Sun employees bring in ESOP experts

Although Tribune's ESOP has already been created, and most employees are already participants, those represented by unions aren't yet included. Unlike unrepresented workers, union-covered employees must be consulted and under law, it must be bargained.

To that point, the Washington-Baltimore Newspaper Guild (which represents over 4000 workers including employees at The Baltimore Sun) recently sponsored a meeting for it's members with TNG's consultants Chris Mackin and Ian Laird, an investment banker working with Mackin, and CWA-TNG research economist, Bob Patrician, who advises the Local on retirement benefits. The Local issued a summary of that meeting – you can find the full text on it's website: "ESOP Fables and Facts – and we have it's permission to use a couple of summary highlights here:

How does an ESOP work in general?

There are good ESOPs and bad ESOPs. We don't yet know enough to place the Tribune one on the good-bad continuum. In general, we prefer those that give employee-owners a real voice in running the company. There are some 10,000 ESOPs currently functioning.

Most are "plain vanilla" ESOPs, where a company/founder decides to transfer ownership, over time, to the employees. These ESOPs typically take place in small and mid sized privately-held companies of between 50 and 2000 workers and provide tax advantage to the seller for choosing the ESOP. Many of the these companies do make an effort to create what is called and "ownership culture," that not only allows employees to participate but, studies show, leads to improved profitability.

Another group of ESOP transactions — including Tribune's — are what might be called "tycoon ESOPs", set up by savvy investors looking for advantage in a competitive bidding situation where ESOP tax benefits can help them succeed. Sometimes these work out well: Avis car rentals, for example, was bought through a "tycoon ESOP" and when it was sold, it's employees received nice checks.

The law that created ESOPs doesn't guarantee employees a direct voice in running the company. Under law, the ESOP is managed by a trustee, who has a legal obligation to look out for the long-term interest of the employee-owners. This doesn't necessarily mean the wishes of the employee-owners. For example, employees might oppose a staff reduction, but the trustee would support it if he felt the staff reduction was in the long-term interest of the business and would improve the value of the shares.

When workers are represented by a union, they are in a better position to tap into expertise (by hiring lawyers and consultants), to gather ideas from employee-owners and express the wishes of the employees.

How does the Tribune ESOP work?

In the case of this ESOP, where the ESOP will own all the stock of the reorganized company, trustees have a particularly strong voice in the corporate affairs with the ability to elect the board of directors. Trustees can sometimes act aggressively — including, if warranted, the firing of CEOs — to protect the long-term interests of employee-owners. Since the ESOP shares aren't publicly traded, the "fair market value" of the shares is determined periodically by an independent valuation firm. Employees are allocated ESOP shares each year based on their base salary, but they can't sell their ESOP shares while they're still employed. When they retire or leave the company, their shares are cashed out at fair market value as determined by the independent valuation firm.

The trustee to the Tribune ESOP is GreatBanc. It is an experienced trustee with a good track record of representing the interests of employee-owners. Although Tribune has made public filings with some ESOP documents, it isn't clear yet exactly what latitude the trustee will have in nominating and electing Board members, although the trustee will be required to elect two representatives of Sam Zell and the CEO. It is also unclear what special powers will be vested with Zell, as Chairman, and his representative on the Board. No mechanism has yet been proposed for employee-owners, most of whom are not represented by a union, to express their ideas or to vote on key issues. Tribune has said it will initially contribute 5% of pay into an account for each participating employee; that money will purchase ESOP shares at a value determined by the trustee.

Tribune is borrowing a lot of money to buy out existing shares (notice offer likely to go out end of April). As it generates cash from operations, money will be paid into the ESOP and the ESOP will make payments on the loans, while benefiting from substantial tax savings.

If the reorganized Tribune prospers, the shares will become valuable over time for both Sam Zell and employee ESOP participants as the debt is paid down. If Tribune continues to slip, it could have trouble making it's payments and the shares could become worthless.