Monday, December 8, 2008

Tribune Bankruptcy and Absolute Priority

Photo by matt1125

The Tribune Company, owner of the flagship Chicago Tribune, as well as the L.A. Times, Baltimore Sun, WGN News, and other assets (including the Chicago Cubs) has finally entered Chapter 11 bankruptcy--a destination toward which it has been slouching for months. It thus seems to have become the latest victim of private equity's debt-fueled LBO rampage, joining Mervyn's and perhaps Bally. Tribune Company Chairman and CEO (and architect of the recent ill-fated going-private deal) real estate tycoon Sam Zell said that he expects creditors to take a significant haircut: "[s]ome elements (of the credit structure) will have no recovery."

As mad as the creditors are likely to be about this, the shareholders--especially the employees--are likely to be hopping mad when the facts emerge about how this company will restructure. Tribune Company is "America’s largest employee-owned media company," and many employees were unhappy about Zell's takeover/privatization of the company, as well as his capitalism-heavy-journalism-lite management refocus, and now they'll have reason to be really upset. While Chapter 11 may well not mean the demise of the company, it will almost surely mean the complete or near complete destruction of whatever value the employee's ownership stake (equity) might have had before the filing. The reorganization will almost certainly result in a debt-for-equity exchange, where current equity gets squeezed out (at least for the most part) and big debtholders take over that equity in exchange for discharge of debt. The absolute priority rule will almost certainly prevent equity (shareholders) from retaining any significant stake if some significant group of creditors will have "no recovery." Unless every creditor class can be convinced to vote in favor of a plan that leaves some value for equity, the company will be unable to confirm a Chapter 11 plan. Indeed, one wonders what Zell plans to do about his own equity stake.

Maybe there are more surprises waiting in the wings here, but this is yet another sad day in a long string of sad days for the Tribune Company's employees, who seem to have been largely involuntary passengers on Zell's pirate ship to Chapter 11.

Update: A little surfing answered my question about Zell's personal stake and added an interesting twist to the case. Zell's $315 million (!) investment in the going-private deal was structured as a $225 million subordinated 11-year note and a $90 million warrant to purchase up to 40% of the company's shares within 15 years from the Employee Stock Ownership Plan that now owns 100% of the Tribune Company's equity. Thus, Zell's $90 million warrant is likely worthless (or nearly so) after the bankruptcy filing (for the reasons discussed above), but his $225 million note is debt, which will likely be promised some distribution in a Chapter 11 plan. I intend to follow this (for me, local) case in the days ahead, focusing on the word "subordinated." While Zell's note now is likely subordinated only to the other company debt (both public bonds and bank loans), it might well ultimately be equitably subordinated under Bankruptcy Code § 510(c)(1) to the ESOP's share interest, which Zell's going-private transaction has now all but completely destroyed. Stay tuned!

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