The Deal from Hell (44 page)

During the fire coverage, I learned of an intriguing
Times
project in which two reporters had been scrutinizing how government officials fought fires. They discovered that the fire-retardant chemicals that airplanes dumped from above might do more harm than good. It was just the kind of story I loved, and I told the reporters to forge ahead and see if we could get something in the paper about it before the year's end. I wanted to personally edit the story to demonstrate I was first and foremost an editor. A year after I left the paper, the project won a Pulitzer Prize.

The California fires soon tapered off, but the sparks continued to fly on Wall Street as the calendar slipped into mid-December and the banks zeroed in on the adequacy of Tribune's solvency expert's work. A roadblock had developed when VRC, under pressure from the banks, asked if another $4 billion in phase-two loans would give the company a major problem in 2014, when some Tribune debt would have to be refinanced. How could a company so encumbered with loans get a bank to refinance its debt, particularly if the economy didn't improve? By that time, VRC's own analysts had cast doubt on the financial projections supplied by Grenesko and Bigelow, and had asked them if they could get Morgan Stanley, the Special Committee's financial adviser, to affirm that Tribune could get the loans refinanced in 2014, an opinion that no investment bank would ever deliver.

After much to and fro, Grenesko and Bigelow, who would be promoted to Tribune CFO once the deal went through, gave VRC an
answer. Although Morgan Stanley wouldn't issue any kind of formal opinion, they said, the bank would supply Tribune with data about the ability of companies with similar debt ratios to refinance loans. The data gave VRC justification to agree that refinancing was a reasonable assumption.

But on December 19, lead banker JPMorgan Chase, where one officer ranked Tribune management as “B at best,” broke the logjam by once again hauling out its big guns. Jimmy Lee, the company's savvy vice president who'd played key roles in almost every media deal over the past decade, spoke to Zell that morning and later reported back to colleagues:

Lee's boss, Dimon, later characterized the conversation as an entreaty from Lee to Zell to improve Tribune's deteriorating financial performance. “This is just saying, ‘Hey partner, we've got this far, we need to give it everything you got.'” Zell said he knew the bank would fund his deal after the phone call: “I never heard the word
solvency
with him, I've never had any conversations about this whole solvency issue other than in the board meetings. This is Jimmy, and he truly believes,
as I do, that banking is personal. He wanted to make sure that I was still there, and I was.”

On December 20, 2007, at 12:02 p.m., the deal, at long last, closed. The FCC, thanks to lobbying by Zell, had approved of it. VRC ignored every pessimistic projection of its own analysts and accepted the financial rationale of the Tribune managers, who had fat bonuses riding on the deal. Grenesko and Bigelow based their broadcasting revenue projections on an election year, when income from political ads inflated the ad revenue outlook, a step that would push the company over the solvency line, but later come back to haunt it. The banks wire-transferred funds to Tribune, which disbursed about $4 billion to Computershare Trust Co., to buy back the remaining Tribune stock at $34 per share. The company terminated its registration at the U.S. Securities and Exchange Commission and requested its common stock be delisted at the New York Stock Exchange. As a public company, Tribune was no more. Zell now controlled its fate, along with his “partners” in the ESOP.

A lot was written at the time about how Zell shafted the Tribune employees. That's not completely true. Many existing Tribune employees had investments in Tribune stock through 401(k) plans. They still had jobs and got $34 a share for their stock, not what it once fetched but still far more than they would have garnered had the grave dancer not waltzed along. The company had ended its defined-benefits pension plan and had set aside enough money so that it actually was overfunded and carried benefits backed by the federal government. The big question was the future. In doing the deal, Zell had cut things so close to the wire that the Tribune ESOP, which now owned most of the company, had an extremely narrow band for success: If the company's performance was off just 2 percent from its plan, the ESOP would have no value for five years. Nonetheless, employees at Tribune newspapers were thrilled on December 20, 2007. FitzSimons' departure made Wolinsky smile; he'd survived him to fight another day. But FitzSimons had reason to be even happier. His salary, bonus, and the price of stock he'd acquired over the years totaled $41 million,
not a staggering amount compared to some of the golden parachutes other CEOs corralled, but still a tidy sum. Many of his friends in the company did well, too, particularly in corporate headquarters and on the broadcasting side. John Reardon, president of Tribune Broadcasting, walked away with about $10 million in salary, bonus, and benefits. Some thirty-two managers and other key employees involved in the strategic review process leading up to the deal got $6.5 million in benefits under a bonus and phantom stock plan. Don Grenesko, the senior vice president and CFO who played a key role in engineering the deal, got $13.8 million in salary, bonus, and stock proceeds after the deal closed.

On Wall Street, the banks and their advisers collected another $122 million in fees and expenses, bringing their total take to around $283 million. “Ka-ching” was no longer in the air, though, for they had to quickly mark down the debt to its trading value and simply collect interest from Tribune, which paid just under 8 percent on the loans, until—and unless—they could peddle the debt to other institutional investors, which would probably generate a loss. Zell later said the banks had to mark down the debt on their books by $400 million.

Nevertheless, Zell was happy. He had gained control of some nice assets for relatively little money. Overall, he put $315 million into the deal, which would represent about 5.25 percent of his reported net worth of $6 billion at the time. That's like a $5,250 investment for someone worth $100,000. For his money, Zell acquired control of a company that owned the best collection of daily newspapers in America, thirteen titles, including a presence in the nation's three largest cities; twenty-six television stations; a one-third interest in the Food Network; the Chicago Cubs baseball team; and a range of other properties, including a near-monopoly of the media market in Chicago. He probably laid off some of his investment on others he brought into the deal, but he had a potential bonanza on his hands if he could make the deal work. The imputed rate of return that he had figured on the deal ranged from 25 percent to 35 percent, depending on how long the grave dancer hung on to his new toy.

