The Employee Ownership Update
July 1, 2007
Zions Bancorp Approach to Stock Option Pricing Raises New ConcernsAccording to Associated Press stories on July 19 and July 23, new issues have arisen over the use of Employee Stock Option Appreciation Rights Securities (ESOARS) as a means to value employee stock options for company accounting purposes. ESOARS are a marketable security that tracks employee option benefits (see the May 15 Employee Ownership Update). Zions Bancorp held the first-ever auction of the securities in 2007, resulting in a price of $12.07. Jeff Mahoney of the Council of Institutional Investors told the AP that it "appears that the SEC staff [by its inaction on this matter after the auction] has agreed to permit Zions to use the price of Zions ESOARS to value their options." He called this "surprising and disappointing." The SEC has declined to say whether its inaction means it is endorsing the approach, however.
At the same time, concerns have been raised whether financial products like ESOARS are equity instruments or liabilities. Companies would prefer to record them as equities, but FASB has not decided on what approach to take and probably will not for at least another year. Liability accounting might discourage some companies from using the ESOARS approach because it could partly or entirely offset any apparent accounting gains from the presumably lower options price the company would have to charge against income if it used the ESOARS approach.
Tribune Deal Faces ChallengesThe proposed buyout of the Tribune Company by an ESOP and Sam Zell could possibly be derailed if certain credit covenants are not met. A stipulation in the credit agreement requires that the ratio of indebtedness to the trailing four quarters of EBITDA cannot exceed 9 to 1. Lower-than-expected reported earnings have made that target harder to meet, although the company does have substantial assets it either plans to sell (including the Chicago Cubs, which reportedly have already lured $1 billion offers) or could sell. The offer for the shares is at $34, but, as of July 24, the market price had fallen to $27.62, indicating investors are becoming somewhat wary over the chances the proposal will go forward. Zell does have an option to pull out of the deal. However, most observes still believe that, barring even worse news, the deal will proceed.
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