It’s Official: Tribune to Zell — But Cubbies Not Sam’s Club

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By: Mark Fitzgerald

Tribune Co. is going private in a deal engineered by Chicago real estate tycoon Sam Zell that will give shareholders $34 a share in a two-stage transaction, the media giant announced Monday.

Zell is “supporting the transaction” with an investment of $315 million, Tribune said.

Once shareholders are paid, Tribune will be privately held, with an employee stock ownership plan (ESOP) holding all of Tribune’s then-outstanding common stock, and Zell holding a subordinated note and a warrant entitling him to acquire 40 percent of Tribune’s common stock, the company said.

In a statement, Zell described himself as a ?long-term investor? who hoped to ?build on the great heritage of Tribune Company.”

Tribune also announced that following the 2007 baseball season, it will sell the Chicago Cubs and the company’s 25% interest in Comcast SportsNet Chicago.

Zell will become chairman when the deal closes. Dennis FitzSimons, who had been chairman, will retain his positions as CEO and president, Tribune said.

Representatives of the Chandler family — who put the auction in motion with their public complaints about Tribune stock performance — abstained from voting as directors on the plan, Tribune said. “However, the Chandler Trusts have agreed to vote in favor of the transaction,” the company added.

The New York Times reports: “Mr. Zell, 65, the son of refugees who fled Poland on the eve of Hitler?s invasion, is a self-made billionaire who has thrived on buying up distressed businesses. What he plans to do with Tribune is not clear. He has said he would leave current management in place and that his interest was not editorial but economic. Some employees fear that he could continue paring down the company, which has cut staff and costs over the last few years as its newspapers, along with many others, have lost readers and advertisers to the Internet.

“He has also said that he would not break up the company by selling off assets individually or spinning off the television stations. But he may have no choice. Any new owner faces regulatory hurdles that bar a newspaper publisher from owning broadcast outlets in the same market.”

Tribune said the first stage of the transaction will be a cash tender offer for approximately 126 million shares at $34 per share. The tender offer will be funded by “incremental borrowings,” the company said, plus a $250 million investment from Zell. This stage should close in the second quarter of 2007.

The second stage is a merger expected to close in the fourth quarter of 2007 in which the remaining publicly-held shares will receive $34 per share, Tribune said. At that point, Zell will make an additional investment of $65 million.

This is how the transaction will proceed, Tribune said:

The ESOP will immediately purchase $250 million of newly issued Tribune common stock for $28 per share.

Zell will invest $250 million in Tribune and join its board of directors. Of this initial investment, $50 million will purchase approximately 1.5 million newly issued shares of Tribune common stock for $34 per share and $200 million will purchase a note exchangeable for common stock at a $34 per share exchange price.

Tribune will launch a tender offer to repurchase approximately 126 million shares of its common stock for $34 per share, returning approximately $4.3 billion of capital to shareholders.

Following the tender offer, Tribune and the ESOP will merge and all remaining Tribune stock will be converted to cash at $34 per share.

Tribune noted that there are some regulatory hurdles — including approval by the Federal Communications Commission (FCC). In some of its markets, Tribune owns both a newspaper and a television station, which violates the FCC cross-ownsership ban. The company has been operating the stations on waivers in several markets. It?s not clear whether the commission will continue those waivers under a new ownership structure.

Tribune said if the merger is not closed by Jan. 1, 2008, shareholders will receive an additional amount of cash based upon an 8% annualized “ticking fee” that will accrue from Jan. 1, 2008, until the closing.

Tribune also kept the door open to new proposals, noting pointedly that ?up to the time of shareholder approval, Tribune’s board of directors will be entitled, subject to specified conditions, to consider unsolicited alternative proposals that may lead to a superior proposal.?

As reported previously, this deal has a low break up fee — just $25 million — that could encourage the losing bidders, Los Angeles billionaires Eli Broad and Ron Burkle, to up their bid, which they had valued as $34 a share with a $500 million equity investment. Until Monday?s announcement, Zell?s bid had been reported as being valued at $33 a share, and his equity investment as $300 million.

Tribune said it is suspending its regular quarterly dividend.

When the deal is completed, Zell’s initial $250 million investment will be redeemed and Zell will make a new investment through the purchase of a subordinated note for $225 million with an 11-year maturity and a warrant for $90 million with a 15-year maturity, Tribune said Zell can exercise the warrant at any time to acquire 40% of Tribune common stock for an aggregate exercise price initially of $500 million.

Tribune?s boared will have an independent majority, and will include FitzSimons and an additional Zell representative.

William A. Osborn, the board?s lead director and head of the special committee that conducted the auction, said the strategic review process ?was rigorous and thorough.”

Alluding to the Broad and Burkle offer, Osborn said it was ?the same price as the ESOP/Zell plan,? and that the board ?considered this (offer) in the light of prior discussions with Messrs. Broad and Burkle and the completed negotiations of definitive agreements with Zell and the ESOP trustee.?

FitzSimons, for his part, called the deal ?a positive outcome for all Tribune shareholders, including our employees.” In picking Zell?s plan, the board rejected a so-called ?self-help? proposal from FitzSimons and other top management that also would have taken the company private. That plan reportedly would have sold off the Cubs, the broadcast operations and possibly some smaller papers.

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