both a newspaper and broadcaster in the same market. Mr Martin has so far refused to bring the deal up for a vote although he has the necessary support of his two Republican colleagues.

Instead, in a move that some say reflects Mr Martin's reputation for being a calculating political operator, the commission chairman is pressing forward the broader media ownership overhaul.

People close to the FCC say they believe Mr Martin is holding up the Tribune deal for political reasons.

The transaction has won the backing of a handful of Democrats and they say Mr Martin believes delaying the deal will divide the Democrats and prevent them mobilising against the Dec-ember 18 vote on media ownership, which would negate the need for a separate Tribune waiver.

Mr Sheehan said: "The Democratic majority is butting up against the regulatory objectives of the Republican chairman of the FCC. My very real concern is [Tribune] being thrown overboard in that very macho stare-down."

Mr Martin's office declined to comment.

I just love the way people just don't get it!

First, let's deal with the title. The average person, apparently the author of this FT article included, with no background might conclude the same as the title says. After all, the Tribune says that the tax angle is lost if the deal doesn't close in 2007, right? Wrong, see below.

Second, finally people are waking up to a little known fact that I expounded upon in earlier articles that there is an 8% payment due to all outstanding shareholders starting 01/01/2008. This time, it is the Tribune itself coming out and saying that they want to avoid this payment at all cost, not just Saul Sterman.

Third, Martin may very well hold out until the last minute. This will put pressure on the Democrats that want to see the TRB deal close. The original TRB waiver was in place when the Democrats ruled the FCC and for good reason. The Democrats don't want to fiddle with ESOP, especially not before next year's election. To lose Tribune support doesn't bode well especially when Fox and Murdoch have made inroads in both the TV and newspaper medium (as in 'average' because internet rules!). What Martin is saying to the Democrats or proxies is that you can have the TRB deal and I get mine (a future deal to be announced?) or we both end up with nothing. It is all about politics and the balance of power.

As an aside, media ownership rules are going to be changed anyway sooner or later simply because Google (GOOG) is over $700 a share. If a newspaper/TV combo was more potent than a website/TV combo then GOOG would be in the outhouse and the Media sector would be king. The facts on paper say that the newspaper/TV combo is yesterday's news. The problem is that some of these politicians are dinosaurs that don't subscribe to the theory of evolution. Perhaps they should start scrolling with the Times. (I claim copyright to "scrolling with the times").

Zell knows Martin's game plan and doesn't like the timetable. The reason for this is not just the tax status. The primary reason is that Zell doesn't want to be pressured by the banks to change the financing arrangements under the threat of the 8% interest payment.

Fourth, the tax angle actually acts as a safety valve against the banks from attempting to pressure Zell/ESOP into amending the financing agreement. As Martin may hold out to December 18 for 'political' reasons, the Tribune should have everything else in place to close the deal before year end. If the banks squawk, ESOP will lose the tax angle for one year, 2007 only. The tax advantage will start only in 2008. The banks know that should they force a re-negotiation, after the deal is concluded ESOP will turn around and sue the banks for the $100+ million in losses and claim coercion. No matter how the new agreement is worded, a jury (they would request a jury trial IMO) is likely to side with ESOP, once the facts are laid out - including this article.

The banks aren't dim-witted and they have to carefully weigh their options whether or not it is worth risking lawsuits. I can't answer for the banks, but from a layman's point of view, the gain from renegotiating $4.2 billion debt terms pitted against possible treble damages, a possible reversal of terms and possible class action by shareholders as well, simply doesn’t warrant postponement into 2008 on a risk/reward analysis.

Amusingly, the banks may have an interest in closing the deal in 2007 in order to write off their losses in 2007 and regain investor trust by showing earnings in 2008. The faster they accept their losses and write them off, the sooner faith can be restored in the system and the banks can start earning money again. The longer they play around, the more disenchanted investors become, creating a bigger mess that will take more resources and time to clean up. Zell/ESOP may have unwittingly found new allies.

Conclusion

As a shareholder, this FT article is great news! Once again the Tribune is confirming that the second part of the deal will go through. The article confirms that the FCC is not an issue anymore, at least not from my perspective. Basically the article states that the FCC is a shoe in, just some political shenanigans are messing with the timing. Big deal!

It makes no difference to me whether the deal closes November 18 or December 18 or January 18. The latter just puts more money in my pocket, something that ESOP/ZELL would very much like to avoid.

Just be patient, your $34 (perhaps more) is in the bank. I don't think that shareholders can act against politicians, so Martin is immune from a class action lawsuit. Not that I can think of anything to hit him with, or even want to at this stage, but that is what lawyers are for. Too bad the lawyers haven't chimed in yet to throw in a few twists to stir things up a bit! This is beginning to get dull.

Disclosure: long TRB

Comments

[User 121199]

"Fourth, the tax angle actually acts as a safety valve against the banks from attempting to pressure Zell/ESOP into amending the financing agreement. As Martin may hold out to December 18 for 'political' reasons, the Tribune should have everything else in place to close the deal before year end."

I am long TRB, but the recent developments are giving me jitters specifically due to the tax situation. They said it will take them 20 days AFTER the decision, which is Jan18, and by this time they will loose the tax benefit, which is substantial. How can you say tis does not matter? I agree that Zell has a long term perspective and understand Martin's game, but they def. are loosing this money just because of these politicians!!