Tribune Foundation Caught In A Buy-Out Bind

April 1, 2007       Tom Pope      

They threw a party and no one attended. The party for the sale of the Tribune Co.’s assets invited several players, but after the January 17 date for a bid acceptance, the Tribune management and board of the McCormick Tribune Foundation were still looking for a buyer.

Potential buyers had been expected to offer prices at or above the market price of $30.85 per share that closed that day. Yet Tribune’s largest shareholder, the Chandler family from California, struggled to produce that figure. The family owns 20 percent of Tribune’s stock.

Another potential bidder included a team of Los Angeles billionaires, philanthropist Eli Broad and supermarket magnate Ron Burkle, although according to The Los Angeles Times, they wanted a minority stake in the company and would give shareholders a dividend.

The McCormick Foundation entertained a thought to buyout The Chicago Tribune with help from the private-equity group of Chicago’s Madison Dearborn Partners. "I’d be surprised if a private equity firm gets involved," said Dan Primack, who covers private equity venture capital in Boston as editor at large for Thompson Financial. "That leaves this in the hands of Chandler or the board of The Tribune."

Foundations officials declined to be interviewed for this story.

With a lack interest in buying The Tribune, the McCormick Foundation’s board has a role because the foundation’s board overlaps with the Tribune’s management to accept or reject offers. McCormick is the number two shareholder, maintaining a 12 percent interest in the Tribune stock.

The McCormick Foundation originated in 1955 after the death of editor and publisher of "the Colonel" McCormick. According to Newsday, McCormick spokesman Joseph A. Hays encouraged buyers by saying, "a low-ball offer certainly isn’t as attractive as an offer at a premium, given our fiduciary obligations."

Yet both Hays and The Tribune have declined to comment on the ensuing developments.

"We still see talk that The Tribune might buy itself out with help from private equity," Primack said. "Or shareholders could turn that offer down — they said no to a number of private equity deals."

The Tribune Company owns 11 newspapers, including the Los Angeles Times and the Chicago Tribune, along with WGN-Ch. 9 and a number of other media or entertainment assets, including the Chicago Cubs.

The Carlyle Group, a large private-equity group based in Washington, D.C., eyed the Tribune’s television stations, according to The Wall Street Journal. The Chandler plan would spin off the Tribune’s TV station business into a new company and make the newspapers private. The Burkle-Broad proposal aims to recapitalize the company, and pay a $27-a-share dividend to shareholders.

All the major equity firms looked at the Tribune and no one wanted it, according to Primack. "It would have to be a really good reason for Madison to come in and back the existing Tribune management and McCormick since the management and foundation didn’t want to buy it on their own," he said.

The decision to either accept or decline an offer clearly rests with The Tribune. However, a question of some conflict of interest exists, according to Pablo Eisenberg, senior fellow at the Georgetown Public Policy Institute at Georgetown University in Washington, D.C. The McCormick Foundation is the second largest shareholder and the foundation chair is also chair of The Tribune.

Tribune CEO Dennis FitzSimons chairs the McCormick Foundation, while former and current Tribune executives also populate the foundation’s board. "I don’t know if recusing himself is enough to avoid a conflict of interests," Eisenberg said. "That may depend on how many shares he owns."

The best recourse would be to leave the McCormick Foundation board, he advised. "If you have Tribune people sitting on the board of McCormick, then selling parts of the whole could affect the policies of the foundation," he said.

The decision also involves the Chandler family, which has three representatives on the 11-member Tribune board. In one deal, Chandlers’ stock holdings would be affected to the point where the family would have lost the guaranteed seats on Tribune’s board, according to The Washington Post.

Closeness between a foundation and publisher isn’t unusual. The Annenberg Foundation was closely tied to media. "Many folks have close ties," Eisenberg said. "But if the McCormick Foundation has independent assets not dependent on yearly contribution from the parent organization, then they should be made totally independent," he said. "With independent members, the board would run like a public service organization without reflecting the owner’s desires."

Some rules can be put in place, Primack said. "When Chandler originally considered an offer, they had to bring the board’s attention to a fairness opinion, where boards will employ investment banks to review the offers in terms of a fairness opinion to say this is a legitimate offer beyond one member’s interest," he said.

As business ownership and leveraged buyouts become more complex, foundations are controlling significant blocks of stock.

Most of the deals appear to add extra debt to the company. Yet Primack deems this as not being too risky for the company. "Almost 80 percent of all debts in leveraged buyouts place the hooks on hedge funds and banks," he said.

The Tribune would emerge from a Burkle and Broad-led buyout with about $10.7 billion in net debt. That would give the company a debt-to-earnings ratio of 7.4, which is considered high by traditional standards.

Eisenberg points to the many buyouts and mergers that show the difficulty of a newspaper paying back large debts. "The Philadelphia Inquirer cut the editorial staff by half over the last two years and more cuts are to come," he said. "Rather than caring about international news, they are desperate for higher shares of stock, thinking that profitability would make Wall Street love them."

Maxwell King served as editor at The Inquirer before his present position as president of the endowments for the Heinz Foundation. "Incurring debt means future problems," he said. "The Inquirer was bought for $550 million and took on $300 million in debt."

What does that mean for McCormick? "The McCormick people never exercised much authority over management," he said. "But the Broad and Burkle situation would be different."

The assumption is that the Broad and Burkle effort would take the LA Times because the two live in the community. The Chandlers original point of interest was the LA Times, but the family has had an interest in other properties so a possible partnership between the Chandlers and the Broad-Burkle team could unfold.

King recognized a concern the McCormick board might have about the fate of an endowment and a selection of any bid. "That’s a trade off you face on other issues as well," he said. "For example, that problem would also emerge if you have a foundation interested in the environment yet wants the most bang for the buck in an investment from a coal interest that’s going to degrade the environment."

King also pointed out that advantages exist for the entity being bought as a whole compared to being split into parts. "That would help shareholder value," he said. "That would also help maintain journalist excellence."

Advantages to buying the whole company would include synergies like the business operational savings from better deals in health care and insurance, according to Primack. "You can syndicate, use the same call centers, and computer systems," he said. "The down side is that the broadcasting part is doing well, but the big newspapers are struggling."

A Chandler buyout could affect the McCormick shares, according to Eisenberg. "Shares owned by McCormick would be converted into whatever the Chandler shares are," he said. "Who determines that is unknown, and maybe that could affect grantmaking because it would be unclear who will run the foundation."

Part of corporate law with mergers seems to advocate that shareholders opt for the highest profit for the company regardless of undermining the mission of the foundation, according to Eisenberg. "I don’t understand or agree with the ethics," he said.

The McCormick board doesn’t have a role, according to Primack. "As fiduciaries, they get to pressure The Tribune," he said. "But the prognosis doesn’t look good for a private equity firm like Madison being interested — they would want a price per share less than market value." NPT

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