Is Sam Zell Digging the Sentinel's Grave?

 

The maverick real estate investor earned his fortune—and the nickname “the Grave Dancer”—by capitalizing on corporate decay. In buying Tribune Company late last year, he saw another opportunity to find profit in a struggling business. But he didn’t see the black hole the newspaper industry was about to fall into, made deeper by the privatized company’s $13 billion of debt. For the Tribune-owned Sentinel, Zell’s ownership has come at a hefty price: drastic cuts in staff and content. 




Sam Zell once hung a map of the United States in his downtown Chicago office. It would have looked like a patriotic gesture if he hadn’t hung it upside-down. But that’s Zell, mischievous to the point of defiance, a 67-year-old entrepreneur with a middle-schooler’s sense of humor, a drill sergeant’s vocabulary and an estimated net worth of $5 billion.

He crafted most of that fortune by turning himself into the biggest commercial landlord in the country, then supplemented real estate with barges, wineries, electronics, recycling plants, radio stations and, most recently, TV stations and newspapers, including the Orlando Sentinel.

The gravel-voiced native Chicagoan became one of the most influential figures in Orlando nearly a year ago, tucking our hometown newspaper into his portfolio almost as an afterthought.  The Sentinel was just part of his $8.2  billion buyout of the then-160-year-old Tribune Company, whose assets included the Chicago Cubs and Wrigley Field, 23 television stations and nine newspapers: the Chicago Tribune, the Los Angeles Times, Long Island’s Newsday and six smaller dailies.

Zell, who declined through his assistant to be interviewed for this story, has no particular interest in journalism. What he specializes in is distress. There was plenty of that to go around at Tribune. Corporate infighting, an ill-fated merger and a sharp downturn in its newspaper division, which accounts for about 75 percent of Tribune’s revenues, had rocked the company in the immediate years preceding Zell’s takeover.

Zell’s bread and butter is capitalizing on the failings of others by snapping up troubled properties, gambling that he can turn them around. He feasts on corporate decay, cheerfully referring to himself as a vulture. He also likes being known as “the Grave Dancer,” a nickname he coined when he wrote an essay describing his strategy for finding profit in struggling companies.

That’s another Zell trademark: dispensing high-finance wisdom with an adolescent flourish.

Every holiday season, he writes a song, hires a singer to record it, finds someone to design and manufacture 600 customized brass music boxes that play it, and then sends them out to friends and business acquaintances as gifts.

A sample from one year’s melody, set to the tune of “Raindrops Keep Fallin’ on My Head”:
Capital is fallin’ on my head
Everything is liquid, we’re awash with
cash to spend.
The flood has drowned return
’Cause assets keep liquifying, monetizing,
raining.
So I just did me some Econ 101
And found that we’re out of equilibrium . . .


Poet and Prophet
Zell’s friends have grown accustomed to his peculiar annual greetings, which, like their lyricist, tend to favor economics over sentiment.

Howard Ecker has been on the music-box gift list for a long time now. Ecker, who owns and operates a real estate servicing business in downtown Chicago, goes back 35 years with Zell. They were roommates then, both young, both struggling to establish themselves in the Windy City.

Even in those days—before Zell started socializing with sheiks in Abu Dhabi and motorcycling in exotic locations all over the world with a crew of cronies he calls “Zell’s Angels”—nobody quite knew what to make of him.

“Let’s just say he was a little different,” Ecker said. “He had drive, boundless energy. You knew he was going to succeed. But he was sort of out there. Free-wheeling. Not typical.”

In Zell, Ecker had a roomie who as an elementary schoolboy bought copies of Playboy magazine in downtown Chicago and then sold them to suburban classmates at quadruple the price. His motto in his high school yearbook: “I’m not arguing with you. I’m telling you.” After graduating from the University of Michigan with a law degree in 1966, Zell had taken all of a week, working on contract law for a Chicago firm, to decide that lawyering wasn’t for him.

