It took 3 1/2 years and at least $410 million in fees billed by lawyers and other professionals, but it appears Tribune Co. may be on the verge of winning approval for a plan to emerge from bankruptcy court.
The Chicago-based media company and its creditors must appear before U.S. Bankruptcy Judge Kevin Carey for a confirmation hearing starting Thursday afternoon in Wilmington, Del. But unlike a year ago when a group of junior bondholders led by New York hedge fund Aurelius Capital Management waged all-out war against a restructuring plan proposed by the company and its senior creditors, this plan has drawn little new opposition, and most observers expect Carey to approve it.
Given the complexity of the case, legal experts say the judge likely will take several weeks to write a formal opinion. But approval would pave the way for Tribune Co., parent of the Chicago Tribune, to exit bankruptcy as early as the fourth quarter, assuming the company and its lawyers can overcome several key obstacles.
Chief among them is that Tribune Co. must win approval from the Federal Communications Commission to transfer the company's broadcasting licenses to its soon-to-be new owners, a group of banks and hedge funds led by Oaktree Capital Management, Angelo, Gordon and Co. and JPMorgan Chase.
Tribune Co. lawyers have been working with FCC staff to answer questions related to the transfer application. But the agency's commissioners still have to rule on the matter, and that's a process that can't officially start until Carey issues a confirmation order. The transfer could yet face opposition from groups opposed to media concentration that have targeted Tribune Co. in the past.
Aurelius and its allies also are expected to appeal the confirmation order. They have argued that the settlement underlying the restructuring plan was deeply flawed because it shortchanged their claims that Chicago billionaire Sam Zell's 2007 buyout of Tribune Co. left the company insolvent.
But legal experts and some sources among the junior creditors say Carey has been careful to shield his opinion from potential challenge. After the heated confirmation trial last year, Carey rejected competing plans but approved the settlement at the heart of the Oaktree plan. He refused to rule on any of the major pieces of the bankruptcy law argued by the opponents. Instead, he relied on rules that give judges wide discretion to approve settlements that are in the best interest of the estate, said Douglas Baird, a bankruptcy scholar at the University of Chicago Law School.
Baird said the hurdle is to show the settlement was reasonable, and Carey emphasized that it was the best outcome possible given the endless legal wrangling in the case. He pointed out that the pact was mediated by Carey's colleague on the Delaware bench, U.S. Bankruptcy Judge Kevin Gross, and it hewed to the conclusions contained in a 1,000-page report issued by a court-appointed examiner, Kenneth Klee.
"Its going to be very, very hard for an appellate judge to say (Carey) was not within his discretion," said one source among the junior creditors.
Even if they fail with an appeal, however, Aurelius and its allies are hardly expected to sit still with their settlement payment of $431 million on $1.3 billion in claims. They and a deeply subordinated class of debt called the PHONES, which Aurelius also owns a slice of, will press on with suing 35,000 former Tribune Co. shareholders in federal court to recover more than $2 billion in claims.
Those cases await a key ruling from the district court on whether the bondholders have the right to bring the litigation. If the judge rules in the bondholders' favor, former shareholders, from individuals to large institutions like the Robert R. McCormick Foundation, will be vulnerable.
Moreover, the plan sets up a litigation trust that will allow the junior group to press other claims related to the buyout against the shareholders, Zell, and current and former Tribune Co. managers and directors. Others targeted include advisers to the company, such as Morgan Stanley and Valuation Research Corp., which issued a highly controversial solvency opinion in the case.
If the plan stands and the FCC approves the transfers, the senior creditors will emerge owning more than 95 percent of the new company's equity. Oaktree will be the largest individual shareholder, with 22 percent, and will have the right to appoint two of seven board members. Angelo, Gordon and Co. will have 9 percent, JPMorgan 8 percent, and each will control one board seat. All three investors will appoint another two board members, and a final seat will be reserved for the chief executive.
Sources close to the situation say that the senior group has been looking for new board members and CEO candidates, but they are awaiting a final decision from Carey and more clarity about the date of emergence before making any moves. It is likely a new board won't be announced until the company is ready to exit bankruptcy court, the sources said.
Representatives of Tribune Co. and the senior creditors declined to comment.
The big question is, what will Oaktree and the others do to maximize the value of their investment?
Although the hedge funds likely paid very little for their share of the debt that would be swapped for equity in the new entity, Tribune Co.'s value is much diminished from what it was when the company filed for bankruptcy Dec. 8, 2008. Zell's deal valued the equity at $8.2 billion, but documents show the equity value now is closer to $4.5 billion. Senior creditors will split up that value. They also will take possession of almost $2 billion in cash built up for their benefit during the bankruptcy, partly a reflection of the deep cost cutting management has done in the face of declining advertising revenues.
What's clear is that the company is valued primarily for its 23 television stations, which have been performing well, and a slate of equity investments in other businesses, such as the Food Network and CareerBuilder, an Internet job site.
Before the Zell deal, Tribune Co. entertained offers topping $2 billion for the Los Angeles Times alone, but today, according to a recent valuation analysis by Tribune adviser Lazard Freres and Co. the entire publishing group of eight newspapers, including the Times and Tribune, is worth about $623 million.
By contrast, the TV stations are valued at $2.9 billion and the equity investments at $2.3 billion.
Experts have widely predicted the new owners will divvy up Tribune Co., but how and when is hard to predict. In LA, billionaire Eli Broad has expressed renewed interest in forming a group of civic-minded investors to buy the Los Angeles Times. And in recent months, newspapers have managed to attract buyers, most notably Warren Buffett, who in May spent $142 million for 63 newspapers formerly owned by Media General Inc.
But the senior creditors are under no pressure to move quickly. The new company will have only $1.1 billion in debt and an estimated $500 million in 2012 cash flow, according to documents. Even the newspapers are projected to throw off more than $180 million in cash this year, although the trend line has shown a steep decline.
According to the agenda, this week's hearing will largely focus on efforts by the junior creditors to adjust language in the plan to strengthen their rights relative to the litigation trust. The junior creditors also are pressing for more disclosure requirements as the senior creditors petition the court to pay more than $72 million in professional fees generated by their lawyers, investment bankers and other advisers during the case. Documents filed with the court show that total fees billed by lawyers and other professionals working on the Tribune Co. case recently crossed the $400 million mark.