1. ESOPS IN THE CAPITAL MARKET:
THE ZELL-TRIBUNE TRANSACTION AND OTHER USES OF LEVERAGED ESOPS BY PRIVATE EQUITY AND MEZZANINE FUNDS
April 29, 2008
Edwin G. Schuck, Jr.
Chair, California Corporate & Tax Practices
500 So. Grand Avenue, 19th Floor
Los Angeles, California
(213)

2. PEG takes a public company private (Zell-Tribune)
AGENDA: Opportunities for Private Equity and Mezzanine Funds to Use Capital Markets Leveraged ESOPs
PEG takes a public company private (Zell-Tribune)
Public or private company divests or “spins off” a subsidiary to management and/or a PEG
Closely held company sells to a PEG
Closely held company sells to management and PEG
PEG sells portfolio company to management 2

3. What Makes a Leveraged ESOP a “Capital Markets” Leveraged ESOP?
Investments in leveraged ESOP transactions by PEGs, Mezzanine Fund Investors and private investors
Such investments typically are in subordinated unsecured “mezzanine” debt and/or detached warrants or other “capital appreciation” instruments
S corporation warrants must have FMV strike price but can be “penny” warrants if the investor is routinely in the business of lending; C corporation warrants can be “penny” warrants
Stock purchased by the ESOP can be financially structured to be high value/low equity percentage to reduce other equity holders’ dilution 3

4. What Makes a Leveraged ESOP a “Capital Markets” Leveraged ESOP. (cont
Senior lenders are often themselves capital markets players who will place the mezzanine and equity on a fee basis
Management is incentivized outside the ESOP with “synthetic equity” awards and “rollover” of existing equity and/or deferred compensation balances
ESOP trustees are often sophisticated and well-advised financial institutions who understand the role of private equity and the role of the ESOP initially as co-investor and ultimately, on the “exit,” as (i) a possible buyer from the PEG, (ii) a co-seller with the PEG or (iii) the sole remaining shareholder after the PEG is redeemed
PEGs can take public companies private using ESOPS 4

5. What Makes a Leveraged ESOP a “Capital Markets” Leveraged ESOP. (cont
S corporation ESOP tax savings generate enhanced cash-flow and liquidity – tax savings alone prior to exit can equal the debt incurred in the acquisition
S corporation ESOP tax savings can then finance the PEG exit by paying off the mezzanine debt so that new senior debt is available to redeem the warrant
Public or private companies can dispose of subsidiaries in a management-led leveraged ESOP buyout using PEG financing
PEGs can both acquire and dispose of portfolio companies using leveraged ESOPs
Other qualified defined contribution plan balances can be moved into an ESOP to provide additional financing; overfunded defined benefit plans can roll over excess funds into an ESOP under some circumstances 5

6. What Is a Leveraged ESOP?
A Leveraged ESOP is a tool of corporate finance that can be used by PEGs and other capital markets players to enhance returns on both buy-side and sell-side transactions
An ESOP is an Employee Stock Ownership Plan that is a “qualified” deferred compensation plan regulated under ERISA and the Internal Revenue Code
An ESOP is similar to a profit sharing or 401(k) plan but is designed to invest primarily in company stock – there are no diversification requirements except for long-term participants
An ESOP can borrow from related persons without penalty – and thereby becomes a “leveraged” ESOP 6

7. Leveraged ESOPs: There Are Four Principal Tax Incentives to Use Them
Section 1042 capital gains deferral and ultimate elimination for non-C-corporation sellers of nonpublic C corporations
Effective deduction of ESOP loan principal (and interest)
Deduction of dividends paid on ESOP-held shares (C Corporations)
S Corporation ESOP: flow-through of corporate income to shareholders – no corporate-level tax except for any tax on 10-year built-in gains (“BIG”) of a former C corporation – and ESOP shareholder pays no shareholder-level tax – qualifying straight debt, options and warrants are not treated as stock and so holders pay no shareholder-level tax 7

8. Section 1042 Permanent Capital Gains Tax Deferral for C Corporation Shareholders
Permits shareholders (other than C corporations) of non-public C corporations selling shares to an ESOP to defer indefinitely capital gains tax on the sale
ESOP must own at least 30% of value of all company stock after sale
Selling shareholders must within one year purchase qualified replacement property (“QRP”)—stock or debt of any domestic operating corporation – sellers get over 90% tax-free liquidity with a secured margin loan on QRP specially designed to have a FMV equal to its face amount (“floating rate notes”) 8

