13
FIRE SALE
WHILE ZELL IS not given to understatement, he does often produce simplistic analogies to describe his strategic thinking, even when it comes to the workings of multi-billion-dollar enterprises. “It’s like we have a pile of Lego blocks on the table and we’re going to, in effect, re-create this company in a kind of virtual fashion and by doing that we’re going to see what works and what doesn’t work.”1
Throughout the Tribune bidding war, Zell repeatedly said he would focus first on communication and restructuring rather than deep cost cutting, agreeing only to sell off the Chicago Cubs and Wrigley Field. But even before the battle for Tribune was won, the company was disposed to dispose.
In March 2007, it sold two southern Connecticut newspapers, the Stamford Advocate and Greenwich Time, the smallest of Tribune’s eleven papers, to Gannett Co. for $73 million. That deal was scrubbed just two months later after Gannett refused to assume the contracts of the union representing reporters and photographers. Ultimately, privately held Hearst Corporation bought the two papers in October 2007 for the reduced price of $62.4 million.
Tribune also made a few strategic real estate plays in early 2008. First it sold its studio and production lot in Hollywood for $125 million, then its Southern Connecticut Newspapers real estate in Stamford and Greenwich for $30 million. It used the proceeds, plus $30 million in cash, to structure a so-called like-kind exchange to purchase property it was leasing from TMCT LLC in April 2008. The deal helped Tribune defer taxes on the earlier sales.

ZELL’S STILL GOTTA SELL

More sales were on the way. In early 2008, the wakeup call came when it was apparent that Zell’s analysis of Tribune’s financial travails was a bit wide of the mark. Advertising continued to slump, dragging down profits at the newspapers, cash he needed to help repay the bankers as debt obligations came due.
“Probably our toughest year is 2008,” Zell remarked. “It’s going to be a shitty year and we’re going to have to do a whole bunch of things to make sure that we don’t get hurt. Number one, it’s manageable. Number two, I have a lot of experience running and managing highly leveraged institutions. And I don’t think this is any different than any of them. I’m not a newspaper guy, I’m a businessman. Therefore all that matters in the end is the bottom line, because as long as we have a bottom line we have a viable newspaper. If we lose that bottom line or erode it significantly, then we’re all going to get buried together. And that ain’t a good deal.”2
Soon the whispers in Zell’s ears were growing louder, as potential suitors lined up outside his door to buy up various Tribune assets, particularly Newsday. The New York newspaper, a sixty-eight-year-old daily tabloid serving the city’s Long Island and Queens residents, was among Tribune’s most profitable properties, but a sale would certainly help Zell meet his first hefty debt payment of $650 million due in December 2008. And right on its heels, another $750 million debt bill was due in May 2009.
Zell and Rupert Murdoch, the Australian financier and fellow media mogul, had become better acquainted after Zell’s protracted negotiations over Tribune. Murdoch had purchased Dow Jones and with it the Wall Street Journal in December 2007 for $5.16 billion from the Bancroft family in a protracted contest similar to that of Tribune and the Chandler clan. Murdoch had not formally entered the Tribune fray, fearing the debt levels he would assume, but he was keenly interested in partnering with Tribune to print the Wall Street Journal at Tribune printing plants, or at least create a joint venture between Newsday and the New York Post whereby the two entities would reduce costs by sharing content production.
There are few secrets in the publishing world, and when the prize is New York readers’ hearts and minds, it did not take long for interest in Newsday to gather steam. Suddenly, three of New York’s most powerful media moguls—Murdoch, Mortimer Zuckerman (a fellow real estate/media titan and owner of Boston Properties, a big office REIT, as well as U.S. News & World Report and the New York Daily News), and Cablevision chief James L. Dolan—showed a keen interest in tightening their grip on New York’s lucrative media market.
Murdoch faced an uphill challenge in his bidding. Federal Communications Commission cross-ownership rules forbid one entity from owning two major media in any one market. Murdoch owned the New York Post and two television stations in New York. Zuckerman owned the Daily News. Only Murdoch would have to seek an FCC waiver on the ownership rules.
Initial interest in Newsday was lukewarm at best. What Zell needed was an auction to help extract the highest price. He created one by agreeing to a deal to sell to Murdoch for $580 million. That, in effect, created a floor for the auction, as Murdoch was unaware that two other bidders were knocking on Zell’s door.
Zuckerman matched Murdoch’s bid, secure in the knowledge that he would not have to beg the FCC for an ownership waiver. Then Cablevision leapfrogged them both, offering up $650 million. Murdoch, though, thought his deal would win the day and publicly at least, he was claiming the deal was struck. “I don’t think Cablevision will prevail. Just be patient for a couple of days,” Murdoch told investors on a conference call. “We’re certainly not in the business of getting into an auction here,” he said. “We’re hoping to wrap it up within the next week. We think everything is in hand.”3
But was Murdoch willing to bid higher, knowing it could negate the potential savings he sought in combining the Post and Newsday operations, as well as stir up angst among News Corp. shareholders who thought newspapers were already getting too pricey? Three days later, Murdoch suddenly withdrew his bid, and the Dolan family and Cablevision steered to the inside track. After all, they were willing to pay more money and agree to Zell’s joint venture structure, something that would help Zell avoid a hefty capital gains tax bill. Cablevision, with its subscriber base of some 3 million strong, was also based on Long Island, Newsday’s home turf.
On May 12, 2008, Zell sold a 97 percent stake in Newsday Media Group to Cablevision for $650 million. Once again, he had drawn a Royal Flush to win yet another game of high-stakes poker with some of the world’s top deal makers.
In the immediate aftermath, however, the sale raised more questions than it answered. After all, he seemed to be selling off one of his prime cash cows. What was Zell’s strategy for Tribune’s future? Would he invest in the company or sell other flagships, especially as they were less profitable than Newsday?
Zell repeatedly insisted he would not sell either of his remaining marquee newspapers, the Chicago Tribune or the Los Angeles Times. But that didn’t mean some other properties wouldn’t go on the auction block.

