ESOP at Center of Chicago Tribune $8.2B Deal

April 3, 2007 ( - At the heart of the recently announced mega-deal in which the Chicago Tribune newspaper company will go private is the company's employee stock ownership plan (ESOP).

According to a Chicago Tribune news report, real estate magnate Sam Zell will buy out the company’s public shares in a complex, $8.2 billion transaction structured around the ESOP.

The news report explained that the deal will close in several steps. In the first step, the ESOP will buy $250 million worth of newly issued Tribune common stock while Zell will put in $225 million and get a note from the company. He will also pay $90 million for a warrant that can be converted into about 40% of the company if Zell pays $500 million.

Meanwhile, according to the explanation, the company will stage a tender offer for approximately 126 million shares at $34 a share. It will borrow $7 billion at the same time, using $4.2 billion to pay for the tender and $2.8 billion to refinance existing debt. Finally, if or when various government approvals can be secured, Tribune will merge with the ESOP and convert into an S corporation and will borrow another $4.2 billion to buy the rest of the shares at $34 a share, the Tribune news report said.

When all is said an done, according to the report, the ESOP will hold all of Tribune’s then-outstanding stock, with Zell holding a subordinated note for $225 million and the warrant entitling him to acquire 40% of the common stock for $500 million. In effect, the ownership split will be 60% employees, 40% Zell.

Selling the Cubs

To help finance the deal, the company said it would sell the Chicago Cubs and its 25% stake in local cable channel Comcast SportsNet Chicago after the 2007 season. It will also take on $8.4 billion in new loans, leaving the company with more than $13 billion in debt and the most encumbered balance sheet in the newspaper industry, the Tribune report said.

The news report said that Zell will join the board upon completion of his initial investment and become chairman when the transaction closes. Tribune’s current Chairman and Chief Executive Dennis FitzSimons will remain on the board, which will have a majority of five independent directors. Zell will be represented by himself and one director of his choosing.

Employees won’t be represented on the board but their interests will be guarded by an ESOP trustee. While employees didn’t know it, that trustee participated in the negotiations on their behalf, Tribune executives said.

The news report said that the new company structure depends on the creation of what’s known as an S Corp. ESOP. The attractiveness of the structure, according to an unnamed source, is that it eliminates most of the corporate taxes Tribune would otherwise pay, which boosts the cash flow and allows the company to support a heavier debt load, the news report said.

If the structure had been in place in 2006, for instance, Tribune would have been able to avoid paying $348 million in taxes.