The Post-Tribune is for sale and its employees want to buy it.
What is an ESOP?
The term ESOP stands for Employee Stock Ownership Plan.ESOPs are a common structure for employee stock ownership across the United States. There are over 10,000 ESOP companies that operate in every business sector of the economy. ESOP corporations nationwide have 10 million employees, including successful Northwest Indiana companies such as Von Tobel Lumber & Hardware (Valparaiso), Horizon Bank (Michigan City), and McDaniel Fire Systems (Porter).
Who is in charge of the ESOP effort at the Post-Tribune?
The Gary Newspaper Guild, the union representing the newsroom employees (photographers, copy editors, editorial assistants and reporters), is coordinating the the ESOP discussions, with support from their national union, The Newspaper Guild-Communications Workers of America. The Guild had retained consultant Christopher Mackin of Ownership Associates of Cambridge, Mass.Can a newspaper work as an ESOP?
Yes it can.Media companies that make use of ESOPs include the Bureau of National Affairs in Washington, D.C., a TNG-CWA employer with 1,800 employees www.bna.com, the Monroe, Mich., Evening News www.monroenews.com and the Omaha World-Herald www.omaha.com. This month, union members in Maine joined with local investors to buy Blethen Maine Newspapers, with Mackin aiding the unions in creating an ESOP?that will give employees a 15-percent ownership share in the company. And of course, there is the most recent, high-profile use of the ESOP structure in the media and newspaper: the 2007 purchase of the Tribune Corporation by financier Sam Zell. Zell used an ESOP to purchase that company which in turn owns the Chicago Tribune, the Los Angeles Times, the Hartford Courant, the Baltimore Sun and Newsday— a transaction that admittedly has not gone well for Zell or his employees, though that situation has more to do with the structure of the deal and the global recession than the corporate structure. For more on that, check out this article from the National Center for Employee Ownership. http://www.nceo.org/library/tribune-esop-bankruptcy.html
How can employees buy the Post-Tribune?
Employees are not the first group that comes to mind when considering the purchase of large and expensive corporations, but there are a number of tax incentives and financing options that can make it possible. But with the help of banks, private investors and the Federal Tax Code, during the past 32 years, employees have become significant shareholders in over 10,000 corporations in the United States. In 1998, an employee group led by the Gary Guild was able to secure financing and submitted a $37.5 million bid to buy the Post-Tribune with a private equity group— only to be outbid by Hollinger International, the predecessor company to Sun-Times Media Group. Authors of ESOP legislation created a range of tax breaks and investment tools to induce business owners to sell companies to employees. In a small number of these cases employees have also chosen to invest a some percentage of their 401(k) funds in the creation of successful ESOP enterprises. And Indiana has some unique options for ESOP?companies, thanks to state Treasurer Richard Mourdock, who retired in his 50s from an ESOP company. Last year, he launched Indiana’s ESOP Initiative, which helps employee groups find expertise and makes available additional, lower-cost financing for ESOP purchases. But in all likelihood, an “equity partner”—a person with a significant portion of cash— will have to emerge to invest what amounts to a down payment. In exchange, that partner will receive a negotiated amount of stock in the ESOP, and it is Post-Tribune employees’ hope that over time, the ESOP would buy a controlling, majority share of the company. In discussion with prospective equity investors, willingness to let the employees eventually “buy out” the investor will be a key factor.How are ESOPs financed?
If the business outlook for a Post-Tribune ESOP enterprise is strong, it should be possible to attract at least two forms of debt financing: 1) conventional commercial bank debt and’ 2) “mezzanine” debt that, together with investor and potentially employee equity, can generate sufficient funds to acquire large corporations. Since it occupies a higher risk position, mezzanine debt commands a high interest rate. One reason that mezzanine investors are ready to compete in order to invest in ESOP transactions is that S Corporation ESOP investments are a unique niche. They are the only targets for investment that are “tax-free” from an operating company standpoint, thanks to special tax incentives created for ESOP companies. Presuming that the Post-Tribune is profitable, the “premium” afforded by being both profitable and “tax-free” at the corporate level makes S-corporation ESOPs uniquely attractive to mezzanine debt investors. In the case of the Post-Tribune, the S-corporation ESOP strategy may or may not be explored by potential lead investment groups along with more conventional ownership strategies. Since it occupies a higher risk position, mezzanine debt commands a high interest rate. One reason that mezzanine investors are ready to compete in order to invest in ESOP transactions is that S Corporation ESOP investments are a unique niche. They are the only targets for investment that are “tax-free” from an operating company standpoint, thanks to special tax incentives created for ESOP companies. Presuming that the investment target – in this case the Post-Tribune – is profitable, the “premium” afforded by being both profitable and “tax-free” at the corporate level makes S-corporation ESOPs uniquely attractive to mezzanine debt investors. In the case of the Post-Tribune, the S-corporation ESOP strategy may or may not be explored by potential lead investment groups along with more conventional ownership strategies. The primary objectives of this effort is to preserve the commitment that union workers have to the profession of journalism and to ensure that the Post-Tribune can remain profitable in a competitive, changing media market.What are examples of employee-friendly buyout options other than ESOPs?
