Tribune Acquisition Begins

The Tribune Corporation took the first step on its acquisition by Sam Zell today, commencing a large share buyback.  The second step, a leveraged acquisition of the rest of the company stock by an ESOP will take place after the necessary regulatory approvals are secured.  After the leveraged ESOP, Zell will hold a deeply in-the-money warrant on 40% of the stock and control the company through a management contract.  The deal financing takes advantage of tax beaks awarded ESOPs, a flow through tax structure (a Sub S), the tax advantages of leverage, and the current spate of cheap money (low interest rates).  Zell has never run a newspaper but he knows how to find value in depressed assets (his nick name is the "grave digger"). This is a bust up takeover, pure and simple; he will sell the assets and piece out the company, having found some nugget (or nuggets) that the market has overlooked.  The surprise in the package for me is the participation of the newspaper employees.  They are Zell's new owner/partners and must support the deal for it to go through.  What is in it for them?  They lose other benefits to hold the stock which means they are severely undiversified investors with both salary and benefits linked to a company with failing revenues and their new boss will bust-up the company.  Employees usually hate bust-ups, fearing the loss of their jobs.  I am still scratching my head over why the unions are going along with this. The irony is that the taxpayer is also a partner, through the tax breaks given leveraged ESOPs.  The tax breaks favor ESOP so that employees can own a share of their own companies; employee ownership was thought to produce longterm employee satisfaction and company health.  Congress did not anticipate that employees could be the passive partners in a bust-up of their own company.  Congress will have to reconsider the tax breaks for ESOPs after this deal.