Soon he was investing in real estate and presenting seminars about it to the attorneys whose ranks he had deserted, all the while adding to his own coast-to-coast collection of office and apartment buildings. Eventually, Zell’s holdings would total nearly 600 buildings, including SunTrust Center Tower in downtown Orlando.

Two years ago, Zell sold Equity Office Properties Trust  in a single, record-setting transaction—but only after pausing in the middle of a high-pressure auction with billions of dollars at stake to send off a snippet of poetry to one of the potential buyers, inquiring about their level of interest:


Roses are red
Violets are blue
I heard a rumor
Is it true?


It was. The final sale price: $39 billion.

Zell says the essence of his business philosophy is to operate outside the mainstream, to see things from a loner’s point of view. It’s a philosophy with deeper personal roots than he ordinarily admits.

When he was conceived, his Jewish parents were wayfarers without a country, having fled their native Poland just ahead of the Nazis. They were in Hong Kong, working their way toward the United States.

In a 1995 interview with a Chicago television station, Zell said the experience of being from an immigrant family profoundly influenced his business perspective. Perhaps it also found expression in his contrarian ways. What’s certain is that his penchant for combining brash showmanship with drop-dead moneymaking has earned him a certain cachet among the high-finance crowd.

“He’s like a fortune teller,” said Ecker. “Sam is just better at predicting than most people. They say he is lucky. I think it’s intuition and nerve. I’ve skied with him off and on for years. He’s always the guy who takes the fastest way down. He either wins the race to the bottom, or crashes along the way.

“There’s something he sent me. It’s a cartoon of two guys in a boxing ring. One of them is this big scary lug. The other guy, he’s skinny, just a skinny little guy. But he has a gun. And underneath it says, ‘Be a risk-taker. But define the risk on your own terms.’”


‘Open Kimono’ Exchange
When Zell bought Tribune and took it private, hope flickered across demoralized Trib newsrooms from L.A. to Hartford, Connecticut, that he would be exactly the sort of swaggering, deep-pockets gunslinger the chain needed.

He certainly made a hell of a first impression.

Six weeks after closing the deal, he traveled via private jet to Orlando to meet with the assembled Sentinel staff as part of a goodwill tour of his new holdings. In a videotaped moment destined for the Internet, photographer Sara Fajardo, one of the paper’s younger, more idealistic staffers, approached the microphone and asked Zell if he wanted his newspapers to favor lighter features—stories, as she put it, about “puppy dogs”—at the expense of more serious articles on Iraq.

Zell likes to say that he favors candid communication between himself and his employees, or as he puts it in a characteristically off-color image: “Open kimono!”

There was certainly no mystery in his response to Fajardo.

He told her that her question sounded to him like “typical journalistic arrogance.” Sure, he said, he’d like to promote serious journalism, but first he had to turn the company around financially. If that meant putting puppy dogs in the paper, so be it.

Then, because he felt she had turned her back on him prematurely, he glared as she walked back to her seat and cursed at her, using a four-letter word and a second-person pronoun.

Zell later apologized, saying that he intentionally uses profanity to wake people up to the urgency of a situation. He apparently was unaware that working journalists had been using that sort of language in urgent situations for years and to no perceivable effect on declining ad revenues, plummeting circulation, competition from the Web, ill-conceived mergers, or any of the other problems that had put the Orlando Sentinel into the hands of someone whose idea of leadership involved gathering employees together and dropping an f-bomb on the one who displeased him.

The impact of Zell’s visit reverberated all the way to the top at the Sentinel. Only two weeks later, publisher Kathleen Waltz, who had been with Tribune Company for 34 years, abruptly announced her resignation in the newsroom and left the building.


Newsroom Exodus
Five months after Sam and Sara had their YouTube moment, I visited the Orlando Sentinel newsroom to see how the Zell regime was working out.

Sara was just leaving. A lot of other people soon would follow.