There are a range of other possible “employee-friendly” buyout strategies that should and will be considered alongside the ESOP strategy. Those strategies include the recruitment of one or more “employee friendly” private equity firms, some of which are funded in part with union pension funds, to take the lead ownership position in a buy-out. Other possible options include the recruitment of conventional private equity firms, the recruitment of one or more deep-pocketed, presumably locally based investors, philanthropically motivated individuals or foundations either locally or nationally based and consideration of a non-profit structure.If an ESOP is considered the best way to go, does everyone have to participate?
ESOPs can be introduced by employers without employee consent.The primary exception to this standard regards employers covered by collective bargaining contracts. ESOPs are a mandatory subject of bargaining so union groups must be consulted if employers wish to include union members in an ESOP.
Most ESOPs, including very possibly an ESOP structure that could take place with the Post-Tribune, do not involve any direct, “at-risk” equity investment by employees. Instead, they are benefit plans that companies design both to benefit from the tax advantages they provide and to motivate employees. Most ESOP transactions that have attracted attention from the media during the past few decades are when unionized industries such as steel, auto and airlines have created “concessionary” or “investment bargaining” ESOPs, where ESOP stock is “traded” in exchange for concessions in wages, benefits and work rules. But those situations represent no more than 2 percent of the thousands of ESOP transactions completed over the past 30 years, a tiny fraction of the total. In most of the “concessionary” or “investment bargaining” cases, all union members must follow the decisions made by their union leadership, often after a rank-and-file vote. Gary Guild leaders invite any Post-Tribune employee to participate in our campaign to buy the paper, and it is our hope that they will.
The best scenario for employee ownership at the Post-Tribune is one in which there is not an owner class and a non-owner class of employee, in our opinion.
Does an ESOP mean the pay cuts and layoffs we’ve faced under corporate ownership will be over?
The fact that an S-corporation ESOP may be considered Post-Tribune does not necessarily mean that investors, beside the employees themselves, won’t want a review of the costs of existing labor contracts and our entire payroll and benefit structure.But possible changes to those contracts though would have to proceed through ordinary collective bargaining, in this case with a new management team representing the new corporation formed for the ESOP.
So who runs the corporation in an ESOP?
Trustees would be selected by management of the acquiring corporation in consultation with the unions representing employees. Should the ESOP option become a likely one for the Post-Tribune, we will offer much more information about how ESOPs function in the FAQ section.The selection of senior management of the new corporation formed for the ESOP will be up to the investors who are putting forth the money to make the sale happen. The “equity partners” who put in the down payment and risk their money up front will be the majority shareholders in the new corporation.
If a significant ESOP is part of the final ownership structure, the Gary Guild and other labor organizations with affected employees would want consultation on the selection of the Board including possible direct or indirect representation— actual seats on the board for the Guild and employees. Candidates for the Board of Directors of would be selected primarily on the basis of their professional contribution, on how their skills and contacts can help grow the business and meet the industry’s challenges. Over time, seats for the Board of Directors would be subject to an election process that reflects the investment stake of different investment groups: the more stock the ESOP holds, the more votes it gets. ion of the Board including possible direct or indirect representation— actual seats on the board for the Guild and employees. Candidates for the Board of Directors of would be selected primarily on the basis of their professional contribution, on how their skills and contacts can help grow the business and meet the industry’s challenges. Over time, seats for the Board of Directors would be subject to an election process that reflects the investment stake of different investment groups:?the more stock the ESOP?holds, the more votes it gets.