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Sunday evening it was announced that the Tribune Company was preparing for the possibility of a bankruptcy filing. Yesterday, it became a reality as the Tribune Co. Officially Filed for Chapter 11 Protection with assets of $7.6 billion and debts of $12.9 billion:

The filing gives Tribune breathing room to rework its debt, and Mr. Zell said the company will continue to operate normally...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.

The article also mentions the ESOP and the expected outcome of the bankruptcy:

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.

Here is Sam Zell's memo to Tribune Company employees, which included a reference to the ESOP:

You are also most likely wondering about the other aspects of your compensation. The 401(k) is unaffected by the filing, and in general, the existing benefits in the pension and cash balance plans are also unaffected by the filing. The ESOP is part of the ownership structure, so its value and role long-term will be determined in the restructuring. We believe the structure is a valuable asset to the company and that there are strong reasons to preserve it.

Corey Rosen, the NCEO Executive Director, has prepared an information page titled What Will Happen to the ESOP in the Tribune Bankruptcy?, which covers the following:

  • Who Paid for the Shares Held by the ESOP?
  • How Was the Tribune Transaction Structured?
  • How Much Will the Stock in the ESOP Be Worth?
  • How Will Employee Retirement Assets Be Affected?
  • ESOPs in Context
  • He sums up the Tribune ESOP situation as follows:

    "The Tribune Company ESOP was clearly a gamble on a business that was already facing a difficult market, only to face the worst recession in decades, one especially hard on media companies."

    Here are some highlights of the information page:

    • ESOPs generally do not permit employee contributions and the Tribune ESOP was no exception. In other words, "No existing employee retirement money was used to fund the ESOP, no direct investments by employees were made, and no wage concessions were traded for the ESOP."

    • The two-stage ESOP transaction was very complex:

      The transaction was complicated and involved two stages: (1) redemption of shares and issuance of new shares, and (2) taking the company off the public market. At the outset of the transaction, the ESOP borrowed $250 million to buy Tribune Company stock at $28 per share. That bought 100% of the common stock of the company. Sam Zell provided additional financing in return for a subordinated note and for warrants potentially worth 40% of the company (warrants are a kind of claim on the equity of the company). Zell effectively paid $34 per share for these rights. Thirty-eight executives were given phantom stock rights worth potentially 8% of the company.

    • He illustrates that there is no reason to believe the employees would have been better off had there been no ESOP:

      "There is no reason to think that employees would have done better than the 4% match to the 401(k) plan had there been no ESOP. In other words, even if the value of the Tribune Company shares allocated to their accounts in 2008 falls to zero, employees will receive a 3% contribution to the cash balance plan. Absent the ESOP-linked restructuring, they would have received a 4% match to their 401(k). The net loss to employees, then, is equal to 1% of compensation. So the bankruptcy will have little effect on employee retirement relative to there not being an ESOP."

    As we prepare for More of the Same kind of Overly Sensational Anti-ESOP Coverage, it is essential that the ESOP community continue to Counter Negative ESOP Coverage with the Facts and keep the following in mind:

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