Zell's zeal leads him to Tribune

Tribune staff reporters

Tribune Co.'s board of directors negotiated late into Sunday night on adeal aimed at handing control of the 159-year-old Chicago Tribune and othermajor media properties to maverick Chicago billionaire Sam Zell for $13billion.

If Tribune's board can work out the last-minute details on a revised bidthat raised Zell's price to $34 a share, one of the most buttoned-downcorporations in America would be controlled by Zell, who has relished a lifeand career as an outsider from his contrarian investment philosophy to hisfull-throttle lifestyle.

Zell's bid seemed positioned to trump an 11th-hour offer from rivalbillionaires Ron Burkle and Eli Broad of Los Angeles. Though Zell's initial$33-a-share bid fell short of the Burkle and Broad offer of $34 a share, Zellmatched them late Sunday and Tribune's board seemed to be leaning his way.

The situation was still fluid, and sources cautioned that a deal might notbe completed. Tribune directors were hoping to finalize a pact before marketsopen Monday morning.

Zell, who did not even submit a bid before the company's initial deadline,seemed to jump into the driver's seat in mid-February by suggesting his offercould be financed with the help of a tax-efficient employee stock ownershipplan, or ESOP. Broad and Burkle countered with their own ESOP late last weekas the Tribune's self-imposed March 31 deadline loomed.

The deal, which would return Tribune to private ownership, would make thecompany one of the most heavily-indebted enterprises in the media industry ata time of falling readership and declining advertising revenues. But Zelllikes to say a true entrepreneur has unending self-confidence--that he doesn'tsee risk; he sees only solutions.

That might explain why the flamboyant Chicago real estate magnate believeshe can transform Tribune Co. even while the industry is an unprecedented stateof siege from the Internet.

The fact that Tribune's auction dragged on for nine months with a dearth ofserious bidders speaks volumes about how the rest of the world views theoutlook for traditional media properties in an increasingly digital world.Zell hedged his own bet by limiting his personal investment in the deal to$300 million and relying on the ESOP as the backbone of his $8 billionpurchase price. Tribune's $5 billion in existing debt will remain on thebooks.

Even some industry rivals are dumbfounded by what Zell has planned.

"The amount of debt Tribune is going to have blows my mind," said one ofthem, noting that he's expecting three years of cash flow declines asonce-loyal advertisers rush to get online. "It seems very dangerous to me."

Many observers have speculated that Zell's only exit from the danger zonewill be to continue the cost-cutting, job-slashing and asset-shuffling thathas caused so much angst in the newspaper industry. Critics note that hisrecent operating results as a manager have been less than encouraging:Although he cleared $1.1 billion when he sold his Equity Office Properties Trust to Blackstone Group in February, that company's returns underperformedits peers' over the past decade.

But Zell has said repeatedly he has no intention of breaking up Tribune. Hemay find it tempting to ease the debt burden by selling a prize like theChicago Cubs, but those who know him believe a strategy that depends onmassive cost-cutting or asset sales that merely scrounging through Tribune'sassets for what he might sell at a profit isn't Zell's style.

The 65-year-old Highland Park native, they say, earned his $4.5 billionfortune not by tearing things down but by building them up. "His job islooking over the horizon," said a person who used to work with Zell. "Youwon't necessarily find [what he sees] in the annual report right now."

Short, balding and pugnacious, Zell is among Chicago's most iconoclasticbusiness figures. A born outsider, he rides motorcycles, parties hard, talkslike a truck driver and may be keeping Marlboro in business.

But no one would care about any of that if he weren't asn't so good atbuying low and selling high. Though his self-imposed nickname, the GraveDancer, implies death and destruction, Zell's fortune is built on finding lifea pulse where others don't. His talent, people say, is exploiting assets inways most never would have thought of.

In the case of Tribune, Zell has already shown off his financial agility.At least seven private equity firms kicked the tires at Tribune but couldn'tmake a deal work for more than $30 a share. The board concluded that the fourother deals that did develop were too tentative or too debt heavy, includingtwo versions from Burkle and Broad.

But then Zell emerged in early February with his offer. He made it work bybuilding his proposal around an ESOP, which should slash Tribune's tax billand boost the company's cash flow enough to make a much larger debt loadmanageable.

As creative as the deal is, however, adding more than $7 billion in newdebt to Tribune's balance sheet puts the company under enormous pressure toperform. That may be risky, but according to Zell's worldview, it may alsoforce a conservative, bureaucratic company that is stuck in the past to digdeeper to find some innovative solutions to help it start embracing thefuture.

