Sam Zell and the Prisoners of Excel

On Tuesday, Tribune shareholders meet, asked to give their blessing to a drawn-out sale of the company. It's a sale in sloooow motion, having been set into action in April, but unlikely to be finished -- if it's finished -- until December. It's playing out like some satire, with the main characters in the drama, including Tribune CEO Dennis Fitzsimons, would-be new Tribune chairman Sam Zell and the board acting as if this were a normal sale in normal times. These guys are in the foreground. In the background, a company that has badly underperforming its own industry, a news industry that is in free-fall, all in an overall market suddenly hypersensitive to debt. It's like two different movies playing on the same screen.

There are certainly lots of questions about the Sam Zell buyout deal and whether it will go through at anything near the $34 a share sale price, should it finally close after Tribune gets, in December, its expected FCC grandfathering its cross-ownership of newspapers and TV stations. Richard Perez-Pena runs those all down well in a piece in Monday's New York Times. 

In essence, outside observers are scratching their heads at this big disparity: though the deal is announced at $34 a share and Tribune management has recently reiterated the solidness of the financing, the share price closed at $25.67 on Friday, a 24.5% discount to the would-be buyout price. That says few believe the sale will end up closing at or near the $34 a share price.

In short, the outcomes appear to be:
---The deal goes through as outlined, and Tribune takes on total debt of about $13 billion, when it closes its final $4.2 debt package in the fourth quarter.
---The deal falls through and Tribune is left holding on to the new debt it assumed in June -- $ 4 billion -- plus its $5 billion or so in ongoing debt.
---The deal gets renegotiated, at a lower share price. That might mean the company could borrow less money to complete the deal, but the rub is it might well be at a higher rate, given the current credit near-panic.

I'd pick door #3 at this point, simply with the logic that Sam Zell, like the would-be buyers of Home Depot's wholesale supply business or J.C. Flowers, which is threatening to renege on its Sallie Mae deal, will simply say: "Hey, look the market's changed. Let's talk."  It's just good business, and familiar to Zell in his day job as a buyer of distressed assets. Certainly, he can quite properly cite Tribune's further ad revenue plunge -- ad revenue down 11% in the second quarter; total revenue down 9% -- and wider market uncertainty.

But any of these realities lead to an inescapable solution. Tribune, the 4500 people who work at its dozen or so newspapers and their millions of readers are all prisoners of Excel.  The numbers don't lie; the spreadsheets yield what the spreadsheets yield. More on those numbers in a moment, but the short story is whatever happens, the further pressure on Tribune resources -- on its newsgathering ability -- will grow appreciably. Expect more buyouts, more layoffs and thousands of years of experience to vanish from these newsrooms -- and their readers' lives -- within the next year, no matter how this drama plays out.

The numbers, going in the direction they're all going, tell us that taking on bone-crushing debt that needs to be serviced at market rates and market timing may well cripple the very enterprises being "financed." Employees are reeling just trying to figure out whether the new Tribune's would-be future pension payments into a new Employee Stock Ownership Program (the ESOP) is a good idea. Will they be well-served, they wonder, as they and their leaders try to figure out the ravels and unravels of the complex deal.

But I think that's like a game of three-card Monte. The pension worry is just a dodge. No job, no pension worry. And the jobs themselves are really what are at immediate risk given the declining financial picture. Of course, employees have a hard time dealing with that, like so many in the profession at this point, they feel powerless, just observers, as their papers of record record their own demise.

When we do look the numbers more closely, we see there's an almost endless number of bad numbers from which to choose. You can compare Tribune's anticipated debt service -- of about $1 billion a year -- against its anticipated free cash flow of about the same a year, post sale and post ESOP. That doesn't leave much room for error. But the would-be cash flow is now a moving target, as each monthly and quarterly report undercut projections. 

You can look at Bloomberg's excellent July story by Tim Mullaney and Shannon Harrington on credit-default swaps numbers, showing how little confidence moneymen had in the deal going forward. In Friday's story, Mullaney updated a couple of those numbers:

Lehman Brothers Holdings Inc. said this week the deal has no better than a 50-50 chance of being completed as scheduled, and credit markets indicate a 57 percent probability of insolvency if it is.

Or you can look at the wider newspaper industry, if you make the argument that of course Tribune's been preoccupied by sale upheaval and once it re-focuses, things will get better. But even for the rest of the industry, the second quarter was a nightmare: while publishers struggle to keep classifieds from double-digit declines, both national and retail ads (long bulwarks against the classified decline) are now exceeding 5% declines at most of the major chains.

And then we've got all those long-term trends going in the wrong direction, the Googles and Yahoos gobbling more market share from newspaper companies and disproportionately pulling the growth from the fastest growing part of the Internet business, video. In addition, readers, according to a new Shorenstein Center report, disproportionately get their news at non-newspaper-owned sites. (That report is well-covered and commented at Recovering Journalist and Newsosaur.)

Or one last number. When Tribune took its $4 billion in new debt and did phase 1 of its buyback, it was way over-subscribed. Shareholders smartly wanted out, but only 57.7% of their offers were accepted. The others await the uncertain future of this deal.

More on Tribune, here.