Business Blog: Hoover’s Business Insight Zone

A couple of weeks ago The New Yorker ran one of its patented character profiles* on Sam Zell, the real estate tycoon who is in the process of buying Tribune Company.

Rough Rider
Where will Sam Zell take the struggling Tribune Company?
by Connie Bruck

Having read the piece, I’m having second thoughts about my own reflexive dismissal of the deal. Yes, the newspaper business is heading further into the toilet by the week. But dang, Zell sure knows how to make money.

He also makes many a meal out of his flamboyant personality, to the point that you could think of him as a Richard Branson of real estate. But this penchant for iconoclasm has also helped Zell to excel in the business world.

Annotated excerpts follow.

Zell has made much of his fortune by identifying opportunity where others see only trouble. He says that he is constantly trying to “shut out the noise” of conventional wisdom, because, although it may not always be wrong, it is rarely profitable.

The more I experience, the more aware I am that many top performers are willing to be outliers in many things. For Zell, this includes being rude of speech (he would call it “direct”) and flashy of dress. The Richard Bransons and Andres Segovias and Isaac Newtons of the world are perfectly willing to act very differently from the rest of us, whether that means an unusual social life or bizarre-but-savvy business deals.

The [Tribune] deal epitomizes what Zell always seeks: potential for great profit, acceptable risk, and an ingenious tax advantage. . . .

[Former Zell lieutenant Randy] Michaels told Zell that he thought they could buy the [radio] station for the value of its license, or less. “He said, ‘Listen, business is easy. If you’ve got a low downside and a big upside, you go do it. If you’ve got a big downside and a small upside, you run away. The only time you have any work to do is when you have a big downside and a big upside. So why would you put a book together for something like this?’”

Calculating upside and downside potential seems straightforward enough, and it’s the stock in trade for deal makers from Warren Buffett on down the line. But just consider how little attention was paid, over the past several years, to the downside risks of subprime mortgages by many players in the financial industry. It wasn’t until late, late in the game that many of them twigged to the amount of downside risk embedded in these deals. Zell seems to be smarter than that.

Zell told me, “I’ve had offers on every single asset in the portfolio. Chuck Schumer”—the New York senator—“calls me, because he’s hustling for some people who want to buy Newsday. Baltimore people are calling, Allentown’s calling, Florida’s calling, and, in L.A., David Geffen and Eli Broad. So all I can tell you is that for a dead industry with no future there are an awful lot of schmucks who want to take it away from me!”

Plenty of media analysts think that Zell is entering a dying business by buying Tribune. But as Bruck points out in this article, Zell sees Tribune as an integrated media company that also owns newspapers, rather than primarily as a newspaper company. So even though the circulation and advertising woes of the Chicago Tribune, the L.A. Times, and so on are pretty dire, Zell still has reason to think he may come out ahead. In fact, assuming the deal receives FCC approval and goes through, Zell may do to Tribune Company what Blackstone has already done after its purchase early this year of Zell’s mammoth Equity Office Properties real estate firm — that is, Zell may immediately parcel out key assets of Tribune to those “schmucks” trying to buy them.

Whatever the case, I came away from reading this article with a much better appreciation for Zell’s ability to make a deal work. I still think the newspaper industry is a bad bet, but it won’t surprise me at all if Zell is able to make money from his purchase of Tribune.

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More on the Tribune Company here.

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* I confess: the article’s length was one reason why it’s taken me this long to read it.