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Worker-owned chain reaction.

The Peoria Journal Star adopted employee ownership several years ago to avoid being taken over by a chain, and in the process became something of a mini-chain itself.

How this happened demonstrates the advantages of a federally qualified Employee Stock Ownership Plan (ESOP). The plan enabled the Journal Star to outmaneuver giant Thomson Newspapers and gain control in 1990 of the Galesburg Register-Mail, an evening daily of 18,000 circulation located some 50 miles northwest of Peoria.

As I detailed in last month's column, the Peoria Journal Star established an ESOP in 1984 that over the years has acquired 85 percent of the newspaper's stock. The ESOP was introduced and modified by Congress in the 1970s and 1980s. At the current rate of stock buying, the Journal Star's ESOP will own 100 percent of the company in four or five years. The strategy was devised by the patriarch of the paper's owning family, Henry Slane, to keep the Journal Star locally owned.

When Thomson announced it intended to buy the Galesburg paper, which was owned by the Pritchard family, the Journal Star immediately made a counteroffer that essentially matched Thomson's $15 million bid. The Peoria proposal, however, stressed the different tax consequences of each offer. Selling to Thomson for cash would expose the sellers immediately to a tax on capital gains--a substantial amount because the Pritchard family had owned the paper since early in this century. However, because of provisions of the new ESOP laws, selling to the Peoria ESOP would allow the family to avoid the tax on capital gains if the proceeds from the sale were immediately rolled over into investments in public company stocks or corporate debt securities.

In effect, the family could preserve its capital and continue to reap benefits from it in the form of dividends or interest payments. The family would not have to pay a tax on capital gains unless it subsequently sold its stocks or debt securities. The Thomson offer would have had to have been as much as $20 million to give the family the same immediate after-tax benefit.

Thus the Peoria Journal Star became a mini-chain. An important difference from typical chains, of course, is that the local employees of the Galesburg Register-Mail have become owners along with the Peoria employees.

The employees in Peoria and Galesburg also enjoy some of the same tax advantages that benefited the former owners of the Register-Mail. When an employee quits or retires, he or she has several options. The total value of an employee's account in the ESOP (determined by an annual appraisal and the number of shares in the ESOP the employees have managed to buy) may be taken out in a lump sum; the employee then has to pay income tax on the lump sum. At the end of 1992, the average account balance for Peoria's employees was $147,491.

The employee also may roll over the lump sum into an IRA; income tax becomes due only when money is withdrawn from the IRA. Finally, the employee may choose to have the account paid out over a number of years; the annual payments may be taken as taxable income or rolled over each year into an IRA.

Central to the success of any ESOP, of course, is whether a company is successful enough to generate the profits needed to buy out the shares of retiring and resigning employees and to service the debt required to fund the ESOP in the first place. (The ESOP borrows money to buy out the newspaper's former owners, then sells shares in the ESOP to employees.)

The ESOP legislation was designed to help companies become employee-owned by providing low interest loans to finance an employee takeover. The low-cost loans and the positive effect that owning their own business has had on employees' performance has helped the Peoria Journal Star ESOP to prosper. Steven Koch, vice president of the Journal Star, says, "If there is a classic business qualified for an ESOP, it is a newspaper because of the cash flow it generates."

The employees at Peoria and Galesburg are kept fully informed of how the business is doing because it is important to the ESOP's success that they have the confidence to continue making investments. Employees are represented by an employee advisory council elected by the various departments of the two newspapers. Employees receive regular financial reports and consultations with the ESOP's trustees on company operations.

Indeed, if they become disenchanted, they could look for an outside buyer, say a big chain, to take over the company. But prospering as they are, and no doubt mindful that new owners almost inevitably wind up cutting employees and probably would not offer nearly so generous a retirement program, it is unlikely many employees would vote to sell out.

"It's in the hands of the employees," says Koch, "as it should be."
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Title Annotation:purchase in Illinois of the Galesburg Register-Mail by the employee-owned Peoria Journal Star
Author:Morton, John
Publication:American Journalism Review
Article Type:Column
Date:Apr 1, 1993
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