FOR SALE: TRIBUNE’S HOME

Because Zell is invariably described as a real estate maven, it came as no surprise to most Zell watchers when the first rumors began to swirl about a possible sale of Tribune’s real estate assets, including the venerable Tribune Tower in Chicago and Times Mirror Square in downtown Los Angeles.
One of Zell’s favorite quotes is from noted American architect Daniel Burnham, who famously said, “Make no little plans, they have no magic to stir men’s blood and probably themselves will not be realized. Make big plans, aim high in hope and work.”
Though born in New York, Burnham was raised in Chicago, and surveying the city’s downtown skyline, it is easy to see what Burnham meant. Chicago is generally regarded as the home of American architecture. Masters of the iconic like Burnham were drawn to the Midwestern city thanks to the tragic fire that nearly leveled it in 1871. By 1909, Burnham would prove to be one of the city’s leading lights thanks to his Plan for Chicago. The centerpiece of the plan was the creation of parks stretching all along the city’s natural river and lake fronts.
Today, a myriad of glass-and-steel towers pay homage to great American architecture. And while the monolithic dark and brooding hulks of Sears Tower and the John Hancock Center dominate the view, one of the most enduring icons of the 1920s remains a fi xture. Lit up at night like a limestone wedding cake, the Tribune Tower is the result of a design competition in 1922. The winning architects, John Mead Howells and Raymond Hood, received a $50,000 check for their neo-Gothic design, which featured a flourish of unique “flying buttresses” near the top of the tower.
Under the watchful eye of Colonel Robert McCormick, the Tribune Tower quickly became the past and present symbol for the modern American newspaper. Just to drive the point home, a statue of Nathan Hale, the American spy who was hanged by the British during the revolutionary war, stands as a solemn sentinel outside the tower’s main entry. In 2006, the McCormick Tribune Freedom Museum, devoted to continued study of the First Amendment’s impact on American freedom, was opened on the first floor.
History is often tinged with irony, as demonstrated by another classic building located just a few blocks away. It is hard not to notice that Zell’s own base of operations, Equity Group Investments, is headquartered in the former Chicago Daily News building, an Art Deco structure made out of Indiana limestone and now known as 2 North Riverside Plaza, overlooking the Chicago River.
Zell and business partner Lurie bought the building back in 1976, when they were still just “real estate people,” long before the notion of owning a Chicago landmark like the Tribune Company was even a glimmer on the horizon. Designed by noted Chicago architects Holabird and Root and built in 1929 on the doorstep of the Great Depression, the building is the first to be constructed over railroad tracks.
In a further twist of irony, the Chicago Daily News, an afternoon paper started in 1875, folded in 1978 after severe declines in circulation and advertising sales. Many pundits pointed to the rise in television viewership and the flight of core downtown readers to the suburbs as primary causes for the newspaper’s demise. Today’s newspaper industry is fighting a similar battle in an increasingly 24/7 world, not only from television, but more so from the Internet.