The Sentinel had been overtaken by one of the darkest summers in the history of American newspapers. Even Zell, the poet and the prophet, had been caught unawares. Revenue declines were no longer just steep; they were runaway. The industry had gone as topsy-turvy as that U.S. map in Zell’s office.

I had worked at the Sentinel as a reporter for 21 years, leaving in the fall of 2006 to teach at my old university, Ohio State. I missed the Sentinel, missed the pulse that surges into a story when you get it right, missed the bonds that form when awful things happen—shuttle disasters, hurricanes, terrorist attacks—and stacks of pizza boxes appear in the newsroom, because it’s home until you see the story through. I was looking forward to seeing colleagues who’d been in that pressure cooker with me.

I slipped into the building from the employee entrance off Concord Street and headed straight for a cluster of familiar faces—reporters and columnists bent over computer terminals in the middle of the long, low-ceilinged newsroom. Nervous eyes followed me from the glassed-in offices where various editors sit. A moment later, I was in one of those offices, talking to one of them. I’d known him for 20 years. He couldn’t meet my eyes.

“Uh . . . this is . . . awkward,” he said. “We don’t want you talking to the staff.”

What they wanted was for me to speak only to my former boss, editor Charlotte Hall, with whom I had an appointment. I was told she would only answer questions about the paper’s redesign, which was meant to make the leaner newspaper more colorful and contemporary. She wouldn’t discuss either Zell or the impending layoffs and buyouts that were on the minds of every single soul in that newsroom.

This is what embattled institutions routinely do. They set parameters on interviews, steer reporters away from sources. It’s just creepier when it happens in a place that is supposed to be all about rooting out the truth, no matter what.

So I interviewed Hall, who read from notes in front of her and spoke in tones of determined enthusiasm. When I tried to nudge her off her talking points it was clear I could no longer have an open kimono conversation with her. Later, away from the newsroom, I talked to a few members of the staff with whom I still could.

I started with Fajardo, the photographer. She told me she was leaving the paper for a job as a spokesperson for Catholic Charities. It wasn’t because of Zell, she said; it was something she’d planned on doing for a long time.

I asked her what it was like to be publicly cussed out by a big-shot billionaire.

“I didn’t feel like I was being disrespected,” she said. “I felt like everyone who was there was being disrespected.”

I couldn’t find anybody who disagreed with her. The rank and file of Zell-shocked Sentinel journalists I spoke to over the summer—some who wound up leaving the paper as well as some who stayed—were wary of an owner who didn’t understand that wanting to produce serious stories might just bespeak something other than arrogance.

The staffers I spoke with considered the redesign window dressing, style over substance. They believed that the newspaper’s ability to cover the community had been crippled by Zell’s takeover of Tribune. 

The Sentinel eliminated 153 positions since the takeover, more than a third coming from the newsroom. The cutbacks included job buyouts that lured away some of the paper’s most talented and experienced journalists: Pulitzer-Prize winning editorial page editor Jane Healy, who keeps a presence in the paper with a Sunday op-ed column, popular restaurant critic Scott Joseph, deputy managing editor Ann Hellmuth, Tallahassee bureau chief John Kennedy, and longtime investigative reporter Jim Leusner, to name only a few.

The downsizing went beyond employees, which now number 985, down from 1,200 in May 2007. The Sentinel chucked content and news pages, and consolidated some sections as it shrank its news hole to pump up the ratio of advertising to editorial. The repackaged, color-coded daily is a much lighter read, with splashy graphics, charticles, tips boxes, consumer news-you-can-use-in-brief, and wire service copy filling space that formerly would have carried locally produced content.

“Small, everyday stories in communities like Casselberry and Sanford, something as simple as a tax increase in Ocoee, will go unreported,” said one staffer, speaking on the net effect of the changes. More importantly, added the staffer, who spoke on the condition of anonymity, “big stories will end.”

