When Sam Zell completed an $8.2 billion acquisition of the Tribune Company in December 2007 with an equity investment of only $315 million, he was described alternately as “reckless” and a “genius” by the financial press.  Zell’s main strategy was to sell assets and deleverage his position, but plans to sell the Food Network fell through, while plans to sell Wrigley Field and the Chicago Cubs were delayed, and Zell took the Tribune Company (excluding the baseball franchise) into bankruptcy in December of 2008, less than a year after the acquisition closed.

The “Wall Street Journal” reported on 8/3/10 that Houlihan Lokey, a Los Angeles based investment bank, rejected the Tribune Company’s 2007 request for a “solvency opinion” that would have described Zell’s proposed takeover as financially sound. According to WSJ sources, Houlihan Lokey was concerned about the Tribune’s health in particular, and the fortunes of the newspaper industry in general, and felt the deal was “DOA.”  After being snubbed by Houlihan Lokey, the Tribune turned to a smaller firm, Valuation Research, to get the fairness opinion it sought.  A bankruptcy court examiner, Kenneth Klee, recently criticized Valuation Research, saying it “used faulty methods to reach its conclusions.”

On 7/27/10, the Chicago Sun-Times reported that Klee, a Los Angeles attorney and law professor,  had found that Tribune managers did not act forthrightly in procuring the solvency opinion issued by Valuation Research” and that “one of more of Tribune’s officers breached their fiduciary duties.”

Looking at Tribune Company’s 10-Q reports before and after the deal shows that on 3/31/07, they had $3.6 billion of long term debt, and $4.3 billion of shareholders’ equity and on 3/31/08, one year later, long term debt had nearly tripled to $11.6 billion and there was a shareholders’ deficit of ($1.7 billion). It will be fascinating to see  Klee’s detailed comments about the judgment of Tribune’s officers when his 1,000 page report is fully released to the general public.  I’ll also be interested to see if he comments on the judgment of Tribune’s principal lenders: JP Morgan Chase, Bank of America and Citigroup.