While Zell won't comment until the deal is officially done, he has pledgedthat he has no intention of inserting himself in the editorial process atTribune's media outlets. He will, however, play an active role on the businessside. Executives running other companies he has invested in say Zell doesn'tmicromanage or presume to know more than his managers do about operations. Butby constantly asking questions and testing assumptions, he tries to guide themtoward more-effective strategies.

Tribune's fate will depend on Zell's ability to inspire better performancefrom a beleaguered management team led by Tribune Chief Executive DennisFitzSimons. Sources close to Zell said current executives will get theirchance to turn the ship around. But sources on the management team are wellaware that Zell is known for making changes if he doesn't get results.

Internet efforts to intensify

Most close Tribune observers agree that the Internet holds the key to thecompany's future. Sources close to Zell say he believes the company'spotential online is being badly undervalued by the stock market.

While Tribune's long-term strategy of profiting from owning both television stations and newspapers in the nation's three biggest markets was long-agodiscredited, its reach from Los Angeles through Chicago to New York is anessential component of its Internet strategy. The national reach of Tribune's11 metropolitan dailies, combined with those of partners Gannett Co. andMcClatchy Co., is what powers a set of national online networks anchored byjob-search site

Tribune plans to broaden that partnership to build out other nationalnetworks, possibly by using established properties like Tribune's onlineentertainment channel, Metromix. Zell also sees opportunities in furtherexpanding what's there. CareerBuilder is the dominant job site in the U.S. butis dwarfed by internationally. Zell, who is an avid investor inAsia, Mexico and South America, will likely push harder on an internationalexpansion, sources with knowledge of his plans said.

Tribune and other newspaper companies are also deep into discussions withGoogle Inc. and Yahoo to figure out ways to tap the value of the powerfulbrand power and distribution clout of their local dailies. Nationaladvertisers complain that it is too complicated and inefficient to buy ads inlocal newspapers or on their Websites around the country. But by bandingtogether with a technology provider like Google or Yahoo, newspaper companiesare hoping that technology will allow those same advertisers to buy ads onrelevant pages across a national network of local Web sites. The impact wouldbe more targeted and the results would be more measurable.

At the moment, the industry is divided into at least two camps, withTribune and Gannett lined up against a consortium of smaller chains led byDenver's Media8News and New York's Hearst Corp. The MediaNews group is workingclosely with Yahoo while Tribune and Gannett haven't committed yet beyond asmall deal with Google. Eventually, however, most industry executives hope tosee substantial revenue from these strategies.

Zell's challenge will be to extract this Internet value while somehowfinding a way to energize print products that have been losing readers and addollars in ever greater numbers. Zell doesn't have an immediate answer to thatquestion but is confident he can help management find one with some freshthinking, sources said.

While that sort of ambiguity hardly inspires confidence, Terry Diamond,Zell's friend and co-investor since college, said it is typical of Zell.

"Sam is intensely curious and he's not restrained by conventional wisdom,"said Diamond. "He likes to figure out puzzles and he's very good at it. It'sin the puzzles that there's opportunity."

A close reading of Tribune's annual report shows that there are also someopportunities others might have missed. The company's real estate may be thesort of hidden asset Zell relishes. Next January, Tribune Co. has a right topurchase the L.A. Times building, Newsday's headquarters, the Baltimore Sun'sbuilding and five other properties for $175 million from the Chandler family,the company's largest shareholder. That's $51 million less than the appraisedvalue those properties had more than a decade ago.

Zell is, above all else, a real estate specialist. Actively managingTribune's properties could yield big profits as could taking advantage of realestate like the parking lot behind Chicago's Tribune Tower--an idea Tribunemanagement has considered but never executed. One source noted that Tribune'sFreedom Center printing facility is in the middle of an area that isgentrifying rapidly. Would it make more sense to build elsewhere and leasethat space for development?

It's also true that the ESOP isn't the only tool available for reducingTribune's corporate taxes. Tribune offers Zell the chance to deploy one of hisfavored techniques: using losses from prior years to offset profits fromcurrent operations. Tribune carries $823 million in so-called operating losscarry-forwards, and current management believes $37 million of those willexpire unused. Zell's track record indicates he would hustle to find ways touse every penny of that $823 million.

Executives at Zell's other companies said his efforts to find value from acompany's assets don't usually involve abrupt moves. They evolve fromcountless conversations with management in which Zell constantly challengesassumptions and pushes to make decisions. Zell is known for his explosive,often profane outbursts, but colleagues say he is typically calm, focused andto the point.