That means an end to ambitious projects like John Bersia’s Pulitzer-winning editorial campaign, in 1999, that attacked predatory lending practices in Florida, prompting legislative reform, or a 1993 investigation, also a Pulitzer winner, of racial profiling and questionable seizures of cash by a Volusia County sheriff’s task force.

Equally unlikely, at a time when the newspaper is desperate for advertising dollars, are gutsy, financially risky exposés like the one about shoddy residential construction practices in Central Florida. That 2003 investigative series, a valuable service for readers and consumers, resulted in a backlash that cost the newspaper roughly a million dollars when angry homebuilders fired back by withdrawing ads.

To Ken Auletta, who writes a media column for The New Yorker magazine and is the author of 10 books about the media, there is an inherent danger when an owner tries to treat a newspaper like any other business.

“If you are a businessman, you can look at a newsroom and see it as a very inefficient place, and there are certainly areas where the Sam Zells of the world can make a difference in that area,” he said. “But what if that reporter who’s sitting there waiting for a phone call [from a source] is working on a story that is going to have an impact on the public good? The identity of a newspaper, the brand of a newspaper, is its credibility as a public watchdog. If the readers can’t say, ‘I trust the Orlando Sentinel,’ you’re dead.”


Big Problems Arise
You can’t blame Zell for everything that’s going badly with Tribune’s newspapers, which had been losing revenues and trimming jobs before he came along. 

But you’d never know it from reading the rank-and-file journalism blogs that have singled him out as though he’s solely responsible for all the ills afflicting Tribune-owned papers. In L.A., an anonymous Times journalist has decorated an anti-Zell blog with a caricature of Zell as Daniel Plainview, the avaricious oil tycoon played by Daniel Day-Lewis in the movie There Will Be Blood, caught in the midst of crowing, triumphantly, “I drink your milkshake! I drink it up!” 

And closer to home, two blogs report on the Sentinel’s slide under Zell’s ownership, eyeonthesentinel.blogspot.com and amazingshrinkingsentinel.blogspot.com. The latter carries the slogan “IT’S IN PRINT. ONLINE AND LOSING CONTENT ALL THE TIME” on its home page.

Cast as the villain, Zell seems to relish the part. He told the Chicago Tribune’s Washington correspondents in February they were “overhead”—a financial burden he’d rather do without. He suggested that he wouldn’t mind seeing sex businesses advertise in his newspapers, and he brought in a fresh corps of managers with no print journalism experience to run Tribune. The vast majority of the new managers are people he came to know from his radio days. He cast a former shock jock as his chief operating officer: Randy Michaels, a kind of Zell mini-me, irreverent but successful, feared in radio circles for his competitive drive.

Still, isn’t a newspaper owned by a potty-mouthed grouch better than no newspaper at all? After all, Zell isn’t a word guy. He’s a numbers guy. But what if his numbers don’t add up? 

Zell’s leveraged takeover of Tribune saddled the company with about $13 billion of debt (the $8.2 billion purchase price plus about $5 billion of previous debt). After taking the helm last December, Zell initially said Tribune couldn’t cut its way to profitability. But when the economy tanked, Zell quickly changed his mind.

To comply with loan agreements, Zell needs to report a yearly profit of $1.1 billion and maintain a 9 to 1 ratio of new debt to earnings before interest, taxes, depreciation and amortization. In late June, the company said it was in the “low-to-mid 8 (times) range.”

In August the company reported that it “lost” $4.5 billion in the second quarter. (Because some of its bonds are publicly traded, Tribune still discloses financial results.) Most of that—$3.8 billion—was a “write-down”: an acknowledgement that, like newspaper chains across the country, Tribune’s publishing unit had dramatically declined in value. Though such write-downs measure intangibles more than assets or cash, this one was stark just the same: The company had lost nearly half its value since Zell acquired it.

As the summer drew to a close, Fitch Ratings, a corporate credit rating service, downgraded Tribune’s junk bond status to “CCC.” That rating indicates there is “a real possibility” a company will default.

