DALLAS (CN) - Tribune Co. filed another lawsuit over the media company's 2007 leveraged buyout, claiming the "reckless" deal fraudulently "lined the pockets of Tribune former shareholders with $8.3 billion of cash at the expense of Tribune's creditors, and precipitated Tribune's careen into bankruptcy shortly thereafter."
     Named plaintiffs Deutsche Bank Trust Company Americas, Law Debenture Trust Co. of New York and Wilmington Trust Co. filed suit to recover shareholders' proceeds from the leveraged buyout.
     Deutsche Bank has sued numerous shareholders and brokers, with litigation pending in 21 states.
     "In mid-2006, Tribune's consolidated revenue was plummeting, its prospects were dimming, and its stock price had dropped to around $27 per share from a high of nearly $40 just twelve months earlier. The largest shareholders desperately wanted, and ultimately found, an exit strategy: On April 1, 2007, Tribune's board of directors (the 'Tribune Board') approved a bid by billionaire Samuel Zell ('Zell') to acquire Tribune through an extraordinarily leveraged buyout," the federal complaint states.
     "Under Zell's proposal, the company would borrow nearly $11 billion - while Zell would invest just $315 million of his own money - to buy out the shareholders. In other words, Zell sought to acquire the company by putting up less than three percent of the risk capital and shifting all of the risk of the transaction onto the shoulders of the company's existing creditors," the lawsuit says.
     The noteholders describe leveraged buyouts as "inherently risky to the target company's existing creditors" and say it's cashed-out shareholders "who receive the principal benefit in an LBO transaction."
     According to the complaint, the Tribune transaction was "one of the most highly leveraged in history," but proved too much for Tribune management to resist.
     "Before the LBO, Tribune and its direct and indirect subsidiaries ... had approximately $5.6 billion of funded debt obligations and a positive equity value. As a result of the LBO, however, the company increased its funded debt obligations by more than $8 billion and Tribune had a negative equity value," the complaint states.
     The noteholders claim that the leveraged buyout, a two-step transaction in which the company paid shareholders $4.3 billion in the first step and paid another $4 billion in the second step, "was a textbook fraudulent conveyance."
     "Tribune received, and the shareholders gave, no value whatsoever in exchange for the shareholder transfers. To the contrary, Tribune only received the dubious honor of repurchasing its own stock, and a bloated debtload that increased to more than $13 billion - billions more than Tribune was actually worth, and nearly ten times the company's cash flow for 2006 or projected cash flow for 2007. This highly leveraged capital structure was nothing short of reckless," the complaint states.
     Because of the newspaper industry's steady decline, the Tribune Company, which generated almost two-thirds of its revenues from its newspaper businesses was "a terrible candidate for" a leveraged buyout, and had "significantly underperformed industry averages during the years and months leading up to the LBO," the creditors say.
     "At the time Step One closed, the company had already failed to meet management's projections for the first several months of 2007. As of May 2007, year-to-date operating cash flow for the publishing segment was significantly lower than projected, and less than the prior year's actual results for the same period. In fact, one of Tribune's largest newspapers was reported to have had 'one of the worst quarters ever experienced' in the second quarter of 2007. Consequently, just to meet full-year projections for 2007, the company would have had to achieve an impossible trifecta during the second half of the year: turn around the negative trend, and recoup the performance deficiencies from the first half, and significantly exceed 2006 performance," the complaint states.
     According to the noteholders, Tribune Co. "did not achieve any of these objectives," the company's stock price went into free fall and "Tribune's bond prices fell to almost 50 cents on the dollar for certain tranches of Tribune's longer term debt."
     The plaintiffs say that in the aftermath of the leveraged buyout "Tribune's funded debtload soared from more than $5 billion to nearly $14 billion - ten times greater than the company's actual cash flow for 2006 or projected cash flow for 2007."
     "Market watchers and the media had long predicted and widely publicized that the LBO would ruin Tribune. It did. Before the close of Step Two, it was clear that the company would be unable to meet its operating expenses from existing resources and shortly would be in a full-blown liquidity crisis. Less than one year later, buried in debt and facing a bleak future of looming debt maturities and overwhelming interest payments, Tribune and the majority of its subsidiaries jointly filed for bankruptcy on December 8, 2008," the complaint states.
     "Tribune's own publicly filed estimates in the Bankruptcy Court valued the company at approximately $6.1 billion in 2010 - less than half of the company's debtload at the close of Step Two."
     The plaintiffs are represented by Keefe Bernstein of law firm Akin Gump Strauss Hauer and Feld LLP, and filed suit for construtive fraudulent transfer against shareholder defendants.