BATTER UP

Zell watchers well understood his disdain for emotional attachment to Tribune’s legacy, and many feared he would take the same approach to yet another of Chicago’s most vaunted institutions. One of his most watched moves was the sale of the 132-year-old Chicago Cubs and their landmark shrine to baseball’s old-school roots, Wrigley Field. Rumors that the sale would happen surfaced in June 2007 when Tribune put itself on the auction block. Once Zell took over, he was required to sell them off because he already had an ownership stake in the crosstown rival Chicago White Sox.
Selling the Cubs and the stadium, though, proved to be a complicated mess at times. First there was the bureaucracy, a root concept that Zell openly detests. Major League Baseball franchise owners must submit requests to sell a league club to MLB commissioner Bud Selig. The league then approves the winning bidder, not always based on price but also on subjective factors including financial backing and operating experience. At least 75 percent of the other twenty-nine team owners then must vote in favor of a winner.
Certainly the Cubs were not just another baseball team. Throughout their storied history, they have long been known as the loveable losers, thanks to their unique ability to snatch defeat from the jaws of victory in oh-so-close title games.
That historical track record hasn’t prevented the Cubs from becoming one of the richest teams in baseball, however. More than 3 million fans have crammed into the tight 41,160-seat Wrigley Field to see the Cubs play their home games from 2004 through 2008. And this is a team that had not even been to the World Series since 1945 (when Zell was just four years old) and had not won a championship in one hundred years.
To say Zell is a sports fanatic would be akin to a foul ball. In fact, he seemed to care less about the onfield gamesmanship than he did about the balance sheet, especially because the Cubs paid out more than $100 million a year in player salaries. “We own a baseball team that pays one guy $25 million a year to be right one out of three times,” he quipped. “It’s a business I don’t understand, so I’m going to pass the risk on to somebody who either understands it or gets enough psychic income that they don’t give a shit.”4
But it is history and nostalgia that draws the fans to Wrigley Field by the legions. Built in 1914, Wrigley is the second-oldest ballpark in the major leagues behind Boston’s Fenway Park, opened in 1912. The record books show that Wrigley was the historic site of Babe Ruth’s famous “called shot” when Ruth pointed to the center field bleachers in game three of the 1932 World Series and promptly cracked a home run. And another Sammy, Sosa, hit his sixty home runs in 1998, 1999, and 2001 in home games at Wrigley Field.
In Chicago, Cubs fever runs deep through the community, and rarely has a sports franchise generated such passion among its fans. Not surprisingly, Chicagoans were up in arms over Zell’s decidedly nonchalant approach to selling their beloved institutions. But what they didn’t understand was that Zell is at his best when he can create a “buzz” around whatever he owns. The old adage that “There’s no such thing as bad PR” is definitely a Zell maxim.
To jump-start his debt repayments, Zell was hoping for a quick sale of the team, the stadium, and Tribune’s 25 percent stake in cable channel Comcast SportsNet by the season opener on March 31, 2008. But everything hinged on selling Wrigley Field first. He and Cubs chairman Crane Kenney took a potential deal to the Illinois Sports Facilities Authority (ISFA), which owns U.S. Cellular Field, the stadium where the crosstown Chicago White Sox play. The idea was to involve the quasi local/state agency, formed in 1987, to inject monies into renovating Wrigley Field.
Kenney’s first priority was keeping the Cubs at Wrigley; thus the need to sew up the stadium deal first. “We all had hoped the stadium deal could move more quickly,” Kenney told Major League Baseball. “We also understand that with all the legislative input needed, why it won’t move as quickly as we hoped.”5
It turned out the state had a lot to play for—Wrigley Field was the third most popular tourist destination in the state.

