Tribune bondholders seek to probe sale to Zell

Bondholders of Tribune Co., owner of the Chicago Tribune and Los Angeles Times, asked a bankruptcy judge for permission to investigate billionaire Sam Zell's $8.3 billion takeover of the media company.

The leveraged buyout and "the unsustainable debt burden imposed on a business already in a secular decline undoubtedly caused" Chicago-based Tribune's bankruptcy, the bondholders, who said they have an 18 percent bond stake, alleged yesterday in a court filing in Wilmington, Delaware.

"I'm surprised we haven't seen more of these," said Charles Tatelbaum, a bankruptcy lawyer at Adorno & Yoss in Fort Lauderdale, Florida, and former editor of the American Bankruptcy Institute Journal. "This is what happens when you have a leveraged buyout, and when it fails there is always a good possibility of a subsequent investigation and litigation."

The bondholders filed their motion yesterday, two weeks after the company's creditors' committee sought permission to hire a law firm to investigate the transaction. The bondholders asked Chief U.S. Bankruptcy Judge Kevin J. Carey to let them review e-mails and other documents or to appoint an examiner to do the investigation. Proof of improper transactions could spark litigation to increase creditor payouts.

Tribune sought protection from creditors in December, less than a year after Zell took the company private, citing almost $13 billion in debt and falling advertising sales. Zell, 67, said in April that he had made a "mistake" with the purchase and had been "too optimistic" about the position of the company's namesake Chicago newspaper.

'Complex Transaction'

The purchase of Tribune, which also owns 23 television stations, was "a complex transaction that requires a thorough investigation with all pertinent facts brought openly and publicly to the court's attention," the bondholders said.

In a buyout like this, "money is going right out the door to pay stockholders" and the company is left "with not enough capital to operate properly," Tatelbaum said. While it's not against the law, the court could go after Zell and get a judgment "based on putting the company into unreasonable debt" where money went to shareholders, not creditors, Tatelbaum said.

Damage claims related to the leveraged buyout are "the most significant, central issue in the bankruptcy case," said David LeMay, an attorney representing the main panel of unsecured creditors.

That group has asked the court for permission to hire attorney Graeme W. Bush of Zuckerman Spaeder LLP to prepare a possible lawsuit on behalf of creditors. LeMay declined to say who might be targeted by such a suit.

Settlement or Suit

Claims related to the buyout are worth billions of dollars, LeMay said. Those claims will either be settled or will go forward as a lawsuit, and the committee, not bondholders, should take the lead, he said.

Tribune's privatization benefited shareholders who were paid about $8.3 billion from loan proceeds, the bondholders' filing said. The company "would have been able to withstand this predictable downturn in the publishing business" had it not been for the shareholder payout.

"Everyone knew the acquisition left Tribune highly leveraged; the question is whether it left the company insolvent," said Douglas Baird, a University of Chicago law professor. "The newspaper industry has absolutely collapsed, and that happened after the deal was done," he said.

JPMorgan Chase & Co., Merrill Lynch & Co., Citigroup Inc. and Bank of America Corp. arranged high-yield, high-risk loans to back the Tribune acquisition.

Banks

Danielle Robinson, a spokeswoman for Bank of America Merrill Lynch, didn't immediately have a comment. Justin Perras, a JPMorgan spokesman, declined to immediately comment. Jeanette Volpi, a Citigroup spokeswoman, declined to comment.

Gary Weitman, a Tribune spokesman in Chicago, wouldn't immediately comment on the filing. Zell didn't immediately return voice and e-mail messages seeking comment on the filing.

The first hearing is scheduled for Sept. 4.

Tribune's $450 million of 4.875 percent notes due in 2010 are quoted at 7.125 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The five-year notes, sold in August 2005, were quoted at 97 cents on the dollar in April 2007, before the buyout was announced, Trace data show. The notes traded for more than face value in 2005.

The case is In re Tribune Co., 08-13141, U.S. Bankruptcy Court, District of Delaware (Wilmington).