Tuesday, May 29, 2007
Sam Zell's $12 billion buy-out of Tribune Co. is making ominously fitful progress. On Friday, Tribune announced that approximately 224 million shares or 92% of outstanding shares were tendered in its self-tender offer. The tender offer was to repurchase only up to 126 million of Tribune's shares for $34.00. Tribune will now purchase the tendered shares on a pro rata basis. The remaining shareholders will now have to wait until the fourth quarter of 2007 to receive the same consideration in a back-end merger, effectively providing the company (and its prospective buyers) with some short-term financing.
More interestingly, to finance this purchase Tribune last week sold more than $7 billion in notes. According to this report in the Wall Street Journal, the notes were a tough sell, and the investment bankers ended up forgoing roughly a third of about $120 million in fees to get the deal done. Furthermore, to push the sale through, Tribune agreed to higher interest rates and a faster repayment schedule than originally planned on most of the debt.
Zell is contributing $315 million in equity, while Tribune's ESOP is contributing $250 million, but the company will have post-transaction debt of $12 billion, a debt to equity ratio that is exceedingly high. Moreover, the financing for the back-end merger is still not locked in. Tribune must raise $4 billion more in financing for the back-end merger. The tender of 92% of Tribune's shares in the front-end of the transaction highlights the fact that many think there is significant risk that the back-end will not find financing and be effected. And even if the transaction is completed, Tribune is going to have a tough time servicing these loans, having an interest burden of $1 billion a year before any asset sales (read the Cubs) to pay down debt. This will leave no margin for error or misfortune. A recession or management failure at the Tribune will quickly result in a financial crunch for the company.
The Zell deal has always been an envelope pusher in structure and it is a clever tax-dodge. But the deal appears to be pushing the envelope for risk-tolerance as well, something a bit unsettling given that Zell is using the Tribune employee stock option plan to finance his bid. Tribune's employees may end up on the very raw side of this transaction losing not only their ESOP money but perhaps their jobs in a transaction they unwittingly facilitated. Alternatively, if the back-end cannot be financed, it will be Tribune's remaining shareholders who will suffer under the weight of debt. Meanwhile, Zell's risk is only his $315 million on the table to acquire a 40% interest in a $12 billion company. Nice deal maker that Sam Zell.