WHAT’S IN A NAME?

Throughout its storied history, the Wrigley family, of chewing gum fame, never paid a dime to have its name prominently associated with one of baseball’s shrines, even after Tribune bought the team and stadium from the Wrigley family in 1981 for only $20.5 million.
Could it be that Zell would trample on that heritage? You bet. Naming rights are big business—Citicorp ponied up $20 million for the naming rights to the new New York Mets stadium in Queens. Once again, Zell showed his audacity in asking Wrigley to pay up, even though the firm does not directly market the stadium to sell its products. To Zell, this was another untapped revenue source. And again, he was asking the questions that few were willing to ask.
According to Kenney, that possibility, though viable, held third place on his top to-do list. “We want a championship, that’s Goal 1,” Kenney said after a management session at the 23rd annual Cubs Convention. “We also want a wonderful stadium to see that championship in. That’s Goal [No.] 2. Goal [No.] 3 is what’s the stadium’s name. I put them in that order. If doing something differently with No. 3 allows us to have a championship in that ballpark, then we’ll do it.”6
Zell fueled the public debate over the sales process in February 2008. “Excuse me for being sarcastic, but the idea of a debate occurring over what I should do with my asset leaves me somewhat questioning the integrity of the debate. There are a lot of people who would like to buy the Cubs and would like to buy the Cubs under their terms and conditions and, unfortunately, have to deal with me.”7
That juxtaposition could be seen in a physical sense as well. The Wrigley family’s corporate home, the Wrigley Building, was built just across the street from Tribune Tower in downtown Chicago.

BREAKING UP IS HARD TO DO

Several potential bidders, though, had already balked at separating the two entities, believing that strategy diminished the value of both franchises. Also, the stadium itself needs extensive renovations to keep pace with basic needs—like clean restrooms and better food vendors—and that could weigh heavily on the stadium’s price tag.
Former Illinois governor and ISFA Chairman James Thompson proposed spending $400 million on renovations, to be paid by selling individual seats at Wrigley—think the sporting version of a condominium. But Zell argued that the Internal Revenue Service and Major League Baseball would balk at the tax ramifications of that structure. By June 2008, the ISFA and Zell stopped talking altogether, and they never came back to the table.
Even before the ISFA deal fell through, Zell had quickly scrambled up the next logical path—warming up the bid group approved by MLB. Bid books were distributed to a group of ten suitors approved by MLB in mid-June 2008.
First-round bidders in July 2008 included Mark Cuban, the combustible and controversial owner of the National Basketball Association’s Dallas Mavericks, the Chicago-based Ricketts family, which owned TD-Ameritrade Holding Corp., and an investment group called Sports Acquisition Holding Corp., which included former congressman Jack Kemp and former Atlanta Braves baseball great Hank Aaron.
Cuban’s bid topped $1.3 billion, and if successful, anything in that league would have made the sale the most lucrative deal for an American sports team, exceeding the record 1999 purchase of the National Football League’s Washington Redskins for $800 million, and the $700 million purchase in 2002 of the Boston Red Sox, Fenway Park, and the majority of a regional sports network. However, in November 2008, the Securities and Exchange Commission charged Cuban with insider trading violations. He pulled out of the Cubs bidding contest and sued the SEC in May 2009 to gain access to documents used in the SEC investigation. A Dallas judge dismissed the SEC charges against Cuban two months later.
Zell’s timing of the Cubs sale was a decidedly mixed bag. In the fall of 2008, the team made it as far as the playoffs, then crashed and burned in a three-game shutout by the Los Angeles Dodgers, an ironic twist, considering Tribune’s own internal/infernal newspaper feuds between Chicago and L.A. Unfortunately the worldwide financial markets also did some crashing of their own, at least temporarily stalling Zell’s sale plans.
At one point it seemed almost nothing was sacred, as even the Wrigley’s name was in flux. In September 2008, Wm. Wrigley Jr. Co. was sold to privately held Mars Inc. in a gargantuan $23 billion deal that effectively hit the delete button on one of Chicago’s oldest companies and created the largest confectionary company in the world. The Wrigley’s brand, gracing candy wrappers since 1923, and management may stick around, but there is no denying it’s the end of yet another Chicago institution.
Miraculously, after a nearly two-year auction process, a winning bidder emerged, and it turned out he was a local made good. Chicago billionaire investment banker Tom Ricketts, son of TD Ameritrade discount stock brokerage founder J. Joe Ricketts, plunked down $845 million for the Cubs and Wrigley Field in August 2009.
After twenty-eight years of corporate ownership, the Cubs were back in the hands of a local family. And Zell achieved yet another notch in his legend—largest sale of a sports franchise in history—despite the naysayers and a badly burned economy.

