DALLAS (CN) – Creditors of Tribune Co. claim the company’s “reckless” leveraged buyout in 2007 “lined the pockets of Tribune’s former shareholders with $8.3 billion of cash at the expense of Tribune’s creditors, and precipitated Tribune’s careen into bankruptcy shortly thereafter.”
Deutsche Bank Trust Company Americas, Law Debenture Trust Co. of New York and Wilmington Trust Co. sued AIG Life Insurance and a host of others, including the Baylor Health Care System, ExxonMobil Investment Fund, Laborers International Pension Fund, the Texas Presbyterian Foundation, the Texas Scottish Rite Hospital Retirement, et al., in Federal Court.
A similar complaint was filed in Manhattan Federal Court.
“Plaintiffs seek to avoid and recover, as constructively fraudulent conveyances, all transfers of any proceeds received by each defendant in connection with the LBO. These transfers may be recovered from the defendants because: (a) Tribune made the challenged transfers without receiving reasonably equivalent value or fair consideration in exchange therefor; and (b) the challenged transfers were made when Tribune – (i) was, or was thereby rendered, insolvent, (ii) was engaged, or was about to engage, in a business or a transaction for which any property remaining with Tribune was an unreasonably small capital, or (iii) intended to incur, or believed that it would incur, debts that would be beyond Tribune’s ability to pay as such debts matured,” according to the Dallas complaint.
It continues: “In mid-2006, Tribune’s consolidated revenue was plummeting, its prospects were dimming, and its stock price had dropped to around $27 per share from a high of nearly $40 just twelve months earlier. The largest shareholders desperately wanted, and ultimately found, an exit strategy: On April 1, 2007, Tribune’s board of directors (the ‘Tribune Board’) approved a bid by billionaire Samuel Zell (‘Zell’) to acquire Tribune through an extraordinarily leveraged buyout.” Fifty-two paragraphs later, the complaint sums it up: “Under Zell’s proposal, the company would borrow nearly $11 billion – while Zell would invest just $315 million of his own money – to buy out the shareholders. In other words, Zell sought to acquire the company by putting up less than three percent of the risk capital and shifting all of the risk of the transaction onto the shoulders of the company’s existing creditors.”
The plaintiffs say leveraged buyouts are “inherently risky to the target company’s existing creditors” and that the cashed-out shareholders “receive the principal benefit in an LBO transaction.”
They call the Tribune transaction “one of the most highly leveraged in history,” and say it was too much for Tribune management to resist.
“Before the LBO, Tribune and its direct and indirect subsidiaries … had approximately $5.6 billion of funded debt obligations and a positive equity value. As a result of the LBO, however, the company increased its funded debt obligations by more than $8 billion and Tribune had a negative equity value,” the complaint states.
The plaintiffs say the leveraged buyout, a two-step transaction in which the company paid shareholders $4.3 billion in the first step and another $4 billion in the second step, “was a textbook fraudulent conveyance.”
“Tribune received, and the shareholders gave, no value whatsoever in exchange for the shareholder transfers. To the contrary, Tribune only received the dubious honor of repurchasing its own stock, and a bloated debt load that increased to more than $13 billion – billions more than Tribune was actually worth, and nearly ten times the company’s cash flow for 2006 or projected cash flow for 2007. This highly leveraged capital structure was nothing short of reckless.”
Because of the newspaper industry’s steady decline, the Tribune Company, which generated almost two-thirds of its revenues from its newspaper businesses, was “a terrible candidate for” a leveraged buyout, and had “significantly underperformed industry averages during the years and months leading up to the LBO,” the creditors say.
“At the time Step One closed, the company had already failed to meet management’s projections for the first several months of 2007. As of May 2007, year-to-date operating cash flow for the publishing segment was significantly lower than projected, and less than the prior year’s actual results for the same period. In fact, one of Tribune’s largest newspapers was reported to have had ‘one of the worst quarters ever experienced’ in the second quarter of 2007. Consequently, just to meet full-year projections for 2007, the company would have had to achieve an impossible trifecta during the second half of the year: turn around the negative trend, and recoup the performance deficiencies from the first half, and significantly exceed 2006 performance,” the complaint states.
Not surprisingly, the plaintiffs say, Tribune Co. “did not achieve any of these objectives,” the company’s stock price went into free fall and “Tribune’s bond prices fell to almost 50 cents on the dollar for certain tranches of Tribune’s longer term debt.”
In the aftermath of the leveraged buyout “Tribune’s funded debt load soared from more than $5 billion to nearly $14 billion – ten times greater than the company’s actual cash flow for 2006 or projected cash flow for 2007,” according to the complaint.
“Market watchers and the media had long predicted and widely publicized that the LBO would ruin Tribune. It did. Before the close of Step Two, it was clear that the company would be unable to meet its operating expenses from existing resources and shortly would be in a full-blown liquidity crisis. Less than one year later, buried in debt and facing a bleak future of looming debt maturities and overwhelming interest payments, Tribune and the majority of its subsidiaries jointly filed for bankruptcy on December 8, 2008. …
“Tribune’s own publicly filed estimates in the Bankruptcy Court valued the company at approximately $6.1 billion in 2010 – less than half of the company’s debt load at the close of Step Two.
“The pre-LBO noteholders have yet to receive payments on the pre-LBO noteholder claims; and under the two plans of reorganization currently being considered before the Bankruptcy Court, the pre-LBO noteholders would receive initial distributions of only a small fraction of the money they are owed.”
The plaintiffs seek damages for fraudulent transfer.
They are represented by Jeffrey Goldfarb with Goldfarb Branham of Dallas and Robert Lack with Friedman Kaplan Seiler & Adelman of New York City.