Can We Please Give Sam Zell A Break?

By: Mark Fitzgerald (COMMENTARY) E&P has never been the place to come to for spirited defenses of Sam Zell, the Chicago real estate mogul who took Tribune Co. private in an $8 billion-plus transaction that he himself described as "the deal from Hell," and which turned out to be, well, the deal from Hell.

But Zell simply does not deserve the taunting he's getting from the Chicago media and certain quarters of the business press over the finally signed deal to sell the Chicago Cubs baseball team, its iconic Wrigley Field venue and its share in a regional sports cable channel. Journalists sympathetic to the talent kicked to the curb at Tribune papers throughout the nation are piling on to claim that Zell "botched" the asset sale that's valued at $845 million. Debt-burdened Tribune will retain 5% of the assets, and get $740 million in badly needed after-tax proceeds. (A couple of these commentators, it should be noted, were among the accomplished journalists shown the door.)

The gravamen of their carping is that Zell's dithering and too-clever-by-half maneuvering to avoid capital gains taxes "cost" Tribune more than $150 million. Had he moved sooner, they say, the Cubs would have fetched $1 billion.

That's ordinarily an argument I'd find convincing -- especially when it's made about the post-Times Mirror Tribune.

The poisoned chalice in Tribune's acquisition of Times Mirror was the sale of its Matthew Binder textbook subsidiary dressed up by the Chandler family to look like a non-taxable event. Tribune ultimately had to borrow a cool $1 billion to pay that tax bill, though it got back about a third in a tax refund. And the Chandlers insisted the Times Mirror sale be structured as a low-tax merger between its trusts and Tribune. When the family began agitating to sell Tribune a few years later, the auction was complicated even further as they argued over the tax implications of the sale. Then there was Zell's going-private deal with its tax-avoiding ESOP (employee stock ownership plan) structure that has left the supposed employee-owners facing the prospect of having stakes worth exactly zero when Tribune emerges from bankruptcy reorganization.

Tax avoidance strategies have backfired on Tribune as if it were not a sophisticated media giant but a New Jersey dentist listening to his brother-in-law's advice on sheltering income.

But I can't fault Zell on the Cubs transaction.

For starters, he absolutely had to think about capital gains. It's one thing to move Heaven and Earth to avoid paying a penny to the feds and Illinois -- but it would be beyond irresponsible not to do everything to tamp down capital gains on the Cubs. Tribune bought the team from the Wrigley family for just $20.5 million in 1981. The Cubs are selling for a Major League Baseball record of $845 million. I'm no accountant, but my brother-in-law would tell you that's a lot of capital gains to tax.

That brings up the second rap on Zell: The Cubs and related assets should have sold for $1 billion. They went for $845 -- ergo, $150 million was left on the table, and it's all Zell's fault.

But who says the team "should" have fetched a billion? The marketplace certainly did not. The club was up for sale for more than two years, and in that time no bidder came along with a financially viable offer that high.

Tribune took a little longer than some in the financial press liked in putting together its black book for bidders. That's further proof to some that Zell was dragging his heels on this deal. When the recession and credit freeze hit, he had blown his opportunity to get that magic billion.

But as the final negotiations showed, this would be a complex deal in any economic time. It was more than real estate and broadcast rights, but a sale that would have to pass muster with an old boys' club of owners who insist on someone who is, as the upper-crust English used to say, "clubbable."

And I'll give Zell credit for aggressively playing a hand that was somewhat short of a royal flush in his talks with the Ricketts family, the TD Ameritrade billionaires who were the winning bidders.

Zell encouraged a revived last-minute bid from a New York investment group led by Chicago native Marc Utay to pressure the Ricketts family, who were lowering their final bid number as the two sides squabbled over how to value broadcast rights to the Cubs.

But the Ricketts were tough bargainers, too. They responded with a deadline to get the deal done, bankruptcy court papers filed Monday reveal.

As reporter Ameet Sachdev puts it in Tuesday's Tribune: "The possibility of the Rickettses walking reveals how the sale of one of Major League Baseball's most storied franchises turned into a game of chicken."

If, as appears likely, the Sam Zell era of Chicago newspapering is coming to an end after just two years, his record will leave plenty for the schadenfreude-inclined to carp about.

The Cubs deal, though, doesn't deserve to count as any kind of failure.