PUMPING UP INTERACTIVE

Even as Zell was selling off assets, he and his management team were focused on maximizing internal operating efficiencies. It was classic Zell—streamline management and decision making to create a nimbler organization that could more quickly take advantage of new opportunities, whether homegrown or market driven.
He went on to drive the point home, always fearful that listeners aren’t fully absorbing his message. “I want decision-making to happen quicker. I want information to flow faster. I want connectivity to exist and I have the sense, from the outside, that we haven’t done a great job of that to date. Fixing that and improving that is going to have enormous implications across this company.”8
While making significant cuts in the publishing operations, Zell was making good on an early promise to beef up Tribune’s interactive division to enhance its editorial contributions.
Like Murdoch, Zell believed that some combination of print, broadcast, and Internet properties was the key to unlocking Tribune’s true value. “We think that if anything that the history of this company is that there has not been enough cross-fertilization and there has not been enough cross selling and that that represents a significant opportunity going forward,” said Zell.9
In September 2008, he appointed a new “content team” to both increase Internet search-engine optimization and develop new content across all of Tribune’s online assets. The team included players from each of Tribune’s major markets, including Los Angeles, Chicago, Orlando, and Hartford.
Zell and Michaels also recruited former broadcasting talent from Jacor to run the interactive group. Tribune Interactive President Marc Chase named Jana Gavin senior director/business development for Tribune Interactive. Gavin was part of a growing team of Jacor veterans now working for Tribune, which included Chase, Sean Compton (senior vice president/programming for Tribune Broadcasting), Steve Gable (chief technology officer), Russ Gilbert (vice president/digital innovation), and Special Consultant Roy Laughlin.
With another online property, CareerBuilder, Zell extracted $135 million in cash value by selling an additional 10 percent stake in the joint venture to Gannett Corp. By the end of 2008, Gannett held a majority 50.8 percent stake, while Tribune held 30.8 percent, the McClatchy Co. 14.4 percent, and Microsoft a 4 percent interest.
Ultimately it may take several years for Tribune’s interactive work to pay off from a revenue standpoint, but some signs are at least encouraging. During the 2008 presidential election, both the Los Angeles Times and Chicago Tribune Web sites saw record activity in the number of users and page views.

