Should You Buy It? Zell Gives Tribune an Extra

Tribune(TRB Quote) shareholders are set to vote Aug. 21 on a $8.2 billion takeover bid led by real estate investor Sam Zell. While the deal, announced in April, values the company at $34 a share, Tribune closed Tuesday at just $30.14.

Tribune already bought back 126 million shares, or 52% of the company, on June 5, as part of Zell's strategy. But a major hurdle remains between Zell and his second round of efforts to acquire Tribune's assets, which include 11 newspapers such as the Chicago Tribune and Los Angeles Times, in addition to 23 television networks and various Web sites.

Namely, three hedge funds that hold about $690 million of the company's 2% coupon convertible debt are claiming that Zell's intention to sell the Chicago Cubs baseball team, owned by Tribune since 1981, would violate covenants in the bond offering.

The sale would help Zell pare some of the debt needed to finance a leveraged buyout (LBO), but if Tribune does default, the debtholders are demanding to be repaid their principal investment when that happens, which isn't otherwise due until 2029.

While Zell and Tribune have defended their actions to sell the Cubs, debtholders have had recent success in demanding more money from motivated buyers in recent LBOs.

Even when Zell sold his own company, real estate investment trust Equity Office Properties, to Blackstone Group(BX Quote) in February, bondholders were successfully able to demand a 15% premium to the original bid.