Here is the way it works. Now is the time for people who have been saving their money to come out of hiding and buy things they don’t have to make money on in the immediate future. Everything is for sale, at a discount, provided that you don’t have to finance it. If you need to finance it, it’s no longer on sale. There are no quick turnarounds here. There is no flipping. It’s a buy for cash and hold game. Got that?
You would be the first.
The way the game is currently being played is that you buy something you can barely afford and then leverage yourself to the eyeballs to fund continuing operations. You are getting something of a break on the price because the value of whatever entity you want to buy, be it a house, a newspaper or an amusement park, is currently unknown and because the last guy is being sold out by his backers. The discounted sale price hence becomes the most the new player can leverage himself to, as opposed to any real value. This has the effect of keeping the price inflated as well as tying up strings of credit.
It’s hardly the way things should work.
Although no one knows where the bottom of the current crisis is, vulture capitalists without capital should not apply. This is not going broke slowly. This is going more broke. Eventually this cascade of bankers without consequences will end, hopefully before the government runs out of ink with which to print up money. But the foolishness is continuing of late without abate.
Let us take as an example the now bankrupt Chicago Cubs. Every year I normally send out an email to certain select friends declaring the Cubs’ season over. (In late May, most years.) I refrained from doing so this year, since it would just be maudlin and yet another act of piling on. Not that the Cubs were in any worse shape than they have ever been. They more or less did ‘the typical’ this year, funny business from Milton Bradley (the game playing baseball player, not the company that makes games to play) notwithstanding. It was everything surrounding the Cubs that overshadowed their actual par for the course below par performance.
The Cubs are for sale. They have been for sale for two years. Technically, they are now also broke. They are not really broke, as in the Phoenix Coyotes broke, but rather broke because they filed for bankruptcy. What is the difference, you ask? It’s a mystery of the bankruptcy code, which essentially boils down to the Cubs’ parent company being broke and needing to shield any potential buyer from claims against it. If that sounds silly or dead beat like, it’s partially because it is and it’s partially because it’s the best way to turn the Cubs into cash, which is the only thing the creditors are really interested in. And no, they will not take Carlos Sambrono as a marker.
The Cubs are really broke as in broke, though. They are in a very high cost business. Their real products, beer sales and providing media programming have something of an upward limit as far as profits are concerned. To take their main line, providing programming, the value of this service is directly dependant on the amount of money advertisers are willing to pay. This is a segment that is currently in the pandemic crapper with no light in sight. Moreover, the Cubs do not have a fair share of this revenue nor any real control of its stream. (Even less so now, since being de-linked from its parent owned media outlets WGN television and radio and the Chicago Tribune newspaper.) In short, this revenue is iffy, not entirely theirs and will likely decline. After that, the Cubs are a bar with entertainment. Unless they want to become the New York Yankees and utterly price out the average person, the bar is running at its full revenue potential. Let’s say it makes money. Let’s even be generous and say that the minor leagues, not a Cubs strength, at least break even. As businesses go, the Cubs kind of suck. They would be marginal as a National Park. You would be better off putting the Cubs’ operating revenues in a CD. And a CD will not soon require 200 million dollars in repairs to the Ivy Covered Burial Grounds, which will necessitate a two year split in bar revenues either with your arch rival Chicago White Sox or whatever entity owns the dome in Indianapolis.
(The Cubs are going to have to play somewhere while their stadium, that wonderful national shrine with troth style urinals, is being rebuilt brick by brick.)
As daunting of a prospect as buying the Cubs already was, it was made even murkier by the utter silliness inflicted by what passes for the owner, the Chicago Tribune. The Chicago Tribune is actually broke, as in broke, broke as in broke, broke, broke. It was broke before the last guy bought it. The last guy paid effectively no money down and piled the thing high in debt. He has since been quite correctly identified by Conrad Black, the now jailed former owner of the now also bankrupt Chicago Sun-Times (the other broke Chicago newspaper) as being a “slow footed asset stripper.” The Tribune’s new owner made his money in real estate, which seems to be the only game he knows. As he has subsequently proven, he must have simply been lucky because he doesn’t know much.
