February 17, 2007
Of Taxes, Newspapers and Family
By JOE NOCERA
A little more than a year ago, representatives of the Chandler family approached the management of the Tribune Company, hoping to solve a little tax problem. Years before, when the family still owned Times-Mirror, it had set up two partnerships with the company that allowed the family to diversify its holdings without having to actually sell any Times-Mirror stock — thus avoiding a big tax bill. When the family sold Times-Mirror to Tribune in 2000, for $8 billion, a price that now seems be rich beyond belief, the Tribune Company inherited the partnerships.
The family needed to restructure the partnerships, but it wanted to do so in a way that left Tribune holding any tax liabilities that might ensue. That is, if the Internal Revenue Service ruled that the partnerships owed taxes after all, Tribune would pay them instead of the Chandlers. The potential tax hit was estimated at $40 million to $60 million.
Not surprisingly, Tribune said no. And who could blame the company? As part of the purchase of Times-Mirror, the company had agreed to take on an earlier potential tax liability — which had turned out disastrously. The I.R.S. wound up ruling against a highly controversial tax move Times-Mirror had made in 1998, and Tribune, after a bitter court fight, had to pay the government $1 billion. (That case is still being appealed.) Tribune’s management believed that the Chandlers, owners of 20 percent of Tribune’s stock and holders of three board seats, were putting their own interests ahead of the interests of other shareholders.
In early 2006, with negotiations over the partnerships going nowhere, a family representative sent a letter to Tribune that said, in effect, that if the negotiations weren’t settled satisfactorily, the family would try to put the company in play.
Scroll ahead now to February 2007. Over these last months, Tribune Company has most certainly been in play. During the fall and winter, after much public agitation by the family, the Tribune board conducted a “strategic review.” Potential buyers were invited to kick the tires. The company put itself on the auction block.
But the auction has turned out to be an embarrassment for its instigators, the Chandlers. The timing could not have been worse. With newspaper stocks in decline and the prospects of newspaper companies uncertain at best, there wasn’t a single serious bid for the entire company. Most private equity firms, which are gobbling up everything in sight, weren’t interested. Neither were other newspaper companies. They all saw what had happened to McClatchy after it bought Knight Ridder last year: its stock has swooned, and that deal is now viewed as a disaster. Instead, the small handful of bidders — including the Chandlers — made various offers that did not include a premium to shareholders, and included financial maneuvers like spinning off the company’s television stations into a separate company, or adding on piles of debt. Tribune viewed all of these bids as unacceptable.
All concerned would probably have been better off standing pat and waiting for a more opportune moment. But companies that find themselves in play don’t have that luxury. They have to do something or the stock will collapse. And it now appears likely that, sometime in the next six weeks, Tribune will announce its own restructuring plan, including a spinoff of the broadcast properties, a big one-time dividend to shareholders, and lots more debt. The company will hold on to its declining newspapers, and some other properties, like the Chicago Cubs.
Will this cure what ails Tribune? Unlikely. As a JPMorgan analyst, Frederick Searby, notes: “Financial engineering can only get you so far. That won’t eliminate the problems.” Mainly, it will give shareholders a one-time cash payout.
And all because the Chandlers were trying to duck some potential taxes? Well, that’s one way of looking at it.
If you have only a glancing knowledge of the newspaper industry, it’s natural to lump the Chandlers in with the other great newspaper families — the Sulzbergers of New York, the Grahams of Washington, the Bancrofts of Dow Jones, and so on. But this would be a mistake. In the modern age, there has really been only one Chandler — Otis, who ran The Los Angeles Times for 20 years and made it great — who viewed newspapering as a kind of public trust, the way those other families do.
Otis Chandler died last year, but long before then, other branches of the family had retaken control of Times-Mirror. Famously, they brought in Mark Willes from General Mills to run the company in the 1990s, and when he didn’t work out, they sold it out from under him to Tribune. Mr. Willes apparently didn’t even know Times-Mirror was up for sale until the deed was done.
Although eight family members sit on the board of the family trusts, Jeffrey Chandler, Otis’s 64-year-old cousin, appears to be the lead family member. He is one of the three family representatives on the Tribune board. The Chandlers are legendary for not giving interviews, but Jeffrey Chandler once complained bitterly to Forbes that The Los Angeles Times had become too liberal.