"If you walk out of a meeting and you don't know what he wants you to do,you're an idiot," said one former co-worker. "There's no hidden agenda."

Energy firm a bright spot

A typical Zell strategy emerged at Covanta Energy Corp., a company thatgenerates electricity by burning garbage. Zell had just bought the assets of afailing insurance company in 2003 when he spotted Covanta.

The insurer had hundreds of millions in losses on its balance sheet. Totake advantage of those, Zell needed a company that would spin offconsiderable profits. Covanta, just then emerging from bankruptcy, was one ofseveral companies Zell acquired to do just that.

Just before Zell bought in, Covanta dumped the extraneous units that led tobankruptcy in the first place: ill-fated investments in hockey arenas, airportservices and movie theaters.

But Covanta was hardly a guaranteed success, and Zell soon faced two majordecisions. The existing CEO, a relatively inexperienced former plant managernamed Anthony Orlando, was untested and made some early mistakes. Orlando'shand-picked chief financial officer, for instance, had to be let go because hecouldn't handle the complexities of Covanta's business. Meanwhile, Zellthought Covanta should dump its Asian operations, even though managementwanted to keep them.

Zell decided to give Orlando a second chance--and a chance to prove theAsian operations could contribute. Both moves turned out well. "He's not amicromanager, but you definitely feel his presence," Orlando says.

Covanta began logging big profits, and Zell sidestepped any taxes byoffsetting the earnings with the losses the insurance company carried on itsbooks.

Richard L. Huber, who sits on the board of Covanta and several other Zellcompanies, said this is vintage Zell: Turning profits from a decidedly unsexybusiness, avoiding taxes, guiding outcomes without dictating tactics."Certainly, he's not an absentee landlord," Huber said. "But Sam's oversightis also not pushing every button, pulling every lever."

As good as Zell has been with vision and broad strategy, prior experienceshows some errors and shortcomings in the course of his career too.

For most of its existence, Equity Office Properties trailed the averagereal estate investment trust, and its stock price never fully reflected thevalue of the underlying real estate assets. The firm was roiled byexecutive-suite tensions, which forced Zell at one point to step in as chiefexecutive--a more hands-on role than Zell typically prefers to take.

"A REIT that big--with 700 office buildings under one roof, the hypothesisthat there would be an advantage to that in the marketplace just didn't turnout," said one Zell associate. "Managing that many properties just got toohard."

Still, the whopping $39 billion sale of EOP seems to stand as evidence thateven Zell's mistakes have tended to turn out well for him. His otherhigh-profile calamity, the near-bankruptcy of a department store companycalled Broadway Stores, was averted at the last minute. Even as vendors beganrefusing to deliver goods to Broadway's stores, Federated Department Stores in1995 took the chain off Zell's hands in an all-stock transaction.

Plenty of moving parts

At Tribune, Zell will face more moving parts, more buttons and levers, thanin perhaps any other investment he has made. The industry's well-documentedrevenue problems are one thing. But the economic pressure has createdmanagement challenges that Zell may not easily fathom. The recent newsroomrebellion in Los Angeles over cost-cutting demonstrated that operating acompany full of journalists is among the more daunting challenges in business.

Journalists are creative, often non-conformist and dedicated to the socialmission of their craft. They routinely challenge authority, and that caninclude their own managers.

Above all else, Zell will have to teach Tribune how to innovate in the wayit did when Col. Robert McCormick broke new ground as head of the ChicagoTribune. While other publishers tried to stop new emerging media forms, likeradio and television, McCormick embraced it by starting WGN-AM 720 and Channel9.

Finding answers to today's old-media woes will require entirely new ways ofthinking. That's what Zell did at Glenview-based Anixter Inc., and Tribune canonly hope for such a positive result.

Anixter CEO Bob Grubbs explained that in the 1980s, the company was alow-tech wire and cable distributor that had very little promise. Zell boughtit and over a period of years he and Grubbs transformed it based on two ideas:First, every building in America is going to need more and more cable asdevices like computers, phones and TV become increasing digital. Second, ifAnixter could convince its customers to let it manage the purchase, deliveryand billing for those products, it could become an essential partner on thoseprojects. By investing in global expansion and an Internet based system tomanage these complex customer relationships, Anixter has become a worldwidesupply-chain manager, not a mere distributor.

"He changed an old-line business into a new-line business," Grubbs said.


IN THE WEB EDITION: For latest details on the Tribune deal, go to

Copyright © 2018, CT Now