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In Depth July 30, 2008, 3:47PM EST

Sam Zell's Deal from Hell

(page 3 of 3)

Zell, at his office in Chicago, expected only single-digit revenue declines Len Irish

The Los Angeles Times building, which is for sale Reed Saxon/AP Photo

Lipinski, the Chicago Tribune's editor, left during the latest round of job cuts E. Jason Wambsgans/Chicago Tribune/MCT

Hiller, the paper's publisher, left during the latest round of job cuts

Operating chief Michaels conferred with publishers to find out how many pages Tribune could afford to print without breaking its debt provisions. In June he ordered that the ratio of ads to news shift to 50-50 instead of the usual 60% reserved for articles—meaning the so-called news hole had to shrink by 17%. The Baltimore Sun killed its stand-alone daily business section. The Orlando Sentinel ditched its stock tables. The Los Angeles Times announced it was merging sections devoted to books, opinion, real estate, autos, and a weekend calendar.

To Michaels, the moves are a matter of survival. "An animal with his leg caught in a trap will chew it off," he explains. "At the moment, we're doing some leg-chewing." Zell, meanwhile, has no patience for what he views as the pomposity of journalists casting their profession as some kind of sacred trust. "If you want to tell people what they should want, become a professor," he says. "But if you're in the newspaper business—and I emphasize the word business—then you have to respond to what your customer wants."

Zell and Michaels also shook up the sales side. They started placing calls to big advertisers, paying sales reps on commission only, and arming them with new types of ads, including ones in the middle of stories. "We want to incent them like hell to be greedy," says EVP Gremillion. Even if advertisers didn't want to be in the paper, Zell suggested, they could buy space on delivery trucks and printing plants.

As newspaper bosses were cutting jobs and pages, Zell's lieutenants sought to crank up broadcast profits, which had fallen 10% in 2007 because 13 Tribune stations were affiliated with the struggling CW Network. Michaels pressured CW to lower the estimated $72 million a year Tribune pays for its programs. He also complained about its core audience of young women, saying they tend not to watch local news. Local newscasts are the most lucrative programs because 100% of the ad revenue flows to the station, without network or syndicator middlemen.

The More Urgent Problem

Internally, Michaels unleashed radical changes designed to double the number of hours of local news on Tribune's stations. In Fort Lauderdale, Tribune is building a local TV news station inside the newsroom of the South Florida Sun-Sentinel to feed hours of content to Miami's WSFL-TV station. It also plans to launch a four-hour local morning show in January. In Chicago the company is planning a 24-hour breaking news center in the Tribune's newsroom to provide content for television, radio, cell phones, and newspapers. "What we're doing could really change the business not only for television but also for print," says Ed Wilson, Tribune's head of broadcasting. One top executive at a major network has doubts: "Michaels doesn't know this business and hasn't taken the time to learn it. He's still a radio guy playing a TV executive."

None of the moves address the more urgent problem: Tribune's need for cash. It raised $630 million on July 29 by selling New York's Newsday, one of its most profitable newspapers, to Cablevision Systems (CVC) (Zell smartly kept a 3% stake to avoid taxes.) The price was less than what analysts estimate Zell paid for it last year, but it covered a big chunk of debt. In June, Zell put Tribune's headquarters and the Los Angeles Times' property on the market. On July 3, Tribune signed a $300 million asset-backed commercial paper deal with Barclays, in essence borrowing against money it expects to collect in the future.

And so the layoffs will keep coming. Tribune has axed 1,100 people thus far, with newspapers bearing the brunt. On July 2 the Los Angeles Times scrambled to cut 150 people, or 17% of its staff. It happened so fast that one editor said he didn't know whether to nod sadly or smile to his own staff members in the hallway because he couldn't recall who was on the list.

One wonders what might have happened had someone else bought Tribune. Zell and his team have limited flexibility, but a different buyer might not have taken on so much debt. Zell says the casualties will be "significantly greater" by yearend, and he's unapologetic about that. "I knew that I needed to act as both the grenade thrower and the bomb deflector if we were going to get from here to there," he says. Getting "there," of course, would mean a big payday for Sam Zell.

Links

Speak, Lazarus

In 1976, Real Estate Review published "The Grave Dancer: A Guide to the Risky Art of Resurrecting Dead Properties," by Sam Zell. The author wrote: "Grave dancing is an art that has many potential benefits. But one must be careful while prancing around not to fall into the open pit and join the cadaver."

With Susan Zegel in New York

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