Tribune Files for Chapter 11 Bankruptcy Protection

Yesterday, the Chicago Tribune filed for Chapter 11 bankruptcy protection.

All newspapers are under pressure these days, because of the rise of the internet and the decline of advertising in today's economy. In fact, I think the stock price of the Chicago Sun Times is less than the cost of its daily newspaper.

The Tribune, however, is also burdened by $13 billion in debt - mostly because of its leveraged buyout from last year - which was done by billionaire Sam Zell.

Back in April 2007, I wrote about how Zell won a bidding war for the Tribune and bought it using borrowed money, and using an Employee-owned (ESOP) S-Corp structure to avoid taxes.

In that article, I noted that "...as long as the Tribune's cash flow at least stays flat, they should be able to pay off the debt in 10 years...". As we now know, that did not happen. Newspapers declined faster than expected, and the current "perfect storm" economic crisis made things much worse.

In another post, back in August, I mentioned how Zell was anxious to sell the Chicago Cubs to raise money to pay debts. But, in order to use the ESOP tax advantages to avoid capital gains, Zell was requiring the new owner to finance the purchase with debt, and not repay it for 5 years. There were questions about if Major League baseball would allow this.

As it turns out, the credit crunch made a sale difficult. So, the Tribune still has the Cubs. They still want to sell, but it is doubtful if they will get the $1 billion price they were hoping for.

In the first article, I also mentioned how Zell protected his downside by limiting his personal investment to $300 million, while getting 40% of the multi-billion Tribune. It turns out, he protected himself even better than that.

Zell, as Tribune CEO, was able to convert his investment to a subordinated debt note. Now, in bankruptcy, his claims will be at the head of the unsecured creditors. His "co-owners", the employees, still have their interest in an equity form - in the ESOP - which could get wiped out in the bankruptcy.

So, basically, first dibs will go to the secured creditors (i.e. the banks, such as Bank of America, which leant the money for the leveraged buyout). Second dibs will got to Zell's unsecured debt. Finally, the employees will get anything that is left.

Ex-employees (those who retired or were recently laid off) have it worse. Yesterday, the Tribune stopped paying them their severance payments and told them that, if they want their money, they have to get in back of the line in bankruptcy.

Famous film critic Roger Ebert works for the rival Sun Times, but he stated his opinion in his column today. He blames Zell.