Tribune is a classic textbook case on how not to take a media company private, especially in hard times. But the real tragedy will be if Zell adds insult to injury by failing to use Chapter 11 restructuring to give it a new lease on life. Undertaking a dramatic digital reinvention of its diverse operations would provide a template to other media companies that desperately need to transition into new infrastructures to survive.
There also is a desperate need to preserve the enterprise content, American intellectualism and local connections that historically comprised newspapers' unique value proposition. Sadly, Zell does not appear to care. With its $8 billion in assets overshadowed by $13 billion in debt, initial indications are that Tribune's bankruptcy takes the pressure off operations but focuses restructuring only on debt.
That makes Tribune's filing a travesty at a time when Detroit's troubled Big 3 automakers must agree to a long-overdue restructuring to qualify for a $15 billion federal bridge loan. Both the newspaper and automotive industries require drastic, permanent change in their legacy structures, whose inefficient costs far exceed revenues and steadily growing digital income. Television broadcasters and other old-line businesses are not far behind.
Tribune's bankruptcy filing smacks of a short-term financial fix rather than long-term revolution. It openly defies the interactive structural change that is imperative for all ad-supported business. Magna guru Robert Coen this week called for another 12% decline in local newspaper ad revenues in 2009. Battered by the economy and the long-term loss of classified advertising to the Web, newspaper advertising suffered a record drop in the third quarter, according to the Newspaper Association of America. The biggest 500 newspapers in the country are seeing annual circulation declines of about 10%, and total ad revenues are down another 20%.
A year ago, Zell was banking on a 6% erosion of the company's core newspaper business, which has actually more than doubled. He knew the company's cash flow was far short of servicing more than $1 billion in interest payments due the first year, and played roulette with asset sales in a deal-averse market. So far, its only major sale has been Newsday to Cablevision for $650 million.
Tribune now owes lots of money, including $2 billion to bondholders and $8.6 billion to a syndicate of lenders led by JP Morgan Chase that includes private-equity players Kohlberg Kravis Roberts' KKR Financial. In bankruptcy, even Zell will receive restitution--along with bankers--as the holder of subordinated debt warrants to acquire 40% of Tribune. Standard & Poor's said Tuesday that senior secured creditors may recover 30% to 50%, while holders of senior unsecured and subordinated debt and senior secured notes and debentures could come away with nothing. Barclays has agreed to maintain the Tribune's existing securitization facility and is providing a credit facility.
The weakest link in Zell's financial house of cards is the Tribune employee stock-ownership plan, created when Zell financed his buyout deal partially by borrowing against company contributions to employees' 401(k) plan and future payroll. Shares of stock in the plan's trust are now virtually worthless. There will be no tax advantages or gains to make employees rich, as Zell promised when he set up the financing scheme. Possible restitution may come if the reorganization flags governance issues about the ownership plan. There also appear to be violations of debt terms that limited borrowings to nine times adjusted profits. That ratio was 8.3 mid-year, before Tribune reported an 83% decline in operating profit for the three months ended Sept 28.
To be sure, debt covenants issues are vexing many newspaper publishers and broadcasters that are unable to borrow funds or generate revenues are they have in the past. The New York Times is mortgaging its landmark building for $225 million in emergency funds as it faces $400 million in debt payments next spring. The growing list of distress sales includes Scripps' Rocky Mountain News and McClatchy's Miami Herald. Gannett just announced another 10% staff reduction, and The Christian Science Monitor is going from daily to weekly and combining news-gathering resources with others.
What is less clear is the extent to which the insightful writing and artful storytelling that is the best newspapers' proud tradition will become the centerpiece of online strategies as newsprint gives way to the cyberpage. Chapter 11 bankruptcy may be one of the few ways for shackled publishers, such as Tribune's 12 newspapers, to comprehensively restructure and reinvent.
The Huffington Post is the poster child for creating electronic newspapers from scratch, although it doesn't pay contributors, which sends chills up journalists' spines. The Washington Post, The New York Times and other publishers are aggressively linking to blogs, Web sites and other news sources in an ad hoc model of the networked news hub that is to come. All is produced at a fraction of the cost, with a fraction of the manpower and overhead shouldered by traditional media companies. All is the new foundation for addressable advertising, e-commerce and other interactive revenues streams. Consider Google, which owns Paper of Record, an Ottawa-based firm that has been digitizing global newspapers and transforming them into searchable databases for more than a decade.
Newspaper publishing's solutions may be a simple matter of perspective. The Internet becomes the repository of all the news that's fit to print and all written works, and no town in America goes without a newspaper. Traditional broadcasters, also represented by Tribune Co.'s 23 TV stations, face a similar reckoning of costly old-line infrastructure and operations as they begin to eliminate overpaid news anchors and expensive, inefficient news-gathering systems. Until Zell and other old-line newspaper publishers and broadcasters stop lying to themselves, their businesses and their employees will continue to suffer.