Tribune Company: The PHONES Proposal

In early 1999, the Tribune Company began discussions with bankers at Merrill Lynch & Co. about monetizing a portion of its holdings in the Internet company America Online (AOL). The cash raised would be used for general corporate expenditures. An outright sale of the shares was not attractive due to the significant capital gains taxes that Tribune would be forced to pay. Discussions focused instead around a convertible security known as “participating hybrid option note exchangeable securities,” or PHONES. Merrill Lynch had suggested that PHONES would enable Tribune to monetize their AOL investment and, at the same time, defer capital gains taxes until the security was converted into cash, which wouldn't occur for thirty years. Tribune's management now had to decide if these securities met their needs and if the valuation suggested by Merrill was reasonable.


Headquartered in Chicago, Illinois, the Tribune Company was one of the United States' premier media companies, operating in publishing, broadcasting, entertainment, and education. Established in 1847 as a newspaper publisher, the Tribune Company had expanded into almost every aspect of modern media. In 1998, the publishing segment stood for about 50% of the company's total revenues, the combined broadcasting/ entertainment segment for 39%, and the education segment for 11%.i Net sales for Tribune were over $2.65 billion. (Exhibit 1 shows historical financial information ...

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