Not one to mince words, KPS Capital's Michael Psaros offers a ...

10-19_Watercooler.qxd 4/6/09 5:37 PM Page 12Water Coolerwhat players in the midmarket are talking aboutINCOMPLETE Platinum Equity went from hero to goatin a matter of months after the firm decided to pull its reported$100 million offer to acquire a stake in the ArenaFootball League. The withdrawal forced the league to suspendits 2009 season.The Sports Business Journal reported that Platinum balkedat the league’s $24 million operating loss. As originally conceived,the Los Angeles private equity firm had planned to pouras much as $100 million into the league, garnering a 40% stakein the process, and would assume managerial oversight of the entireleague and its 16 teams. The deal was similar to an offerBain Capital and Ontario Teachers’ Merchant Bank had floatedby the NationalHockey League in2005 after the strike, aproposal that was ultimatelyturned down bythe NHL.The offer for theAFL, meanwhile, hadbeen structured to givePlatinum control ofticketing and sponsorships of the entire league, while the individualfranchise owners would maintain oversight of on-thefielddecisions, such as coaching and player personnel.The league, when it called off the 2009 season, said it wasworking on a long-term plan to improve its economic model.The AFL counts Jon Bon Jovi, John Elway, Jerry Jones andArthur Blank among its team owners.The AFL has served as a farm league of sorts for the NationalFootball League, as Kurt Warner, Rob Bironas, and Stylez G.White all cut their teeth in the arena football before graduatingto the NFL. The league, however, has faced tough times thathave only worsened with the softening economy.Jim Renacci, who owns the Columbus Destroyers and servesas the vice chairman of the AFL’s executive committee, alludedto this in a transcribed conference call with reporters and notedthat the league’s dealings with Platinum were not completelyin vain.“All professional sports leagues will find corporate sponsorshipsdeclining, especially over this last 90 days,” he said. “Theequity group that took a look at the league gave us a lot ofgood ideas and I think it’s time to implement those and putthem in place.”Trips right, AFL dive, on two.ESAPS “Going forward, employees participating in theESOP will be invested alongside Sam Zell, one of today’smost successful investors.” It sounded good at thetime. Lately, though, Dennis FitzSimons’ comments on the TribuneCo. sale in the April 2007 press release would be almostlaughable if the employees hadn’t lost so much from the ill-fateddeal.Immediately following Sam Zell’s $8.2 billion buyout ofTribune Co., his use of an employee stock-ownership plan[ESOP] to help fund the transaction renewed interest in thedeal community in the employee-backed funding source [“ESOPson the Rise,” June 1, 2008]. But considering the travails of Tribuneand the company’s recent bankruptcy, Zell may have donemore bad than good for the ESOP market.Tribune’s employees, through the stock-ownership plan,hold 100% of the company’s common equity, which leavesthem essentially last in line to recover anything when the companyemerges from Chapter 11protection. Zell, meanwhile,since his investment took theform of a promissory note andwarrants — together valued at$315 million — is better protected,although he does face alawsuit filed in September byemployees who claim that heforced their hand in creating theESOP.Whether or not Sam ZellWill Sam Zell be credited for killingthe ESOP?killed the ESOP remains to be seen. At the very least, ESOPsare going to be a tougher sell to employees, who will likely bea bit more circumspect at the prospect of the stock ownershipplans, even it’s the “most successful investors” they’rebacking.12 MERGERS & ACQUISITIONS February 2009