An investment bank declined to give Tribune Co. a clean bill of financial health in 2007 that would have cleared the way for Sam Zell’s $8.2 billion leveraged buyout of the media conglomerate, people familiar with the matter said.
Houlihan Lokey, a Los Angeles-based bank, rejected overtures from Tribune around March 2007 to provide what is known as a “solvency opinion” that would label Zell’s takeover financially sound, these people said. Houlihan believed the deal would saddle the newspaper-and-television company with too much debt, they said.
Solvency opinions often are sought by corporate boards or lenders to provide comfort that a company can handle the obligations incurred in a leveraged deal. Lenders, in particular, want to be assured their investments will be safe from litigation in the event the company seeks bankruptcy protection.
In highly leveraged deals such as Tribune’s, these opinions are sometimes required for the transaction to close.
Tribune needed solvency opinions to complete Zell’s buyout. Houlihan was concerned about Tribune’s financial health to begin with, but also the declining fortunes of the newspaper industry, one of the people said. Houlihan viewed Zell’s deal as “DOA” and felt it was “going to fail,” this person said.
Tribune instead turned to a smaller firm to get a solvency opinion. Valuation Research Corp. A bankruptcy-court examiner criticized Valuation Research in a recent report, saying the firm used faulty methods to reach its conclusions.
Tribune declined to comment. Valuation Research didn’t return a request for comment.
Houlihan’s refusal to provide Tribune with an initial solvency opinion shows how doubts about the deal surfaced well before the first round of financing in spring 2007 that put Zell’s takeover in motion. Tribune’s debt soared to nearly $13 billion after the full deal closed in December 2007, an amount that proved unsustainable. Tribune filed for bankruptcy protection less than a year later.
A bankruptcy-court examiner found it “highly likely” that the second, and final, part of the deal left Tribune “rendered insolvent and without adequate capital.”
Tribune took on about $3.6 billion in additional debt during that final step of the transaction in December 2007, after having taken on more than $7 billion earlier in the year to start cashing out shareholders and get the deal under way.
Upon learning of Houlihan’s decision, Zell contacted Houlihan executives to ask why they were holding up the deal, according to people familiar with the matter.
A person familiar with the matter said that Zell was frustrated that Houlihan had turned down the assignment, because the bank had been trying to work with Zell for some time.
The findings by the examiner, Kenneth Klee, were well received by some creditors, who believe that the buyout constituted a “fraudulent transfer” that should wipe out recoveries for banks that backed the deal.
Klee called Valuation Research’s solvency opinion “highly suspect.” He also faulted Tribune’s board for not being more skeptical of the firm’s findings. Much of the report is redacted, making it difficult to assess Mr. Klee’s findings in detail. A judge will hear arguments Tuesday on whether to release the full report to the public. Tribune has said it is “premature” to comment about the examiner’s report while much of it is redacted.
Tribune’s bank lenders and senior bondholders reached a settlement to avoid litigation over the deal and speed Tribune’s bankruptcy exit. But Mr. Klee’s report has made the situation more fluid, with a lawyer for one set of creditors saying in court last week that the “settlement is dead.”
The company’s senior bonds are trading at around 34 cents on the dollar, up from roughly 26 cents before Mr. Klee’s report, as lower-ranking creditors bet that debts owed to some of the banks that backed Mr. Zell’s deal could be clawed back.
By Mike Spector and Shira Ovide, The Wall Street Journal
