THE WRIGLEYVILLE WAR
PART FOUR
A Chronicle
53. Fidel Zell
54. Feast of Pigs
55. Civil War
56. Game Over
57. Double Header
58. It's Over!
59. Fine Print
FIDEL ZELL
February 24, 2008
It was the Las Vegas of the Caribbean. A playground for the rich and famous. But when poverty wedged between the working classes, a man came in to topple the status quo under the guise of reform and wealth for all of his people. Fidel Castro took over Cuba more than 50 years ago. Instead of prosperity, his island nation stagnated and rusted in a time belt from the 1950s. The moral of the story is sometimes you don't get the person you think you are getting to change things.
The man who led the coup at the Chicago Tribune was Sam Zell. Who exactly wanted him to take over the Tribune media conglomerate is becoming murky. At first, the Chandler family demanded the Board to cash them out, sell the company, or break it a part. Investment bankers looked at the Tribune businesses and passed on taking the company private or selling off the pieces for a profit. Almost all of the Tribune divisions, cable, television, newspapers, magazines, were struggling with revenue losses from declining advertising and recessionary fears. The whole print newspaper industry was under attack from the free internet information age. There were a few people who poked with a stick around some of the Tribune pieces but in the end, the Board decided to get rid of the Chandlers as fast as possible. The Board needed a white knight to put together a deal. Enter, Zell.
In a transaction that still has bankers and investment brokers scratching their heads, Zell took on billions of new debt on top of a debt heavy company bleeding red ink in order to gain control of the Tribune's assets. Before the deal close, the new alleged owners, the employees, objected to the lock-up of their stock plan burdened with the company debts and the lack of any participation in management. The unions were not happy with a private company with a heavy debt load because that would mean serious cuts - - - i.e. union jobs - - - on the horizon. The bond rating companies looked at the prospects of a chairman with no media experience running a media conglomerate as being junk, as in lowering the Tribune's bond ratings to three levels below junk status. Since the deal closed, the value of the Tribune's bonds have tanked which a sign on how the market believes the deal will end. Badly.
It was the existing Tribune Board that made the decision to sell out to Zell. In the end, they gave him not a seat on the board of directors, but a self proclaimed dictatorship. Zell made the rounds to his major newspaper newsrooms and conducted foul mouthed, insensitive and bizarre interaction with his professional staffs. He treated them like dish washers in a prison cafe. One day he said that he would go forward and make each unit dependent (so it could guide itself to profitability) but then the next week announce huge staff cuts.
Zell is scrambling to raise cash. He wants to auction off Cub field box tickets to squeeze quarters in the big picture. He wants to increase circulation figures to boost ad revenue. But in a strange marketing campaign, readers have the opportunity to get home delivery of the Sunday Trib for 99 cents, or Wed-Thur-Fri-Sun delivery for $1.00, or full weekly delivery for $2.75. The pricing structure makes no sense; Mon-Tue-Sat editions are worth $1.75, more than the Sunday edition? And the end of week editions are worth only a penny. Morale must be low in the newsrooms with a business plan that makes trivial certain editions of the newspaper.
But that what happens when Zell begins to surround himself with his people. A former shock-jock radio programmer and a former executive at a rental car agency are Zell's new lead dogs. He is consolidating control like a boa constrictor on its prey. The open question is still why. Why is Zell so charging on taking total control over the Tribune when in the end he put in none of the $350 million (his part of the initial deal stake; he got that from other private investors). He has nothing at risk. He is not accountable to anyone. The employee pension stock is frozen in a trust which Zell controls. So why is Zell taking charge? What is it (profit) for him besides the power and ego of being a Fidel-like dictator? He made his money in real estate, so the only real link left is that his real intent is not to run the papers as a white knight, but to get final control over the Tribune's trophy real estate properties. Otherwise, this exercise in corporate takeovers makes no common sense.
See, also CARTOON MONSOON: FUKUDOME.
FEAST OF PIGS
May 25, 2008
The Tribune has been in bog of quicksand ever since Sam Zell came to alleged rescue. Zell continues to hire ex-radio people to run a newspaper-television business (some say into the ground). The Tribune continues to lose advertising dollars, revenue and asset value at a faster rate than its peers. The garage sale has begun with the sale of Newsday to a cable operator. The Chicago Cubs have been on the block for almost a year but there has been no movement because of utter greed.
Zell has the notion that the Cubs franchise is worth a billion dollars. It is not. Forbes magazine estimated its value in the $650 million range (or less if a new owner factors in Zell's own comments that Wrigley Field needs $150 million plus in repairs). The Red Sox were sold for $650 million, and Fenway Park was in better shape. There is no reason why the Cubs would command a huge premium in a tight credit and recessionary economy.
