Zell, ESOP Buy the Tribune Company

The proposal by Sam Zell to use an ESOP to purchase the Tribune Company has now been accepted. The deal must still pass a variety of regulatory approvals, however, including a determination by the independent trustee of the ESOP (GreatBanc Trust) that the transaction structure and the price paid for the shares are fair to ESOP participants.

The proposed transaction is complicated. It appears, however, that when all the dust settles, the ESOP will end up with at least majority ownership of the company, but Sam Zell will have stock warrants that can be exchanged for up to 40% of the shares. These might be purchased by the ESOP, sold to other investors, or sold in a public offering or sale of the company. Details of the sale can be found in the company's press release.

The current Tribune retirement plans will be changed somewhat. For most employees, the current plan involves a company contribution to the 401(k) plan that can be as much as 4% of pay if an employee defers at least 4% of his or her own pay into the plan, plus an additional variable contribution of up to 5% of pay depending on profits. While this is the most common arrangement, however, different properties owned by the Tribune Company can have different arrangements. With the ESOP, the company will contribute 5% of pay to the ESOP, to be held in Tribune stock, plus 3% per year to a cash balance retirement plan, a kind of hybrid pension/defined contribution plan. In a cash balance plan, an employee has an account that receives contributions each year, plus a credited rate of interest set by the company in accordance with federal guidelines. The employee is guaranteed to receive whatever value accrues to the account at retirement, either in the form of a lump-sum distribution or an annuity, even if the company's investments in the plan are not adequate to meet this requirement. Insurance for this is provided by the Pension Benefit Guaranty Corporation. So employees will generally receive more from the company overall, but be somewhat less diversified.

The deal will involve a great deal of debt, and one question is whether this will mean future layoffs, asset sales, cuts in compensation, or changes in business strategy that might compromise the editorial integrity of the papers. It should be noted, of course, that any proposed transaction for the Tribune, with or without an ESOP, would likely involve as much or more debt, and that many of these transactions also end up with assets being sold, employees being laid off, and/or compensation being reduced.