The owner, Sam Zell, first tried to murk up the Cubs sale be de-linking it from the sale of the ballpark. His end game is only a matter of conjecture on my part. Part one was to sell the ballpark to the also broke State of Illinois at an inflated price. (And stick the taxpayers with the 200 million repair bill while he was at it.) The new owner of the Cubs would then be stuck with a bar revenue split and a rental fee on their venue. Plus, the Cubs are basically worthless without their specific venue. This would have set up a permanent game of chicken between the State and the new owner. It didn’t work, but it did disclose Zell’s basic tactics. He then went on to offer to sell Tribune Tower and the Tribune’s printing plant and other real estate assets, real estate being the only game he knows, if knowing it only poorly. A funny thing happened to Sam as he was off playing his various shell games: he ran out of spending money, operations money, money money. Suddenly Sam’s at the bankruptcy door. All this after moving a motorcycle into Colonel McCormick’s suite and polluting the suite with cigarette smoke. Who says there is no justice?
(Colonel McCormick is the brilliant but certifiable nut job who built the Tribune media empire.)
Here’s the deal: If you or I were as broke as the Chicago Tribune, we would file chapter 7. Or our creditors would force file it for us. We would get the clothes on our backs and in our closets, our under 5K in value car and our creditors would get the rest.* Moreover, if we owed the kind of Income Tax money that the Tribune owes, we wouldn’t need the car since our next residence would be Federal Prison. The same should be true for the Tribune.
The Tribune needs liquidation. Bankruptcy is set up to satisfy all parties with an interest, all stakeholders, be they the employees, creditors or the government. In the best case, Bankruptcy keeps the farmer farming. You string out his debt and wait for his crops. In the Tribune’s case, the farmer is farming sand, owes back child support and has a Tiffany Egg collection. It’s time to shut down his farm and make him sell his eggs.
As with anyone else under the law, the Tax liability needs to be paid in full first. It’s everybody else, including Sam Zell, who gets a haircut on their investment. Since it’s quite obvious that Tribune has no future as a whole, it needs to be split up through an asset sale. A limited portion of the funds should be kept in custody to operate those assets which have no value unless they are functioning, such as the newspapers, television stations and radio outlets. Most of these assets have some value. The television stations may not be worth much as a ‘network’, but individually they will have takers. Ditto the real estate and radio holdings. Broken free of a debt laden, money leaking entity, these parts have the best chance for economic survival going forward. That keeps people employed. (At least some of them.) That keeps valuable local institutions functioning. No one is going to miss Tribune Media, Continental Broadcasting or the CW. As for the newspapers, take what you can get. If asset sale money starts to run out or if the cost of operating assets impedes significant repayment of liability, all assets which are money sucks go dark. Period. To continue on otherwise, as the Tribune is by masquerading as a chapter 11 candidate, is an abuse of the code.
There really ain’t no two ways of looking at it. This isn’t GM or Chrysler. It’s a silly and hodge podge media company, of which it seems the world does not need another. If I had the cash, I would buy the TV stations or the radio stations. My hope is that concerned citizens form non for profits to save the LA Times and the Tribune, since no other model seems viable at the moment. After that, it should pay its taxes and cash out, just like everyone else, with no harm to society being affected. As it is, Tribune is a tax payer supported entity funded by bankers who print money for people like Sam Zell. Enough is enough.
To get back to the Cubs sale, the ball team is in bankruptcy to avoid being tagged with some of the Tribune’s tax liability. This makes sense if the Cubs are being converted into cash. As long as the tax man (you and I) gets his proportional share of the funds, no harm is caused. This means tax debt, a priority, is partially retired, a good thing.** It’s a travesty if the code is being used to construct a fiction that the Cubs do not owe a portion of this tax liability. They owe it. All of Tribune owes it. They need to pay their share in cash before hitting the door or this is an abuse.
Cash has been the big issue in the sale of the Cubs all along—as in very few of the potential buyers actually had any. In fact, they were only able to find one guy who did, or at least came close. The initial asking price was ONE BILLION DOLLARS. Once everyone was through laughing so hard they pissed themselves, the price came down to the most the richest person bidding could possibly get his hands on. Do not think Steinbrenner and the Yankees, Cub fans. For a view of your probable future, look south to Kansas City and east to Pittsburgh. The new owner did not build Scottrade. He is an heir. Unless he can hit up his sibs, he is going to be a little strapped going forward. But fear not Cub fans, even if he is being advised by a drunken parrot reading the I-Ching, he could not do worse than the Tribune Company. In any case, I wish him the best of luck with his risky, needing 200 million in repairs, 2% return business entity. Let me be the first to say this: fool.
