The New Yorker has a long, intermittently informative profile of the probably-soon-to-be-new owner of the Tribune Company. (Unfortunately, the subhed, “Where will Sam Zell take the Tribune Company?” isn’t really answered, except for the suggestion that David Geffen might buy the Los Angeles Times.) Much of it will be familiar to anyone who’s been following his story, but some of the details of the sale are fascinating. Zell has, like a lot of business people, an aversion to taxes, and his deal for the institution involves a complicated end-run around them that I only dimly understand.
“In order to make his acquisition of Tribune financially viable, Zell devised a structure, never before implemented in a deal this large, that would enable the company to pay essentially no taxes. Tribune’s directors were incredulous when Zell first proposed the idea but eventually concluded that it could work. According to his plan, Tribune would buy out the public shareholders and then become a Subchapter S corporation, which pays no corporate income tax but must pass all taxable income through to shareholders. The novelty of the scheme is that the sole shareholder would be an employee-stock-ownership plan, or ESOP, which also pays no taxes. (When employees leave the company or retire, they will pay taxes on their ESOP income.) Thus a large amount of cash, which otherwise would have been used to pay taxes, is freed to pay down debt.”
The Tribune wouldn’t be alone in being an ESOP, even in the media world; it would just be an ESOP on a grand scale. ESOPs, however, are risky for the employee stock owners, as ex-employees of Enron and WorldCom are aware, and in a business with an uncertain future such a plan has to be nerve-wracking.
“Had Tribune’s employees been invited to assess their risk, they might have reached a different conclusion. If the company is unable to service its debt, it could go bankrupt. (Zell argues that employees’ jobs are already in jeopardy because the company’s revenues have fallen so sharply, and that, by taking the company private and removing it from the glare of public markets, he can reverse the decline.) In addition, the majority of company contributions to employees’ retirement funds will now be made not to 401(k)s but to the ESOP, in the form of company stock; many employees will have a less diversified portfolio, and one that is heavily invested in a company that is saddled with debt. Of course, if the company does well, its workers will profit handsomely.”