Sale of Chicago Tribune buoys hopes for US newspapers

Iconoclastic buyer sees profit potential in an industry that Wall Street shuns.

Known for his love of motorcycles and disdain for suits, and without any media experience, Sam Zell is an unlikely savior for the nation's second-largest newspaper empire.

But some are hoping that his likely buyout of the Chicago Tribune and its many holdings may ultimately mean good news for the troubled company and a flagging industry – if for no other reason than it's a signal that a smart, iconoclastic investor sees good profit potential in an area that Wall Street is turning its back on.

The deal, which would burden the company with over $13 billion in debt, would also privatize it – a direction some say is necessary to foster quality journalism and long-term value over short-term profit pressures from shareholders.

"I think it's a good sign for the industry that a private individual and private groups are stepping forward," says Rick Edmonds, a media business analyst with the Poynter Institute in Fort Lauderdale, Fla. "Private investors seem to value these properties higher than the public markets do…. The people going in are looking to take a longer-term perspective and presumably will be willing to take some drop in profits" in the short term.

The deal, announced last week and yet to be finalized, involves an unusual financing structure. Mr. Zell is putting up $315 million of his own money, offering an $8.2 billion buyout that is largely debt (which will be added to the $5 billion in debt the company already has), and hopes to repay the debt in part through setting up an employee stock ownership plan (ESOP) that would provide significant tax benefits for the company.

The Tribune Company, which includes the Los Angeles Times, Newsday, Tribune Broadcasting, the Baltimore Sun, and dozens of smaller newspapers and broadcast stations – as well as the Chicago Cubs – has been up for auction for a number of months and attracted a fair amount of interest. But most backed off after examining the company's books. Zell won out over a competing bid from Eli Broad and Ron Burkle, a pair off civic-minded billionaires in Los Angeles.

In the meantime, the company has become a symbol of the woes of the newspaper industry, under pressure from declining readership and ad revenue.

The L.A. Times has been particularly troubled, with several editors and publishers leaving after demands for staff cuts.

Still, not everyone agrees that the newspaper industry is dying, and some experts point out that Zell's deal isn't quite as unlikely an investment as it might first appear.

"Assuming it goes forward, he'll wind up taking charge of the second-largest newspaper company in the country by putting up only $315 million in cash – it's a financier's dream," says John Morton, a veteran newspaper analyst in Maryland. "With all the talk about the newspaper business, it's still immensely profitable. The average profit margin is almost 18 percent."

While Mr. Morton hopes that privatizing the company will free it up from the short-term profit demands that often drive staff cuts and layoffs, others note that private owners face the same tough market conditions as public ones. They point to Brian Tierney's recent buyout of The Philadelphia Inquirer and his subsequent struggles as a prime example.

Still, some Tribune employees are optimistic, in part because any change, at this point, seems like an improvement over the status quo.

"Death by 1,000 cuts was no answer. There's got to be somebody with a different pair of eyes and different imagination and perhaps with more nerve than [the current Tribune CEO and president] have," says one longtime manager at the Tribune Company. "It's time for a real change."

He says that many of the rank-and-file employees are concerned about the transition – what the ESOP means for their retirement plan, for instance, and whether there will be layoffs – and adds that he's aware of the perils of a real-estate magnate without journalism experience taking over. "But I also think this is a real smart guy who may see this as a bona fide challenge to prove the conventional wisdom wrong about the nature of the industry."

Zell himself has said that he wants to focus on raising revenue rather than making more cuts. And some hope that once he learns about the industry – which he admits he knows little about – he'll be as creative in publishing as he has been in real estate.

What's needed is someone who can find ways to put out a better product that will win an audience in a world with more choice, says John Lavine, dean of Northwestern's Medill School of Journalism in Evanston, Ill.

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