KA-CHING

One of Zell’s most important moves was naming Eddy Hartenstein, the founder of DirectTV, as the new Los Angeles Times publisher in August 2008. Hartenstein became the paper’s fourth publisher since 2000 but was the first with Southern California roots to hold the job since Otis Chandler.
Cagey as always, Zell designed his recruitment of Hartenstein to stem the angst emanating from the West Coast crowd. Raised in Alhambra, California, Hartenstein began reading the L.A. Times at age eleven and expected his familiarity with the community and with the paper to be a major plus.
“To be publisher here in L.A., you need a local, and I am a local,” he told an overflow crowd of Times employees at an afternoon meeting. “I’m a 213 kind of guy, not a 312 kind of guy,” he quickly noted, referring to the area codes for downtown Los Angeles and Chicago, respectively. Hartenstein had the credentials to run a successful enterprise—albeit in the broadcast realm—and assured Times staffers that Zell had given him six months of unobstructed freedom to scout the local landscape and produce needed changes.10
While most of the headlines about Tribune’s moves dealt with slashing costs and firing journalists, aka “cost centers,” Zell’s team was busy focusing on another logical function, the primary driver of revenue, sales. Here Zell felt most comfortable, for it was a subject near and dear to his heart (and his pocketbook).
One of Hartenstein’s first moves was to group all Times advertising sales functions, including interactive, under one person. For this challenging role, he named veteran sales guru Scott McKibben as the Times’s new executive vice president and chief revenue officer, which was a brand-new title there. McKibben had a long career in newspaper sales, once holding the title of president and publisher of San Francisco Examiner & Independent Newspaper Group and most recently with Freedom Communications, where he oversaw the Orange County Register.
The L.A. Times staff members might have welcomed one of their own, a local industry veteran, with open arms. Unfortunately, they didn’t. Times journalists discovered that McKibben had sued the Fang family, the former owners of the San Francisco Examiner, for $1.2 million in unpaid commissions he was allegedly due for brokering the sale of the paper and its parent company for $20 million to Denver billionaire Philip Anschutz. Shortly after the sale, McKibben went to work for Anschutz. The Fang family then sued Anschutz, but the suit was settled out of court.
Meanwhile, Zell was doing what he did best—piling the pressure on Tribune’s sales staff to be top producers or be gone. “[Salespeople] ought to look at themselves in the mirror and ask themselves, ‘Am I hungry? Do I want to make a lot more money and do I want to work a lot harder?’ ” said Zell. “If the answer to all those questions is ‘yes,’ they’ve got a great future. If they look in the mirror and say, ‘Gee, I’m an order taker and I don’t really want to work harder and I don’t want to do anything,’ then maybe the outlook is bleak. Because part of what we’ve got to do here is make this company aggressive. We’ve got to make everybody go for it. I’m going for it, shouldn’t everybody else? And particularly a sales force, because in the end we live and die by revenue. And it’s that sales force that we’re depending on the revenue for.”11

A PRODUCT OF THE TIMES

Unfortunately, revenue continued to be in shorter supply. Certainly this was a systemic problem for the newspaper industry, but it led to continued speculation that Zell’s bet on Tribune was particularly ill timed. After all, the company’s financials had been deteriorating rapidly for the past two years.
Proof positive of the state of newspaper advertising was all around Zell. In June 2008, McClatchy Newspapers announced 1,400 layoffs as a result of lower advertising revenues after buying Knight Ridder. The theory was well founded in 2006—snatch up groups of newspapers with loads of debt and create efficiencies to grow revenues across the board. In fact, McClatchy got off to a roaring start, quickly selling off a dozen papers to help pay down some debt.
That strategy failed at precisely the moment the U.S. economy faltered, particularly in California and Florida, where McClatchy had its highest concentration of titles. After McClatchy took $3 billion in noncash goodwill impairment charges related mostly to those papers in 2007, the $4.6 billion Knight Ridder deal looked considerably less valuable. And $2.5 billion in debt was not going away, making growth a huge challenge thanks to high debt and principal payments.
Obviously one by-product of efficiency is often a reduced labor pool. But in one case, Tribune came out on top of the jobs-lost equation for a change. When its South Florida Sun-Sentinel cut a deal to print the Palm Beach Post, Palm Beach Daily News, and La Palma, the papers’ owner, Cox Newspapers, slashed three hundred employees as a result. Zell was not the only newspaper publisher desperate to make ends meet, as others also understood that sometimes soldiers would have to be sacrificed to save the enterprise.
Mergers and consolidations of news-gathering operations, once an unthinkable exercise that would dilute the intrinsic value of “local” in local news, became a commonplace occurrence in the latter months of 2008. Once again, Zell was leading the way by example. Perhaps the most radical shift was his drastic decision to fire half of Tribune’s forty-eight-person bureau in Washington, D.C., in November.
By the end of 2008, more journalists were out of work than at any time in history, as the U.S. Department of Labor estimated that some twenty-one thousand newspaper industry jobs had been lost over the past year. Tribune and its brethren were obviously swimming against the tide.