Sunday, August 3, 2008 4 comments ++[ CLICK TO COMMENT ]++

Sam Zell's Deal From Hell

"It's the deal from hell... And it will continue to be the deal from hell until we turn it around."

-- Sam Zell, On his Tribune Takeover

Businessweek is one of those publications that has a habit of striking out quite often--at least in my view. I much prefer reading The Economist, even though most value investors tend to avoid clouding their minds with too much macroeconomics. That's why I'm not a value investor :) But BusinessWeek does hit home runs once in a while, and their coverage of Sam Zell's trials and tribulations at Tribue is very good. If you are not interested in the struggles faced by newspapers, you may find the topic a bit bland; but if you are thinking of investing in media companies (like I am,) it is well worth reading one or more of the articles.

It is also worth reading to get a sense of what can go wrong with contrarian bets. Zell says that the biggest surprise was how much advertising revenue has fallen off. He was expecting single digit declines but ended up with double-digit declines in both the first and second quarter.

It'll be interesting to see what comes of Zell's plans. He is basically approaching it from an extreme business point of view i.e. hack content to make room for advertising. This is a high risk strategy because consumers read a paper for its content and generally do not like advertising. But since consumers don't really pay for the content, it has a chance of working. Some users think that they are paying for the papers but the subscription fees are negligible for most papers and simply covers distribution and paper (this is one reason I think newspapers can easily adapt to the free online world if they could establish their brands on the internet and increase their advertising revenues somehow.)

Main story: Sam Zell's Deal from Hell (by Emily Thornton, Michael Arndt and Ronald Grover. July 30, 2008. BusinessWeek.)

Sam Zell Interview: Sam Zell Speaks His Mind (by Michael Arndt. July 30, 2008. BusinessWeek.)

Sam Zell's Past Mistakes: Sam Zell's Bad Calls (by Michael Arndt. July 30, 2008. BusinessWeek.)

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4 Response to Sam Zell's Deal From Hell

August 3, 2008 at 9:42 PM

Chrysler is having trouble rolling over its short term debt. IMO, all deals that are highly leveraged would be in trouble down the road.

This is what happens when credit is being rationed.

Btw, on what basis do you say value investors try not to let macroeconomics cloud their mind?

To me, only _BAD_ value investors would ignore how macroeconomics would affect the so-called intrinsic value.

August 3, 2008 at 10:36 PM

this might be the deal from hell. But, Zell selling his Equity Office Properties to Blackstone at the height of the real estate bubble must be the deal from heaven

August 4, 2008 at 1:02 PM

Synchro: "Chrysler is having trouble rolling over its short term debt. IMO, all deals that are highly leveraged would be in trouble down the road."

We need to separate the companies that have in trouble for ages (I would put the American auto companies in that category) against the others.

It'll be interesting because this isn't a normal cycle. We may actually end up with lower corporate defaults than many imagine. The fact that we had a bubble in private equity (or generally low-cost debt financing) would imply that defaults will be much higher than in the past. However, corporate balances (on average) are in far better shape than almost any point in the last 20 years (depending on what metric you look at.)

Yes, default rates will increase as the economy slows; but will they increase beyond past cycles? I wonder.

SYNCHRO: "Btw, on what basis do you say value investors try not to let macroeconomics cloud their mind? "

This is a debatable point and some won't agree with me but my view is that value investing looks at investments primarily from the bottom-up. Macroeconomics rarely enter the picture. Value investors such as Warren Buffett, Martin Whitman, Seth Klarman, Francis Chou, and so on, have said something along those lines.

In other words, they buy if the business is cheap. They would buy even if the future economic environment looks bad. You just need to look at Buffett, who keeps saying that he would buy something based on valuation and not on some economic forecast, or central bank action, or oil price movement, or whatever. Someone like Benjamin Graham also said something similar. In fact Graham recommended buying cyclicals when they are out of favour, which is generally when the macro picture for them is very poor.

August 4, 2008 at 1:04 PM


LOL I guess the deal from hell is cancelled out by the deal from heaven ;)

Zell somehow managed to put down very little for Tribune ($300m) for a huge upside ($2billion+).

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