Zell sought to split Wrigley Field from the Cub franchise; hoping that he could get more from the parts than as a single package. The people who wanted to bid for the Cubs were not happy with that move. They were bidding for the Cubs and the ball park. It would make no sense to overbid for the franchise to be at the mercy of a new landlord. There was also some doubt whether major league baseball owners would approve such a transaction.
But since greed was in the air, in Illinois the political pigs will come sniffing around to see if they can profit from it. The idea that the State of Illinois should buy Wrigley Field, repair it, so the Cubs would remain in Chicago for the next twenty years made absolutely no sense. First, there was not even a hint that the Cubs or potential bidders were going to buy the team and move it out of town. (The only reason that could possibly occur is if the new team owner did not own Wrigley Field.) Second, the Cubs operation is supposed to be highly profitable, with sell-outs at Wrigley for the past decade. There is no reason for the State to own a piece of property that is functioning well in the private sector.
Why this was brought up was because Zell could not sell the field to a private party for the price he wants. Credit markets have squeezed and potential real estate investors never materialized. So the state power brokers, like former governor Thompson, figure that they could control this revenue producing property to their advantage, at taxpayer expense.
Thompson or Zell could never tell the public what the complete deal was for the State acquiring Wrigley. These secret deals are the worst kind. First, it was touted that the deal would not cost the taxpayers a dollar. Zell would sell Wrigley to the State for $1. The State would then sell bonds ($150 million to a final figure of $450 million) to renovate the stadium. The bond amounts made no sense if Zell was giving Wrigley to the State. He never was because that item was merely a PR scam. Zell wants the State or anybody to pay him hundreds of millions of dollars for Wrigley without any credit for cost of repairs. Also, Zell originally wanted to keep the new naming rights revenue (tens of millions of dollars in a twenty year annuity). In the end, the State tried to say that ticket revenue and naming rights would be enough to make the deal work. But in any bond deal, the taxpayers would be on the hook for a default. And the default was real because of the amount of money being borrowed exceeded the amount of revenue Wrigley could generate. By putting a huge burden on the new owner through a long term lease would plunge the value of the Cub franchise. Modern professional teams need to control all revenue streams of their home stadiums in order to survive and compete. The whole State ownership idea runs contrary to modern professional sports business plans. Then, when confronted with the reality of the situation, Thompson sought to divert one percent of the city sales tax to pay for the State bond obligations. Mayor Daley flipped out and said no, there would be no sales tax sharing with Wrigley Field. So the final State gasp at corralling Wrigley was a political fundraiser's claimed patented funding method of selling seats to fans in order to pay back the bonds. However, this was merely a syntax diversion for a long term personal seat license. Who would be willing to spend $100,000-$300,000 per seat for the privilege of buying expensive game tickets? It made no economic sense. But it did not have to because it was being proposed by politicians who have no concept of a real dollar because they never spend or risk their own on any project. The public treasury has been a bottomless well of money. In this final deal, Thompson and his friends would probably try to squeeze the contracts and divert revenue streams to themselves through licensing of this seat-license idea to the State for a percentage of the gross.
In the final comment, the Tribune flatly rejected this State plan for Wrigley Field. The Tribune thought the plan lacked legal and economic merit. It was too risky to succeed. So the Tribune was now willing to package the team with Wrigley. Immediately after the rejection, Thompson proclaimed that the State was still negotiating with Zell. This calls into question why Thompson and the State sports facility board is so desperate to get another piece of property to control with public funds. Let the sinister motivation speculation begin.
CIVIL WAR
SEPTEMBER 21, 2008
Current and former Los Angeles Times staff members have sued the Tribune, Sam Zell and his minions. The lawsuit alleges that Zell and others breached their fiduciary duty to the employees of the Tribune corporation through alleged self dealing, mismanagement and malfeasance. A review of the allegations finds fault with the actual structure of the Zell taking the company private by using a new employee pension plan (ESOP) to acquire all the common shares of the public company. However, the employees through their ESOP had no control over the new Tribune company or its management. Zell was in charge.