At least it’s his own money. Just as Sam Zell was able to convince bankers to print him up some no consequence funds, other vultures without capital have been thinking outside of the box in other types of businesses. Oddly, many also seem to have real estate on the brain. Most businesses sit on land, and, in the case of amusement parks, quite a bit of it. Many of these parks are located in what are called ex-urbs, or far suburbs, or more exactly wilderness nearly near a place people live. Being close to where people live saves folks the time of going to Orlando. With people spreading out, cities continuing to grow without halt, it is reasonable to assume that the land some of these amusement parks are sitting on will accrue in value. To a larcenous degree, perhaps.
This is the thinking behind the people who took over the Six Flags corporation. It’s what you call a Land Bank model. Since population is increasing and they aren’t making any more land, land itself will always increase in price. Operating an amusement park gives you money coming in while you wait for the cities to grow out to you. Moreover, you can get more money for your land because it is partially developed.
This plan may make sense if you are willing to wait a really long time for it to pay off. It starts to not make sense if you’re not playing with your own money. It makes even less sense if you are using your theme park revenues to pay the vig on other mortgaged purchases. And if those purchases happen to be more ex-urb land without theme parks on them, then you start to run into trouble. Especially in a housing bubble. Especially if the idea of inevitable urban sprawl turns out to be false.
General Growth ran into a similar problem. You see, running a profitable business which occupies a lot of space, such as shopping malls or amusement parks makes sense. Buying land near you, with money that you have, for speculation or expansion, also makes sense. What does not make sense is to use your position as an amusement park or shopping mall operator as a jumping off point for willy nilly land speculation. Having land entities which actually make money just enables the banks to sell you swamp land on spec which will never net a return. Heads, everybody wins. Tails, the bank gets all this crappy land back plus your going concern. Or it turns your going concern into a debt vig feeding crack whore.
Enter bankruptcy. Enter the rational operator. The new CEO of Six Flags has made it very clear to his bond holders that he will never be able to repay the debt he has with just amusement park operating profits. The parks themselves are quite profitable. It’s all the vig on the swamp land that is such a drain. The bond holders want him to keep paying at least the vig on the swamp land in perpetuity while they wait out the land value crash. Our valiant CEO is offering to pay for the land his parks are actually sitting on and then give up all interest in the swamp land, which is what the bond holders were actually gambling on. Effectively, he wants to split the company. The bond holders told him to pound sand. Now they are in bankruptcy court.
The good news is that bankruptcy court is doing what it should. It’s keeping the farmer farming. Six Flags gets an at market rate on the mortgage for the land their parks are actually on and the bond holders get their swamp land, to do with what they will.
General Growth, by contrast, isn’t so lucky. They are stuck with a very big portion of the undeveloped land surrounding Las Vegas, a place where no home need be constructed for the next 25 years.
Back in media land we have our pals American Media. Like Tribune Company, it is a newspaper publisher. American Media is now on its 4th or 5th group of new investors depending on how you count. These guys are buying out the last guys who were also leveraged to the eyeballs. The good news for American Media is that they own a string of newspapers which do not depend on advertising for their revenue streams. (They own the Enquirer and all of the other tabloids.) They also own a highly profitable magazine distribution business. These are doing fine. Sadly, they have taken on a slick line of magazines, which are advertising dependent. The choice is to ride the advertising slump out by continuing to slosh funds from going concerns to losing ones or to cut the crack whore off. When you are already leveraged in the first place, there are only so many crack whores you can afford.
*Although Bankruptcy is a federal law overseen by federal courts, these courts are so chock full of "home rules" that no one can really predict outcomes, even with identical situations, from one court to another. Also, as a pal of mine once pointed out, "You cannot become a Bankruptcy Judge unless you believe in bankruptcy."
**In fairness to Sam Zell, he had absolutely nothing to do with the Tribune's core problems nor its tax liability. At worst, he's a peddler of false hope. That said, he should get his fat ass and motorcycle out of the Colonel's tower.
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