By: Mark Fitzgerald
On the eve of the 2007 $8.2 billion leverage buyout of Tribune Co., company senior officers who stood to receive bonuses and stock payouts misled its board of directors and a feckless firm hired to provide a solvency opinion into giving a go-ahead on the deal, which fell apart in bankruptcy less than a year later, according to a massive report from the examiner in the Chicago media giant’s Chapter 11 case.
Examiner Kenneth Klee portrays a management intent on pushing through the deal structured by real estate mogul Sam Zell despite mounting indications that it would be insolvent from day one.
Combined with other circumstances of the deal, examiner Kenneth Klee concludes, Tribune management did enough “to support a finding of an intentional fraudulent transfer.”
The blockbuster report is certain to roil the rocky process of Tribune’s bankruptcy even more. It gives hope to junior creditors, who would get nothing under the existing reorganization plan, that they can stake a claim to at least some of Tribune’s dwindled assets.
The report describes a frenzied time period when billions of dollars were on the line, but sophisticated financial players with differing agendas were working on assumptions rather than hard facts.
In early December 2007, the key to getting the deal done was getting a solvency opinion from Los Angeles-based Valuation Research Corp. so senior lenders would add another $3.6 million in debt in its so-called Step Two. And the key to getting VRC to give a clean solvency opinion was an assurance by Morgan Stanley that Tribune, which would be loaded with $13 billion of debt under its new ownership, could refinance its debt in 2014.
The trouble is, Morgan Stanley refused to offer any opinion on whether Tribune would be able to refinance, according to testimony given to the examiner.
So, Klee writes, “one or more senior financial officers” said just enough in conversations and correspondents to leave the impression that the deal “had the benefit of Morgan Stanley’s blessing.”
“Having conducted lengthy witness interviews involving the participants referred to in this Section and having reviewed the underlying documents, however, the Examiner finds that the evidence adduced shows that Tribune, acting through one or more of its senior financial management members, was not honest in this matter and that these circumstances directly related to the satisfaction of the closing conditions to Step Two,” Klee writes. “These circumstances, standing alone, might not be sufficient in the Examiner’s view to support a finding of an intentional fraudulent transfer, but, considered in tandem with the other considerations discussed in this Section of the Report, do support such a finding.”
Tribune management’s actions, Klee writes, “go well beyond gross negligence or recklessness but enter into the terrain reserved for intentional misconduct. Based on the acts of dishonesty or lack of candor in the record, it is reasonably likely that a court would find that such individual or individuals also breached their fiduciary duties during this time frame, whether it be the duty of care or loyalty.”
Klee writes that his phrasing of “one or more” officers is purposeful, and he does not identify individual culpability.
Two names recur in the narrative, however: former Senior Vice President of Finance Don Grenesko and its former treasurer, Chandler Bigelow, who is now CFO at Tribune.
“The Examiner believes that, faced with all of these circumstances, Mr. Bigelow and/or Mr. Grenesko in advance of the scheduled December 4, 2007 Tribune Board meeting pushed the envelope beyond what Morgan Stanley had said to them, in order to get past the final major hurdle standing in the way of the Step Two Closing,” Klee writes. “Having succeeded in doing so, the persons involved then were able to create the impression that Morgan Stanley agreed that Tribune could successfully refinance its debt by referring to conversations between Morgan Stanley and management. Two weeks later, Tribune then went further and apparently told the Lead Banks that Morgan Stanley actually had evaluated and concurred with VRC’s solvency opinion.”
The Chicago Tribune quote Grenesko as saying through his lawyer that the report was “deeply flawed” and is based on “conflicting testimony.” A Tribune statement said it agreed with some of the report’s findings, but not with “examiner’s characterization of the company’s dealings with Morgan Stanley and believe there are more facts yet to be disclosed regarding the company’s relationship with that firm.”
Klee’s report absolves Tribune Chairman Sam Zell of any misdeeds in the events leading up to his deal.
“Based on the record adduced thus far, the Examiner did not find a sufficient basis to conclude that the Zell Group aided and abetted a breach of any fiduciary duties in connection with the Leveraged ESOP Transactions,” he writes.
Klee at several points in his report characterizes various VRC actions leading up to the deal as puzzling and concludes, “The Examiner leaves in equipoise the question whether a professional malpractice claim could be sustained against VRC.” Equipoise means an equal distribution of weight or balance.
The deadline for creditors voting on Tribune’s plan for reorganization was pushed back to Aug. 20 as a result of the report, and the confirmation hearing on the plan was rescheduled to Oct. 4.