Tribune Co. filed for Chapter 11 bankruptcy protection Monday, bruising billionaire Samuel Zell's ambitious effort to rescue the media company and reshape the ailing newspaper industry.Mr. Zell, who led the $8.2 billion buyout that took Tribune private last year, mostly with borrowed money, fell victim to a mix of heavy debt, withering advertising declines and the recession, the same forces that are expected to topple other newspapers across the nation.
The toxic stew overwhelmed Mr. Zell's blueprint for jump-starting the newspaper-and-television company, which shares his hometown of Chicago.
The bankruptcy filing covers Tribune's eight major daily papers, including the Los Angeles Times and Chicago Tribune, as well as the company's string of local television stations. Tribune's Chicago Cubs baseball franchise, in which the company is trying to sell an interest, wasn't included in the filing.
The filing gives Tribune breathing room to rework its debt, and Mr. Zell said the company will continue to operate normally. He added that the company expects to remain intact, but he is open to selling other assets besides the Cubs.
WSJ's Heidi Moore talks with Adam Najberg about the ill-fated deal that brought Tribune Co. to the brink of brankruptcy. (Dec. 8)
Despite Tribune's financial problems, the timing of the bankruptcy filing came as a surprise to some investors. Even as the company hired bankruptcy advisers in recent days, these investors saw the move as a Tribune negotiating tactic in continuing discussions with its bank group, led by J.P. Morgan Chase & Co.
While Tribune had appeared likely to violate a year-end debt ceiling imposed by its bankers, many investors believed the company's lenders would have allowed it at least a couple of months of grace while it pursued an auction of the Cubs and related assets, which are expected to fetch roughly $1 billion.
But Mr. Zell said in an interview Monday that he saw no way out other than seeking protection from creditors as revenue continued to slide. "It wasn't like we were going to the bottom of a canyon and could see the other side," he said.
People familiar with the matter said a key factor in the timing of the filing was the approach of relatively small but crucial debt payments, including a $70 million payment due Monday to junior bondholders. Executives believed a bankruptcy filing was likely at some point, and chose to file now to preserve as much cash as possible and protect senior lenders, these people said.
Although its diminished cash flow put real pressure on the company, Mr. Zell said he was aware of his predicament well before the broad financial meltdown that started in mid-September.
Asked why he didn't explore the bankruptcy option sooner, he said, "There's this guy who was just elected president of the United States, and he wrote a book called 'The Audacity of Hope.'"
Tribune entered Chapter 11 proceedings with listed assets of $7.6 billion and debt of $12.9 billion, according to the company's bankruptcy filing in Delaware. Creditors on the hook for losses include J.P. Morgan Chase, the source of $1 billion of an $8.6 billion bank loan.
Other creditors include Deutsche Bank AG, distressed-investing specialist Angelo Gordon & Co., and KKR Financial Corp., court documents say.
Mr. Zell has had his share of ups and downs over the decades as an investor in real estate and in distressed businesses, but the Tribune deal is a blow to both his reputation and his wallet.
Last year, Mr. Zell's firm invested $315 million in Tribune in exchange for a subordinated note and a warrant entitling it to acquire 40% of the stock. He now says he assumes his investment is worthless.
From the beginning, there were doubts about Mr. Zell's plan to buy out Tribune, first announced in April 2007. For most of last year, Tribune shares traded well below the deal's $34-a-share value, implying deep investor skepticism he would be able to close the transaction.
There have been questions about the company's viability ever since. Tribune's debt ballooned as a result of the deal, and the company soon began to sell off pieces to bring in as much cash as possible.
Then, larger forces intervened. Newspapers had been steadily bleeding as advertising dollars shifted out of traditional media toward the Web; the weak economy left them hemorrhaging. The newspaper industry is on pace to have its worst year on record. The industry's advertising revenue through the first three quarters of 2008 is about 21% below levels just two years ago.
Mr. Zell acknowledged the structure of his buyout deal left Tribune with little time to wait for a possible industry turnaround. He said the drop-off in Tribune revenue was an insurmountable obstacle. "What precipitated the filing was a huge erosion in revenue and a total lack of visibility going forward," he said. "That's a tsunami you can't swim up against."
Mr. Zell said that Tribune was on the right track, but simply ran out of time. "If we'd had three years to do it, as opposed to the relatively short period of time, I think we'd find the right answers," he said.
Mr. Zell said from the beginning that the deal for Tribune was a calculated bet on a beaten-down company and industry. But his optimism gave hope to the beleaguered newspaper industry, which he said was fixable with new ways of doing business and a change in attitude.
Mr. Zell and other top company executives are staying on, and "remain actively engaged and committed to this company," Tribune said in a memo to employees.
The company's bankruptcy filing is likely a harbinger of more pain across the newspaper industry. Several publishers, including Journal Register Co., and newspapers including the Philadelphia Inquirer and the Minneapolis Star Tribune, are working to restructure their debt with the cooperation of lenders. The perilous financial footing for these and other newspapers make it clear the industry's business model is under siege.
Representatives of Journal Register, the Philadelphia Inquirer and the Star Tribune couldn't be reached for comment.
Newspapers have cut thousands of jobs this year, slashed stock dividends and taken other cost-saving measures to offset steep revenue declines. Even so, a number of publishers, including A.H. Belo Corp. and Sun-Times Media Group, are unprofitable on a cash-flow basis, a once unthinkable situation in the industry.
At a media conference Monday, Washington Post Co. Chief Executive Donald Graham said the company's flagship newspaper will be unprofitable in 2008.
With newspaper revenue declining so quickly and fresh capital so hard to find, some publishers are expected to cut their losses and close their doors. "There's no real light at the end of the tunnel," said Fitch analyst Mike Simonton.
Investment bankers say valuations for newspapers have collapsed, if there are any buyers at all. While potential local buyers have been circling Tribune's newspapers in Los Angeles and Baltimore, any deals would be complicated by a lack of available credit and dwindling profits from Tribune's assets.
Tribune's largest newspaper, the Los Angeles Times, has seen cash flow shrink to roughly $100 million this year from about twice that level in 2007, according to people familiar with the paper's finances.
The bankruptcy filing throws a wrench in the sale of the Cubs, which Tribune had counted on to provide a cash injection. The company received three bids of at least $850 million for the storied team just before a Thanksgiving deadline for second-round offers. Monday, two of the bidding groups expressed deep frustration at a process they now expect will be substantially delayed because of the role the bankruptcy court will play in any transaction.
"This is an absolute mess," said the financial adviser for one bidder. "God know what happens now."
Tribune said the Cubs were excluded from the bankruptcy protection with the intent of minimizing the impact on the auction.
The effect of the bankruptcy on Tribune employees' retirement plans appears to be more limited. An employee stock-option plan is the majority owner of Tribune, a novel structure put together by Mr. Zell's team that allowed Tribune to avoid most corporate taxes.
Employees haven't lost money in the stock plan because they haven't received any stock distributions from it. In a memo to employees, Tribune said the role and value of the plan will be determined in bankruptcy proceedings.
Ultimately, Mr. Zell said he expects Tribune will emerge healthier after he shepherds it through bankruptcy reorganization. "We started this, and we're going to finish it," he said.
—Peg Brickley, Matthew Futterman, Russell Adams and Ellen E. Schultz contributed to this article.