The problem with the lawsuit is that it is a hindsight damnation of the Deal. The deal was disclosed in SEC filings (the suit alleges no securities fraud or misinformation in the transaction), and voted upon by a major of shareholders of the public corporation. The massive amount of debt being used by Zell to acquire control of the Tribune was also disclosed, and some investment bankers at the time were troubled by the prospect of repayment of such an amount of debt in a soft economy. But the deal went through. And as a result, Zell hired failed radio executives to seize the wheel at the Tribune ship, and as the poor staffers now acknowledge, run the ship aground. Massive layoffs, cutting the news hole, insane email rants by the alleged innovation executive, steep revenue declines. The Tribune assets, including the newspapers, were profitable; but no profitable enough for Zell's debt service. So assets had to be sold, including newspapers and real estate. But the massive burden of the corporate debt has choked any value from the employee's pension fund.
What should have happened was an investigation into Zell and the specifics of his deal PRIOR TO the actual shareholders vote. The idea of a non-media person being the chief executive of a media empire in time of crisis makes no management sense. The actual numbers of the new debt service should have been placed side by side by the projected revenue (and revenue declines) to show that it is not feasible transaction in the long run. Remember, private parties and investment banks looked at the Tribune company before the Zell deal, to buy the company as a whole or to buy it and sell off all the pieces to make a profit. Those professional dealmakers all passed on the Tribune. But current major shareholders, the Chandler family, were pressing Tribune board to buy them out quickly. In a rush to get the Chandler civil disruption out of the Tower, management threw in with a perceived guardian angel, Zell, at the last minute. That last minute has turned into the longest hour for Tribune employees.
GAME OVER
April 24, 2009
The Tribune has been attempting to sell the Chicago Cubs, Wrigley Field, and its stake in a local cable sports channel for two years, ever since real estate mogul Sam Zell took the corporation private through a complex ESOP Trust deal. There had been a rush of potential bidders for the Cubs, but Zell attempted to play them all like Jack Benny's violin, giving the groups only piece meal information, and his high billion dollar expectations of a purchase price. The prize is a rare commodity, a major league baseball club. But as time went on, the purchasers did not waive their due diligence. They wanted to see the books, the real baseball operations ledgers, to see what the Cubs and Wrigley Field generated in cold, hard cash. After several rounds of bidding, the final bidder, Thomas Ricketts, the financial and brokerage tycoon family, allegedly bid $900 billion.
But before this transaction was even announced, Zell attempted to sell Wrigley Field to the State of Illinois. Then Governor Blagojevich, a big Cub fan, pounced on the idea that the State buy Wrigley Field so any new buyer would “not move the team from Wrigley Field.” That was an insane concept because part of the value and charm of the Cubs is the ball park, Wrigley, the second oldest venue in major league baseball. No bidding group wanted to bid without the park. But Zell wanted to get as much money as possible for his properties, so he wanted the State to buy Wrigley at an inflated price, and then saddle the new owner with a lease to pay back the State for the cost of the bonds needed to finance the purchase. The deal was so weak that the State's spokesman wanted the City of Chicago to waive its sales tax collection at Wrigley - - - which the city scoffed as insane. The State kept hyping the fact that Wrigley needed $250 million, then $300 million, then $400 million worth of repairs. At the same time, Zell was telling his bidders that Wrigley Field was in pristine shape, no repairs needed by the new ownership.
The State purchase of Wrigley Field quickly came to an end when Governor Blagojevich was arrested for public corruption charges on December 8, 2008. The most surreal charge was that the Governor was allegedly selling Obama's senate seat to the highest bidder. But also part of this criminal complaint was a charge that Blaggo demanded the Tribune management fire Tribune newspaper employees critical of the governor in exchange for the State buying Wrigley Field. It was alleged and reported in the Sun Times, that Zell was personally involved in these discussions. (Zell has refused to comment to the press on the allegations, including to his own flagship paper, the Chicago Tribune, even as his management has continued to fire “partners” left and right.) So when the Blagojevich trial begins, it is apparent that Zell will be at the very least, a witness for the prosecution.
The Tribune has been bleeding red ink since Zell took over management of the corporation. He brought in some radio consultants to run the paper, and they have been seen as jokes by industry trade press. In the end, the Tribune filed for bankruptcy protection in December, 2008 because it could not raise enough cash to make huge debt payments. The whole ESOP structured deal has turned the Tribune Corporation into a zombie company, one feeding upon the cash and red ink in a newspaper and media recession.
But things have gotten worse for the Zellites. The U.S. Bankruptcy Trustee has objected to the bankrupt Tribune continuing to use a consolidated accounting system with non-bankrupt entities like the Cubs. The Tribune system of vouchers, consolidated cash deposits, and intercompany debits-credits may mask the exact reality of business enterprise.
