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Paul Kiesel
Paul Kiesel
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Zell to Chicago Tribune: Employee Owners Could be "Wiped Out"

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Shortly after filing for bankruptcy protection, Sam Zell told the Chicago Tribune, last week, that he believed the Tribune Company could emerge from the Chapter 11 process stronger and more competitive. He did not provide any concrete facts for this assertion.

Also, he chose not to provide specifics for how he plans on restructuring a company that is over-burdened with a debt load almost nine times its cash flow.

Zell, regarded as a smart and cunning businessman (at least before 2008), brokered the acquisition of the Tribune Co. by investing a little over $300 million of his own money and then leveraged the remaining balance with the Tribune Co.’s employee stock ownership program (ESOP). The structuring of this deal provided Mr. Zell the opportunity, if his newly tax-incentive purchase of the Tribune Co. panned out to be financially lucrative in the following years (as Zell presented it to ESOP participants shortly after the transaction was complete), of reaping a great reward without risking much personally.

For instance, here is an example of how the deal was immediately beneficial to Mr. Zell:

The executive director of the National Center for Employee Ownership published an analysis of the Tribune Company’s ESOP in 2007 which included the following: “In the Tribune case, the ESOP will borrow money from the company. Regardless of how the plan acquires stock, company contributions to the trust are tax-deductible, within certain limits. So in this case, the company is able to use the ESOP to borrow money and repay it in pretax dollars, deducting both principal and interest. This is one of the key tax benefits that the many articles on this transaction are referencing.”

But because Mr. Zell, a real-estate magnate, not a media magnate, had a myopic strategy and vision for attempting to steer a sagging portfolio of print and broadcast media’s ad dollars upwards (he assumed cutting overhead costs, jobs, and ramping up more advertising — Tribune newspapers consist of 50 percent advertising and 50 percent content since September — would erase some of the red ink on the Tribune Co.’s balance sheet), he is now caught in the "perfect storm," as he lightly phrased his economic quagmire to the Chicago Tribune, on December 8.

Regardless of the Tribune Co.’s hope that filing for Chapter 11 will bring a more promising future, the company’s ESOP, the employee stock ownership program that purchased the majority of Tribune Co. shares, in December 2007, will likely lose most if not all of the value of its individual employees’ holdings.

Unfortunately for the ESOP participants, they will have to stand in the back of the line in bankruptcy court to recoup their money, as creditors. And by the time it’s their turn to be paid, there won’t be much left to receive.