Zell buys Tribune with eye-popping leverage

Sam Zell wanted to buy the Tribune Company for $33 a share, putting in $300 million of his own money. But somehow Tribune managed to engineer a bidding war — an impressive feat, given that virtually nobody really wanted to buy it — and so now Zell’s paying $34 per share, or $8.2 billion, of which $315 million will come from his own pocket. Which is definitely not so much of a premium that it would make the difference between an attractive deal and an unattractive deal. (Remember that Tribune stock was trading at over $60 in 1999.)

Zell could probably get a large chunk of money straight back out of Tribune if he sold the LA Times to the underbidders, Eli Broad and David Geffen. But don’t hold your breath for that to happen. Zell is no longer a mere billionaire: he’s now a bona fide press magnate. And for all that he says his investment is purely financial, the LA Times is the kind of toy that no press magnate worth his salt would ever jettison for mere cash.

There are some eye-popping leverage numbers in the official statement — numbers which make the deal look very much like a buy-it-and-lever-it-up private equity transaction.

Tribune has financing commitments from Citigroup, Merrill Lynch and JPMorgan Chase to fund the transactions. In the first stage, Tribune will raise $7.0 billion of new debt of which $4.2 billion will be used to complete the tender offer and the remaining $2.8 billion will be used to refinance existing bank credit facilities. In the second stage, Tribune will raise an additional $4.2 billion of debt which will be used to buy all the remaining outstanding shares of the company. Tribune’s existing publicly-traded bonds are expected to remain outstanding.

This means that by the time everything’s finished there will be $11.2 billion in new Tribune bonds outstanding, over and above the bonds which already exist. Even with $2.8 billion in bank credit being paid down, that’s $8.4 billion in new debt. Tribune CEO Dennis FitzSimons says that “going forward, employees participating in the ESOP will be invested alongside Sam Zell, one of today’s most successful investors”. The Employee Stock Ownership Plan is the main part of Zell’s financing strategy, but one can’t help but wonder whether Tribune’s printers and journalists have quite the same risk appetite as Sam Zell. I guess they don’t have much choice.