ESOP at Center of Chicago Tribune $8.2B Deal
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.