He Has Little to Lose
Zell’s short-term strategy has been to sell assets to pay down loan obligations. He sold Newsday in New York for $650 million and also sold 10 percent of Tribune’s careerbuilder.com business. The Chicago Cubs and Wrigley Field are for sale, and Zell is trying to find ways to “generate more value” from the venerable, neo-gothic Tribune Tower in Chicago and the Times Mirror Square Complex in Los Angeles.     

Proceeds from the Newsday and careerbuilder.com transactions helped Tribune recently repay more than $800 million of a $1.4 billion short-term loan, according to company spokesman Gary Weitman. He said Tribune expects to have the liquidity to meet the final installment, due in June 2009.  

According to a BusinessWeek report on the Zell takeover, Tribune seeks to boost profitability through its broadcast and Internet divisions while trimming costs in its newspaper operations. Tribune’s latest financial filing reflected that strategy—operating profit in its broadcast unit was up 41 percent for the first half of ’08 compared with the same period for ’07. Still, the broadcast unit makes up only a quarter of the company’s revenues. Meanwhile, operating profit for the publishing unit was off 45 percent for the same comparable period.

Zell appears to be gambling that he can transform Tribune into an electronic media and entertainment giant, with the newspapers reduced to a supporting role. Given the enormity of the deal, with thousands of jobs hanging in the balance, it’s a low-stakes bet for him.

Remember the skinny little guy in the cartoon about taking risks, but only after defining them on your own terms? Life imitates art in Zell’s takeover of Trib. His personal investment: $315 million.

Using a loophole in a federal regulation that was meant to make it easier for small business employees to own a company, he set up an employee stock ownership plan that calls for all company profits to be funneled into the ESOP. That means that the company itself doesn’t have to pay taxes, which for the Tribune had averaged roughly $250 million annually. But by leveraging the ESOP, Zell passed most of the debt off to his “partners,” as he refers to Tribune employees.

As Zell told journalists at the Sentinel and later at the Los Angeles Times: “I didn’t do this to get myself a place in Malibu or a private jet. I already got all that s---.”

In Chicago, he phrased it another way, telling reporters that, depending on the outcome of the takeover, “My financial situation will not change. Yours will change considerably.”

Sensing as much, a group of current and former L.A. Times employees filed a lawsuit against Zell in mid-September, claiming that he had, among other things, damaged the company and jeopardized their retirement plans. The suit sought class action status on behalf of all 18,000 Tribune employees. The suit also alleged that Zell violated the intent of federal ESOP regulations by using the plan as a means to take over the company.

Zell has been criticized in the past for enrolling “partners” to help him finance a project.

In the mid-1990s, Zell engineered a federally funded deal to build two 1,900-passenger cruise ships that would have exclusive passage routes in the Hawaiian Islands. Called “Project America,” it was backed by now-retired Senator Trent Lott (R-Mississippi) and Senator Daniel Inouye (D-Hawaii). It failed, partly because of 9/11. Zell lost $100 million. Taxpayers were out more than twice that amount.

The flop earned the ire of at least one politician: Senator John McCain (R-Arizona).

“It was a bad idea. The taxpayers took all the risk,” McCain said.  

Zell has had other failures. There have been times when he took the brunt of them himself. In 1998, for example, he invested $45 million in a coin pay-phone company, and lost nearly all of it because of the cellular phone boom.

There were other bad investments, some real estate ventures and some dot-com forays that went awry. But Zell, buoyed by the secrets of his success, is an eternal optimist. You can tell by the slogan he chose to put on the back of ID badges for new Chicago Tribune employees.

It’s the title of a famous Frank Sinatra song: “The Best Is Yet to Come.”

What a hopeful, sentimental melody. Better for the Grave Dancer’s “partners” not to know where that line is most famously inscribed: on Sinatra’s tombstone.

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