Real estate mogul Sam Zell built a complicated deal to take over Tribune Co., putting little of his own money at dare to undertake

By Emily Thornton

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If there is one thing Sam Zell foresaw correctly, it is this: The light of day after Zell announced he was buying Tribune for more than $8 billion, the real possessions tycoon told Chicago Tribune reporters the deal would not change his lifestyle no matter what happened. But, he said, "it’s likely to change yours."

How right he was. Just one year after Zell bought the company (BusinessWeek, 7/30/08), Tribune announced on Dec. 8 that it is filing for bankruptcy. That means Zell could lose a small fraction of his estimated $5 billion fortune. The intellect: The man who likes to call himself "the grave dancer" put same little of his own skin in the game. Instead, employees of the Tribune properties will bear the brunt of the pain, as they technically own the company and hold its $12.9 billion in debt. Tribune reported $7.6 billion in assets.

Tribune comprises eight newspapers, including the Chicago Tribune, Los Angeles Times, and Baltimore Sun; a 31% share of Food Network; two dozen TV stations, including outlets in the three biggest U.S. markets; and the Chicago Cubs baseball team. The Cubs immunity was not part of the bankruptcy filing.

Tribune’s bankruptcy bequeath be complicated. For starters, figuring out the value of Tribune in insolvency could be problematic. Every day brings a slew of firmly worsening statistics on ad revenue and circulation, pummeling gazette valuations. On most prominent one of that, Zell used complex financing schemes predicated on accuse advantages in structuring his deal. Those arrangements now stir up thorny questions.

One of the trickiest issues will subsist how to handle a financing scheme Zell used to buy Tribune that relied on a tax-exempt employee stock ownership plan, known because an ESOP. Although employees had no say over how the ESOP was used, Tribune’s provision approved Zell’s bid, which used the ESOP as a vehicle through which he borrowed hundreds of millions of dollars to tax-efficiently permanent fund the transaction. The scheme allowed Zell to pony up righteous $315 million of his own cash to twist. control of the company and made employees technically Tribune’s owners.

But ownership came at a compensation: Tribune cut hindmost its 401(k) contributions and instead committed to use a fragment of its payroll to pay down the hundreds of millions in debt that a rely on set up for the ESOP used to buy Tribune shares, according to employee stock owner plan expert Corey Rosen. "It was like a mortgage that you use to buy a house with no cash down," says Rosen, who wrote a report that goes into account on Tribune’s ESOP arrangements.

Early on in the deal, Zell tried to motivate his armed force by telling them the financing scheme would result in put a tax upon gains that would bestow Tribune a big advantage and could one epoch make employees rich. "This concern lends itself to ESOPs because you have a piece of land of people, at least in theory, who are intelligent," he declared in the Chicago Tribune interview in December 2007.

Now, the ESOP’s equity stakes order in a fair way be wiped finished, and the handling of the tax gains will likely become one issue in the bankruptcy restructuring. "If a firm goes insolvent debtor, the equity runs the risk of not sentient worth much," says Standard & Poor’s analyst Emile Courtney. "They will probably fail to keep everything" in the ESOP, predicts impost expert Robert Willens, who has closely studied the Tribune deal.

In a Dec. 8 note to Tribune employees, Zell continually addressed them as "partners." He uttered their payroll, benefits, and 401(k)s would not obtain existence affected by the filing. As for the ESOP, Zell said, "it is part of the ownership structure, to such a degree its value and role long term will have being determined in the restructuring. We make no doubt of the structure is a expensive asset to the company and that there are conclusive reasons to preserve it."

But the ESOP could raise governance issues about who should be in charge of reorganizing the company. As side of his financing scheme, Zell also obtained a warrant to pervert with money 43% of the company. So, there’s a question if it is "the ESOP trustees who preserve set store by for the ESOP itself? Or if it is Zell negotiating to protect his note?" says person bankruptcy expert who asked not to be named.

The bright side may be that Tribune employees didn’t have a lot of time to put a great quantity money toward ESOP contributions. "In a weird way, the employees are good in a higher degree off that the company crashed today instead of seven years from now," says a banker familiar with the deal, who asked not to be named.