• by Erik Sass , June 9, 2009

After engineering the $8.6 billion takeover of Tribune Co., struggling with editors over employee layoffs and journalistic integrity, and leading the company into Chapter 11 bankruptcy, Sam Zell may lose control of the newspaper publisher if creditors have their way, according to a report published in the company's flagship paper, the Chicago Tribune. The news comes as another group of creditors are said to be contemplating wresting control of Clear Channel from the private equity firms that bought it last year.

The possible takeover of the Tribune Co. is a reflection of how badly the company's finances have deteriorated in step with the economic downturn; its Chapter 11 status provides the mechanism for such a takeover, although Tribune execs have maintained they could still reach some agreement with their lenders.

Zell and his team said they are still "actively" involved in management of the company, according to the Tribune article, which reports the arrangement could be "a debt-for-equity swap" nullifying Sam Zell's warrant to buy up to 40% of the company. The warrant would also give him control of the employee-owned company, so ending the warrant would effectively give control to senior lenders. Senior debt is trading at 30% of its dollar value.

Like Clear Channel's $23 billion debt (see related story in today's MediaDailyNews), the $8.6 billion debt assumed by Tribune in going private was considered ambitious even in good times, but it has since become insupportable, due to plunging ad revenues and the reluctance of lenders to renegotiate the terms of lending covenants (Tribune entered Chapter 11 in December 2008; Clear Channel is currently still meeting all its financial obligations). Tribune's borrowing covenants required the company to maintain a proportion of cash flow to total debt of no less than 1-to-9 through 2008, tightening to 8.75-to-1 in the first quarter of 2009. This proved impossible after the company failed to sell the Chicago Cubs baseball franchise as planned.

Looking further back, Zell's takeover of the company in December 2007 followed a long auction, demanded by the Chandler family, which became noticeable for a lack of interested bidders; this reflected growing apprehension about the future of the company and the newspaper industry in general. In April Zell admitted in an interview with Bloomberg TV that buying the company was "a mistake," explaining: "By definition, if you bought something and it's now worth a great deal less, you made a mistake, and I'm more than willing to say I made a mistake. I was too optimistic in terms of the newspaper's ability to preserve its position."