Nils Larsen called me later in the day to say how happy he was that the deal had finally closed. “Now what we have to do is go out and hire the best talent we can get,” Larsen said. And I soon sat down with Sean Reily, an editor with an eye for finance, and told him to start going through the paper, section by section, to determine if and how they contributed to our mission to be the voice of California and the West. Our goal was to see if we could redirect some of our energies into more opportunities like Image. My family joined me for Christmas in Manhattan Beach, where the sun was shining and it was 70 degrees. We had a marvelous Christmas. I liked California. I wanted to stay.

But after the holidays, things changed quickly. Reily came into my office for a session on the budget. Hiller had imposed a hiring freeze that would frustrate my plans, and Reily said his sources in finance predicted he would not back down on tight controls on the editorial department, including a mandate that spending in 2008 could not exceed the levels set in October 2007. This was the kind of Tribune top-down micromanagement that simply didn't work. I wrote Hiller a memo outlining how his so-called flat spending blueprint actually represented a fairly large cut to the editorial department.

“I am not saying my budget can't be cut,” I wrote, “and that we can't save money.” I had always come in under budget and reminded him that I had given back $2.5 million the year before when asked. My real problem was that we were reverting to a system in which I had to seek approval to hire even a lower-level employee, a process I considered a waste of time. “If you can't rely on me to make routine decisions, I question why I'm even here,” I wrote. I asked for some time for Reily and me to submit a spending plan that would hit his targets without hurting the paper and provide me with some flexibility. “Just give me a number to hit,” I said, “and let me—and not some accountant upstairs—figure out how to hit it.” But Hiller turned me down flat.

Any newsroom is a gossip mill, and soon rumors flew that our disagreements over the budget meant my days were numbered. Stanton dropped by. Klunder dropped by, too, and I asked him where he
thought the situation was going. He doubted Hiller would do anything to get rid of me and risk having the newsroom hate him anymore than it already did. A few days later, we had a budget meeting in which Hiller and I disagreed. Afterward, he invited me to his office for a chat. It was time for the line in the sand.

I told him that an editorial budget with a hiring freeze and tight controls would not work. “Well, what do you think is going to happen?” he asked. “This paper has to keep getting smaller and smaller. You see what is going on around you. Do you think we can get bigger?” I replied no, but said this was not a discussion about the budget but one about a failed process. “I'm not saying we can't cut,” I said, “but we need to reinvest those funds in journalism.” Hiller almost looked sick. I could see the anger rising. I had smoked out his true feelings. “The future.” he said, “is in cutting back.” I told him I totally disagreed. We talked about whether he needed another editor who saw the world his way. “This is nothing personal,” I told him. “I like you. But I simply don't think the current course is the way to solve our problem. If you think you need another editor, you're the publisher and that's your choice.” “Let's sleep on that over the weekend,” Hiller advised.

I was in my office on Monday writing a memo that Hiller had sought summarizing my accomplishments over the past year when he stuck his head in and asked if I wanted to “grab a bite.” I said I wanted to finish my memo first and send it to him, knowing full well what was about to happen at our lunch. We went to TRAXX, a restaurant in Union Station in downtown Los Angeles, and I thought this wouldn't be a bad place to get fired—there were lots of others coming and going. Hiller made small talk about how much he loved old train stations as we picked our way through our lunches. Eventually, he got to the point.

“I've thought this over, and I want to make a transition,” he said. “Believe me, I've thought a lot about this. I just read your accomplishments memo, and you did a lot. I asked you to come out here, and we owe you a lot.” I told him that I agreed. But I also understood that the editor served at the publisher's pleasure and that the two had to
see eye to eye on things. We didn't. Hiller seemed quite uncomfortable, even clumsy, dealing with the subject.

Then, to my astonishment, Hiller said he wanted to hold off on any changes until he checked with Zell to see if he was going to sell the paper. “We all know that David Geffen is still around, and he might want us to stay here until it is sold. Geffen may even want a new publisher. . . . Sam will probably say, ‘Hiller, you are nuts. I want to keep him [Jim O'Shea], not you. You have a pretty good relationship with Zell, don't you?”

H
iller set his glasses down and drummed his fingers on the table of the sixth-floor conference room where he held his senior team meeting. After Zell had taken over, Hiller rarely wore a tie, and this morning was no different—his crisp, white shirt was open at the collar. A week had passed since our lunch downtown at Union Station's TRAXX, and Hiller still hadn't told me if he had talked to Zell. And he was acting strangely. We didn't talk much, and when we did, it was awkward. On Hiller's desk was a couple of months' worth of my expense reports, amounting to thousands of dollars, which he hadn't approved.

At our lunch, Hiller had asked me if I would consider staying on at the paper in some “advisory” role, but I had categorically rejected the idea and urged him to act sooner rather than later before his decision leaked, which would only make a bad situation worse. When he floated the idea of discreetly searching for a new editor, I flat out refused. It would be an impossible task, given the high profile of the job in question. I could tell that the members of the paper's senior leadership
team, a group comprising about a dozen people around the table, knew nothing of what was about to happen.

After listening to Elisa Ney, a marketing department MBA, babble on about a visit to another paper where they had dumped editors who opposed change, I wrote in my notebook: “I made the right decision. Now let's get this over with by January 31.”