Early in 2009, the media reported that Ricketts and Zell were still “negotiating” the final purchase price, so the sale and transfer of the team would not occur by opening day. Opening Day came and went with no news. Then, buried in the schedules filed in the bankruptcy court, we have found that part of the Cubs sale impasse could be the fact that the bankrupt Tribune owes the non-bankrupt Chicago Cubs $770 million. A Trib spokesman alluded to the fact that the parties were discussing “closing credits,” but in reality, a buyer of a business or real estate would demand credits for accounts payable and/or repairs needed to the ball park. If the final purchase price was $900 million gross, the buyer would want the $770 million credited back from the Tribune otherwise the Tribune gets $1.67 billion in value. The buyer would also want some cash for the alleged repairs the State railed about in its bid for Wrigley. When you start talking about those size credits, Zell's billion dollar sale expectation suddenly turns into $230 million final purchase price, woefully inadequate to pay the next $800 million bond payment in June, 2009.
It gets worse for Zell. Ricketts family raised $405 million from their own resources. But the banks have failed to give them adequate credit to finalize any deal. So Ricketts recently floated the idea of a private preferred stock sale to raise another $100 million. One could assume that the purchase price for the team, Wrigley and cable stake is under $500 million (a buyer needs to have adequate capital beyond the purchase price in order to meet payroll, operating expenses, etc.) The deep recession and financial credit crisis has made leveraged purchase transactions rare. So it appears that the Ricketts bid has stalled and will possibly fail to materialize.
So the Cubs would stay the property of the Tribune, and a potential asset of the bankruptcy estate. Zell and his managers have not proposed any plan of reorganization to show it can be a viable company. Creditors can object and move to liquidate the Tribune to pare their losses. If that occurs, Bud Selig and the baseball owners would cringe . . . the bankruptcy court could sell the Cubs like it did with the Orioles, without any major league baseball approval.
It still gets worse for Zell. Ex-employees continue to sue Zell and the ESOP Trustee for alleged fraud and breach of fiduciary duty in the transaction that brought Zell to power. The Tribune employees stock in the ESOP is basically worthless since the bankruptcy filing; the Tribune owes billions more dollars than the value of their assets. There is also a federal investigation into the complex structure of the Zell transaction. And if the US Bankruptcy Trustee has reservations about the Tribune book keeping system, there will be other investigators who will seek to unravel the books in order to determine if there are other potential criminal or civil cases to be prosecuted.
Zell admitted recently on a cable business program that the private purchase of the Tribune was a mistake. Both current and ex-Tribune employees knew it was a mistake before that deal was finalized.
DOUBLE HEADER
July 13, 2009
The first half of another disappointing season for the Cubs has concluded at the All Star Break. A lone Cub at the All Star game for a team just keeping a float in the NL Central.
The front office is in worse shape. The Tribune “sale” to the Ricketts family has taken more twists and turns than a season of LOST. One week ago, it was announced that the sale had been finalized and the agreement sent to MLB ownership for approval. Less than 24 hours later, the story was that no final sales agreement was signed, but an outline, called a term sheet, was sent to the commissioner's office to review a few “unusual” aspects of the proposed deal. This is highly unusual. Ownership usually receives a completed sales contract, and buyer's financials with a business plan to determine if the sale is to viable. The last thing the MLB team owners want is a club to go bankrupt. In 1993, the Orioles owner went bust and a bankruptcy court sold the Orioles without the consent of MLB to Peter Angelos, the highest bidder at an open auction.
Then less than 48 hours about the term sheet agreement surfaced, the Tribune acknowledged that it was considering a second big from the Utay group. This put the whole matter really back to square one. Ricketts and their advisors have been stuck for months on the valuation of the Cubs, especially the broadcast rights paid by the Tribune's WGN TV and radio. Complicating the matter is that the Tribune does not break a part its subsidiary units financial statements so it is hard to determine quickly how well an operating unit is doing. Further complicating the matter was a filing by bankrupt WGN, which listed a potential $100 million owed to the Cubs for unpaid or uncredited broadcast fees. This apparently is in addition to the %770 million Tribune credit due the Cubs from the Tribune's central accounting ledger. Those two credits equal or exceed the alleged bid price for the team, Wrigley Field and a quarter stake in a local cable channel. (The Tribune bankruptcy filings do not clearly state an opinion on whether the Cubs are actually owed the money, but it leaves open the suggestion that it could if the team was treated as a separate entity.)
So you go from one alleged winner of the blind bidding process after 18 months, to two bidders six months later after some more financial information is disclosed during the final contract negotiations. Zell and the Tribune have conducted the sale in such a strange and secretive fashion that it raises more questions and concerns to a potential buyer. Zell wants to keep a stake in the new Cubs to avoid capital gains tax on the sale. Zell wants to load the new Cubs up with debt to lessen capital gains tax on the sale, even though MLB has strict policies against large debt burdens on clubs (to avoid the owners fear of a team bankruptcy and loss of oversight and control.)