9. S Corporation ESOPs, Qualifying Warrants and Other Equity Options
S Corporation income flows through to shareholders – generally no federal corporate-level tax except for tax on BIG (if any) – no tax on BIG after 10 years – BIG can be avoided with creative structures
ESOP as S-Corp shareholder pays no federal income taxes or UBIT on its flow-through share of corporate income
Limited types of shareholders
One class of stock – non-voting common stock is permitted; also, qualifying stock options, warrants and straight debt are not a separate class of stock
No flow-through taxation to holders of qualifying “synthetic equity” (restricted stock, restricted stock units, warrants, stock options, SARs, phantom stock and other forms of deferred compensation)
No dividend deduction available
No section 1042 capital gains deferral available
Reduced contribution limits apply (irrelevant if 100% ESOP-owned) 9

10. What are the Mechanics of “Capital Markets” Leveraged ESOP?
Company establishes an ESOP and an ESOP Trust
Bank and/or sellers provide “traditional” outside financing to Company (“outside loans”)
Other, “capital markets,” outside financing sources to Company: PEGs, mezzanine investors, private investors (in the form of other “outside loans” and warrants), other qualified plan balances
Company lends money to ESOP (exempt “inside loan”)
ESOP Trust purchases Company stock from shareholders or from Company 10

11. What are the Mechanics of “Capital Markets” Leveraged ESOP? (cont.)
Stock purchased by the ESOP with the “inside loan” is held in a suspense account within the ESOP
Company pays contributions and/or dividends to ESOP that ESOP uses to repay “inside” loan debt from Company
As the “inside loan” is repaid, shares in the ESOP are released from the suspense account to ESOP employee accounts
Company repays bank and other outside loans, in effect with before-tax dollars
Company or ESOP repurchases shares from employees after employment terminates at the then FMV – therefore Company must plan for repurchase obligation funding
An ESOP itself may be a seller or a buyer in a capital markets “exit” (or may remain as sole shareholder after a capital markets redemption “exit”) 11

12. Basic C Corporation Sell-Side Capital Markets ESOP Transaction
Bank
Company
Shareholders
ESOP
Sale of
Company Stock
Cash
Outside Loan Note
Exempt
(Inside)
Loan
(Note & Pledge
of Stock)
PEG and/or
Mezzanine Funds
Other Qualified
Plan Balances
Special
Stock
Subordinated Debt
(Outside Loan Note)
Subordinated Debt (Outside Loan Note)
& Warrants 12

13. Basic Capital Markets S Corporation Sell-Side ESOP Transaction
Exempt
(Inside)
Loan
Note (& Pledge
of Stock)
Bank
Company
Shareholders
ESOP
Outside Loan Note
Cash
Sale of
Stock
PEG and/or
Mezzanine Funds
Redemption of Company Stock
Cash (and possibly Subordinated Debt)
Subordinated Debt (Outside Loan Note)
& Warrants 13

14. ESOP Loan Repayment Inside Loan Outside Loan Payments Deductible
Company
ESOP
Bank, Mezzanine,
PEG Lenders
and/or Shareholders
Release of Shares Pledged
as Collateral and Share
Allocations to Individual
ESOP Accounts
Outside
Loan
Payments
Inside Loan
Deductible
Contributions
and/or
Dividends 14

15. A Typical C Corporation ESOP Capital Markets Sell-Side Transaction
In one or more Section 1042 ESOP transactions selling stockholders sell most or all company stock to ESOP and get tax-deferred liquidity
Preferred “equity,” subordinated debt and/or warrants – warrants can be “penny” warrants – to PEG, Mezzanine Investors, Private Investors
Can use high-value/low-equity preferred stock to minimize dilution of other equity
Stock options, phantom stock or other synthetic equity granted to key management to allow key executives to own eventually 5-20% of economic value of entity outside ESOP
The tax savings from tax-deferred sale and deductible debt principal make the C corporation leveraged ESOP far superior to an IPO secondary or a leveraged recapitalization on a net after-tax proceeds basis
S Corporation election 15

16. A Typical S Corporation Capital Markets Sell-Side ESOP Transaction
ESOP buys relatively small amount of stock from selling shareholders
S corporation effects taxable redemption of all of the stock held by selling shareholders for cash and possibly subordinated notes (installment sale)
Subordinated debt and/or warrants are sold to PEG, Mezzanine Investors, Private Investors
Stock options, phantom stock or other synthetic equity granted to key management to allow key executives to own eventually 15-30% of economic value of entity outside ESOP
Company uses S corp. tax-free operation to accelerate debt reduction 16

17. The Zell-Tribune Deal (12/07) – A Buy-Side ESOP Transaction
NYSE Company
$8.4 Billion Market Cap
Owner of 12 big city papers, including the Chicago Tribune, the Los Angeles Times, Long Island Newsday and numerous television (including KTLA) and radio stations
Owner of the Chicago Cubs and Wrigley Field Stadium
21,000 employees 17