The Chandlers are legendary for several other things. The first is that they may be the most tax-averse family in the country. “I think The Los Angeles Times is a great paper and all,” said the Lehman Brothers tax expert Robert Willens, “but their greatest talent was tax avoidance.” Tribune’s $1 billion tax hit, for instance, came after Times-Mirror tried to make a sale of a subsidiary appear to be a tax-free corporate reorganization. The second is that they view newspapers as just another business — albeit the business they happen to be stuck with.
None of 170 or so family members work for the family business, so the Chandlers’ advisers know that their job is to extract the maximum amount of money they can from the assets they control. This has become an ever more pressing goal in recent years because the family trusts will expire after the last member of the current older generation dies, and the money will be disbursed to the heirs. That is likely to happen in the next 10 to 15 years.
Thus did the Chandlers rather unsentimentally sell Times-Mirror. And thus, as Tribune has struggled in the last few years, with the stock dropping some 40 percent, have the Chandlers have become increasingly unwilling to sit back and wait it out. The tax issue may have been the trigger, but the feeling among the Chandlers and their advisers was that Tribune management was costing them money — and that was unacceptable.
Tribune, meanwhile, had its own struggles. Its strategy has been a kind of Grand Unified Theory of the media business: if it owns lots of media properties in big markets — a TV station, the major newspaper, a radio station, Internet properties, tabloid giveaways, you name it — it will have something to satisfy all advertisers. But that strategy has not had much success; indeed major metropolitan newspapers like The Los Angeles Times have been among the hardest hit in circulation and advertising declines.
So Tribune’s management has turned to a strategy of relentless cost-cutting to maintain its profitability. This has outraged many of the journalists at its newspapers and led, for instance, to the recent departure of the Los Angeles Times editor Dean Baquet (who is returning to The New York Times in March as Washington bureau chief). But it does mean that Tribune has remained a profitable newspaper chain with very healthy cash flow — just the kind of cash flow you’d think a private equity buyout firm might lust after.
Yet even before the Chandlers began publicly rattling the cages, it should have been clear that the Tribune Company wasn’t going to get much interest from private equity firms. The Knight Ridder sale had taken place just a few months before; it not only drew surprisingly little interest, but when the company was finally sold, the price was lower than newspaper chains have historically sold for.
What’s more, precisely because Tribune’s managers have been so focused on cost-cutting, they really haven’t left much low-hanging fruit for private buyers to pick at. “We have now had two referendums on the newspaper business,” said Mr. Searby, the JPMorgan analyst, meaning Knight Ridder and now Tribune. In both cases, he added, the marketplace has given the industry a thumbs down. The Chandlers, by pressing their case when they did, not only didn’t get the sale they wanted, but they also helped reinforce the notion that the industry in which they hold their major asset is in irreversible decline. Nice going.
That’s why you have to wonder what in the world the Chandlers were thinking when then started this brouhaha. Maybe they really thought they could sell the whole company. Maybe they thought if they agitated loudly enough, something good would come of it. Maybe they thought they could reclaim the newspapers, and then sell them off one by one. If they actually have some end-game in mind, they’ve kept it to themselves—except to make it plain that they are looking out for themselves. Indeed, their own proposal was terribly lopsided in their favor.
“The Chandlers ultimately look very self-serving,” said Mr. Searby. For its part, Tribune management now views its largest shareholder as a bully, looking to gain advantage at the company’s expense.
Of course, there is one other possibility: maybe they really were just ticked off about the tax situation. As it turns out, the partnership dispute wound up being settled in September, quickly and quietly, in a manner that satisfied both sides. Tribune agreed to accept the tax liability, but the Chandlers paid the company to do so. It was much ado about very little, and proof that the company didn’t need to be put in play to get it settled.
But of course it is also true that instead of making a public stink over Tribune’s falling stock price, the Chandlers could have just sold their stock, and put their money in other, faster-growing ventures more to their liking. Oh right, I forgot. That would mean they’d have to pay capital gains taxes.
We can’t have that now, can we?
Copyright 2007 The New York Times Company