Tribune Bankruptcy the Leading Edge of the Private Equity Bust
The reason the Tribune went under isn’t primarily because dead tree media is having a hard time making money these days, though it is. The reason it’s going under is because it has too much debt, and can’t borrow much more. It has too much debt because when Zell took over the company, he loaded the company down with the costs of his takeover.
This is standard in deals where private equity firms, or takeover artists like Zell take a company private. The cost of the buyout is loaded onto the takeover target. The new owner then tries to deal with whatever cash flow problems or other issues the company might have had, pays itself a huge dividend, and then sells the company, either to someone else private or back onto the public market. The clean ups are often not as good as they look, they destroy long term value, but the short term is what matters to the market, even though the firm which is resold is generally loaded down with a huge amount of debt, and has had valuable parts of the business sold off.
So, with the Tribune what happened is that Zell bought the company and then a big bad recession happened. If the Tribune wasn’t burdened by so much debt, it could probably have struggled through for a few years, hoping that when the recession ended it could pick things up and that in the meantime it could continue restructuring for the new realities of the news business, where advertising profits from the printed editions are down and never going to recover fully.
But because of the debt, it can’t. Being taken over by Zell is precisely why it’s going under.
This pattern is going to repeat with a lot of private equity acquisitions. Most were bought with the explicit intention to flip, but in the middle of a bad recession or maybe even a depression, with balance sheets burdened by debt related to their own takeover, no one wants to buy and the debt makes it hard for them to survive.
Private equity was easy money, just like high finance.
Until suddenly… it isn’t.