Today, another new twist. The Cubs could file its own bankruptcy in order to facilitate the sale. This would have to upset MLB owners to no end: bankruptcy courts can approve asset sales without league approval. It is a strange twist because the Cubs were making approximately a $30 million profit at the end of the 2008 season. However, a weak economy plus back loaded player contracts will take a financial toll on the club in the next few seasons. So why file bankruptcy?
In bankruptcy, a debtor can void executory contracts. Those are contracts whose performance and obligations are for future events. A baseball club could use the bankruptcy process and attempt to void long term, bad player contracts (Soriano, Bradley, Fukudome, Zambrano) and take off more than $200 million in obligations for the new owner. The bankruptcy court could also eliminate contingent or pending liabilities or contract breaches of the old Cubs, such as the agreement with the City of Chicago for the parking and retail development next to the ball park which is now more than five years overdue. But the most powerful tool a bankruptcy court has is to sell off assets to the highest bidder at a court auction, without major league approval.
The Tribune's own bankruptcy required that its creditors and the court approve any sale of the Cubs since it was wholly owned by the Tribune. However, that court and US Trustee have been strict in compliance with the technical rules and objections to the Tribune so far. The Tribune has yet to file a plan of reorganization. There is no business plan, with or without the sale of the Cubs, for creditors or the court to consider whether the sale of the Cubs would truly be in the best interest of the creditors, most of whom have been stayed from collecting any money for more than seven months.
The reason for a possible Cub bankruptcy would be to guarantee that the new owner would not have any contingent liabilities of the Tribune bankruptcy attached to the assets being sold. However, the Tribune's current bankruptcy case could provide that protection in the approval order. It smacks of judicial forum shopping. Further, there was a report that Zell may have used the Cubs as collateral for the loans he took to take the Tribune private. If that is true, then the secured creditors who have the Cubs as collateral, would be paid from the sales proceeds, and not the general unsecured creditors in the Tribune case. As such, those creditors would most likely file objections and seek the most money possible in order to see some recovery on their claims.
The long nightmare of the Cubs not winning a World Series is now beginning to pale in comparison with the long, strange, winding road of the Tribune's handling of the team and its potential sale.
IT'S OVER!
August 22, 2009
In two weeks, the Cubs have fallen from first place to 7 games behind the Cardinals. When the Cubs starters pitch quality starts, the Cubs offense cannot get a hit. The team is in total free fall. And so is the Cubs management.
The Sun Times reported that the conclusion of the sale came after prolonged negotiations in which the Ricketts family and Tribune Chairman Sam Zell maneuvered for advantages. The negotiations bogged down as credit markets locked up because of the recession and a dispute arose over Tribune's evaluation of the Cubs broadcast deals with Comcast and Tribune-owned WGN-TV and radio. The Sun Times believes that the broadcast contracts with those stations will continue. And as part of the sale, the Cubs will file for a voluntary Chapter 11 bankruptcy. The parent corporation, Tribune, is already in a floundering Chapter 11 reorganization which has gone no where for the past nine months.
New Ownership of the Cubs will be a joint venture between the Ricketts' and Tribune, with the family having management control. Sun Times sources said Ricketts is providing about $450 million and raising $350 million in debt from bankers. The law firm McDermott Will & Emery, representing Tribune, said the company will get $728 million in cash.
Zell and the Ricketts family may believe they have a deal. But there is a LONG ROAD to hoe in order to get approval. As stated previously, the Tribune is under the microscope in three federal investigations. Tribune creditors have been so impatient with the progress of the Tribune and the declining fortunes of the industry that they have asked the bankruptcy court to hire a Washington D.C. law firm with experience in fraud and breach of fiduciary duty litigation to uncover issues in regard to Zell's ESOP privatization deal.
Here are some of the major stumbling blocks to the approval of the Cubs sale:
1) MLB owners and their counsel should have a major fit about the Cubs filing for bankruptcy protection, separate from the Tribune. The idea is to wipe out any contingent liabilities the Cubs may have back to the Tribune or Trib creditors, but the Real News review of the limited bankruptcy financial filings so far indicate that the Tribune “owes” the Cubs $800 million in internal accounting vouchers. The Cubs have their own creditors, including the family suing the Cubs for wrongful death in the wall case, plus the players, the league, and maybe more important, the City of Chicago who brokered the bleacher expansion in exchange for improvements that the team never started (so a huge breach of contract claim and bad blood).