18. Zell-Tribune: A Buy-Side ESOP Transaction
Largest ESOP deal in history
First going-private transaction using a leveraged ESOP
High-profile capital markets transaction using an ESOP 18

19. Zell-Tribune: Transaction Steps
Step One:
A. Tribune Company forms ESOP
B. Company lends $250 million to the ESOP, and the ESOP buys $250 million of stock at (a discounted) $28 per share
Step Two:
Company makes tender offer to public at $34 per share. Company borrows initially
$8 billion from banks and redeems approximately 50% of the public shares, returning
approximately $4.2 billion in capital at $34 per share in the tender, using balance of
initial loan proceeds to pay off existing debt and for working capital
Step Three:
A. Cash-Out Merger: Company borrows another $4.2 billion from banks and squeezes out the other 50% of the public at $34 per share ($4.2 billion) leaving the ESOP as the 100% owner
Zell invests $315 million and receives at par a $225 million subordinated unsecured nonconvertible note (straight debt) and at $90 million an immediately exercisable 15-year warrant to purchase 40%, fully diluted, of the Company’s equity for $500-$600 million
Company makes the S election – Zell’s subordinated straight note and warrant are not treated as outstanding stock
D. Management is awarded 8% synthetic equity, fully diluted (phantom stock) 19

20. Zell-Tribune: Post-Transaction Capitalization
ESOP
Zell
Banks
Trustee
Management
Tribune
Corporation
$12.2 Billion
Senior Secured
Notes
100% Common Stock
(52% Fully Diluted)
$250 Million
8% Phantom Stock Units
$225 Million
Unsecured
Straight
Note
$90 Million
15 year Warrant 40% Fully Diluted
$500 Million Initial Strike Price
increasing by $10 million per year
to a maximum of $600 million after 10 years
Employees
(Beneficiaries) 20

21. Zell-Tribune Post-Closing Capitalization (cont.)
Owner
Investment
Instrument
Ownership
ESOP
$250 Million
Stock
52% fully diluted
Zell
$225 Million
Subordinated Note
-0-
$90 Million plus
$500-$600 Million
Strike price
15-year
Warrant
40% fully diluted
Management
Future Services
Phantom Stock
8% fully diluted
Banks
$12.2 Billion
Senior Secured Notes 21

22. Zell-Tribune Corporate Governance: the Tribune ESOP
ESOP owns 52%, fully diluted
Independent Trustee
Acts for the exclusive benefit of the employees
Acts to maximize the long-term value of plan assets
Directed by ESOP Administrative Committee after initial transaction
The Trustee cannot be an advocate for employees on issues such as pay, layoffs, or other work-related issues
The Trustee votes the shares as directed by the “named fiduciary,” subject to “pass-through” votes to participants only for mergers, sales of substantially all the assets of a business, recapitalizations and reincorporations 22

23. Zell-Tribune Corporate Governance: the Board
Zell was elected to the Board and is its Chairman
The President and CEO of the Tribune remains on the Board
The representatives of the Chandler Trusts have resigned from the Board
The majority of the board is independent 23

24. Zell-Tribune: Post-Closing Events
ESOP annual contribution is 5% of payroll – union members included
a 3% cash balance plan was also adopted for employees
Defined benefit plans are fully funded. No wage concessions
Tribune is now selling assets to pay down debt in a depressed economy – using a creative joint venture format structured to avoid tax on BIG during 10-year post-election period
Example is sale of Long Island Newsday to Newscorp using an LLC joint venture structure where Tribune retains a small (5%) stake and gets tax-free cash from Murdock – cash is tax-free because of debt guarantee 24

25. Zell-Tribune: Post-Closing Events (cont.)
Estimated 10-year tax savings from the ESOP S corporation structure is about $1.4 billion
About 40% of those tax savings will accrue to the Zell acquisition entity
Tribune also benefits from “benefit replacement” (replacing current defined benefit cash contributions with non-cash ESOP contributions) – about $265 million net present value savings at WACC over 10 years 25

26. PEG takes a public company private (Zell-Tribune)
SUMMARY: Opportunities for Private Equity and Mezzanine Funds to Use Capital Markets Leveraged ESOPs
PEG takes a public company private (Zell-Tribune)
Public or private company divests or “spins off” a subsidiary to management and/or a PEG
Closely held company sells to a PEG
Closely held company sells to management and PEG
PEG sells portfolio company to management 26

27. ESOPS in the Capital Market: Conclusion
PEGs and mezzanine fund investors are presented with the opportunity to invest in innovative new transaction structures using leveraged ESOPs to enhance their IRRs 27