Waging Chicago's New Newspaper War

By Allan Sloan
Tuesday, June 20, 2006
Washington Post

Chicago is famous for its newspaper wars. The city was the setting for the classic 1931 movie "The Front Page," about scoop-crazed reporters and their even-crazier editors. Now the city is the site of its biggest newspaper war ever -- the struggle over Tribune Co., the nation's second-largest newspaper owner, whose properties include the Chicago Tribune and the Los Angeles Times.

The Chandler family, a prominent California newspaper clan that holds three seats on Tribune's 11-person board, wants to sell the company or break it up. They oppose Tribune's $2 billion stock buyback, which is underway. That transaction -- designed to boost the stock price to placate Wall Street and give Tribune the option of staying largely intact -- is set to be completed June 26.

This maneuvering is reminiscent of the way that big investors forced Knight-Ridder, the No. 3 chain, to sell itself. Journalists and media investors are waiting to see if Tribune goes down the same path. Journalists, who have already seen Tribune slash editorial budgets, are filled with trepidation; many of the investors are filled with hope of getting a nice payday.

The war went nuclear last week when the Chandlers released an 11-page letter accusing Tribune managers of bungling and the company countered by accusing the Chandlers of putting their financial interests ahead of those of other shareholders. Neither side is totally wrong.

On the surface, this dispute is about the best way to get Tribune's stock price up. But if you look at the fine print, study the Chandlers' history of tax avoidance and consult parties knowledgeable about the situation (who would talk about sensitive matters only if they weren't identified), you see this is a typical corporate battle: It's about money, power and status, not necessarily in that order.

Tribune, a Chicago institution that considers itself to be defending straightforward Midwestern values against East and West coast elites, was less than forthcoming in its original Securities and Exchange Commission filings about the stock buyback. Tribune didn't disclose that the three Chandler directors opposed the buyback -- an important fact that was made clear in an amended filing a week later, only after the Chandlers complained.

What's more, the buyback seems structured to put the Chandlers in a nasty position. Here's why: The buyback is for 20 percent of the stock -- but the Chandlers, whose Tribune stock carries the special right to three board seats, lose that right if they sell 15 percent or more of their shares. The Chandlers wanted Tribune to amend its bylaws so they could keep their board seats if they decided to fully participate in the buyback, but the company didn't accommodate them. Spokesmen for the Chandlers and Tribune declined to discuss the matter.

The Chandlers say that the stock is worth more than the $32.50-a-share maximum being offered in the buyback and that they won't participate. (The stock closed yesterday at $31.93.) If the buyback is completed and the Chandlers don't sell, they would become Tribune's biggest shareholder. They now rank No. 2.

That's the status and power. Now, the money. Tribune's stock buyback and its associated increase in debt would hurt the value of $500 million of preferred stock held in two partnerships that Chandler family trusts own jointly with Tribune but would enhance the value of the partnerships' 52 million Tribune common shares. That's because while the buyback would boost the price of the common stock, it would add $2 billion of debt to Tribune's balance sheet, making the preferred stock (which ranks behind the company's debt when it comes to getting paid, but ahead of the common stock) less secure. Under the partnerships' rules, the bulk of any increase in the value of the partnerships' Tribune common stock goes to the company, while most of any decline in the value of the preferred gets charged to the Chandlers.

Those partnerships, created in 1997 and 1999, are classic Chandler tax avoidance. Rather than selling stock back to the old Times Mirror Co. like other shareholders did and paying tax on their gains, the Chandlers contributed common and preferred stock to partnerships jointly owned by Times Mirror (and now by Tribune). Times Mirror contributed real estate (including the Los Angeles Times building) and cash.

But because the partnerships own Tribune stock (which they got when Tribune bought Times Mirror), it's impossible for Tribune to split itself up tax-free as the Chandlers are seeking. Tribune and the Chandlers discussed settling the problem by having the Chandlers buy most of Tribune's piece of the partnerships by turning over the preferred stock (which carries dividends as high as 8 percent) and most of the common stock. However, talks broke down for reasons that are unclear.

The deal would have required Tribune to pay some income tax -- estimates range from $15 million to $50 million -- and Tribune didn't want to do it. One reason is that Tribune is smarting from having to fork over $1 billion last fall when it lost a Tax Court case involving Times Mirror's supposedly tax-free disposal of its Mosby and Bender subsidiaries in the 1990s. This tax vulnerability was widely recognized when Tribune bought Times Mirror in 2000. In 2001, the Internal Revenue Service declared the Mosby and Bender subsidiaries to be taxable sales. Tribune could have paid the tax under protest, cutting short interest and penalties while continuing to litigate. Instead Tribune declined to pay and spent four years waging an unsuccessful legal battle. The Chandlers say Tribune never consulted them on dealing with the problem.

Tribune says the Chandlers wanted to feather their own nest by solving the partnership problem on terms favorable to themselves before dealing with other matters, such as a stock buyback. The Chandlers say they wanted to solve the partnership problem as part of an overall strategy for Tribune.

Look for the war to escalate, because both sides have plenty of money, plenty of pride and plenty of staying power.

In the old days, reporters from warring Chicago papers might gather at a neutral watering hole to resolve problems over drinks. This war seems unlikely to end so amicably. Tribune being dismantled -- or trading part of itself to the Chandlers tax-free in return for their stock -- seems a much more likely outcome.

Sloan is Newsweek's Wall Street editor. His e-mail is sloan@panix.com.