Sam Zell's smooth Newsday move

NEW YORK (Fortune) -- Sam Zell is in a difficult spot. The real estate mogul turned newspaper baron borrowed $8.4 billion last December to finance his leverage buyout of the Tribune Co., owner of the Chicago Tribune and the Los Angeles Times. Now he's discovered the newspaper business is harsher than he expected. Zell is trying to sell some of his new company's assets to keep his creditors happy.

But Zell isn't acting like he's desperate. On Monday, the Tribune CEO announced his company was selling a 97% stake in Newsday, its Long Island daily, to Cablevision (CVC, Fortune 500) in a deal valued at $650 million. For weeks, it appeared that he was rushing to cut a similar deal with Rupert Murdoch's News Corp. (NWS, Fortune 500) for $580 million. At the last minute, Zell convinced Cablevision to give him everything Murdoch promised - including a joint-venture structure that will save Tribune an estimated $245 million in taxes - for $70 million more than News Corp. had offered.

It was a stunning victory was a guy whose back is supposedly up against the wall. In hindsight, Zell orchestrated the Newsday sale flawlessly. Early on, he lined up three potential bidders. Two of them - News Corp. and New York Daily News owner Mort Zuckerman - were publishers who were interested in Newsday for strategic reasons. News Corp wanted to cut costs at the New York Post by combining the tabloid's printing and distribution operations with those of Newsday. Zuckerman wanted to do the same by creating a joint venture between the Daily News and Newsday.

The third bidder, of course, was Cablevision. The Long Island-based cable company didn't own any newspapers. But the Dolan family - Cablevision's controlling shareholders - seemed to like the idea of owning the biggest paper in their area.

The trick was for Zell to turn this into a bidding war. That was difficult at first. The three interested parties acted as if they had the upper hand. Cablevision did some tire kicking, but the Dolans didn't make an offer. Zuckerman reportedly made a lowball bid.

Zell turned up the heat by entering into negotiations with News Corp. to accept $580 million for a majority stake in Newsday. Murdoch clearly felt he had the inside track. He began courting Long Island's political leaders whose support he would surely need to get the deal approved by the FCC in Washington. That's because News Corp. already owns the Post and two New York City television stations.

It now appears Zell was using News Corp.'s offer to establish a floor for the bidding. Zuckerman soon matched News Corp.'s offer. Then Cablevision did what non-strategic bidders often do in such situations. It offered to pay a higher price than either newspaper publisher.

Murdoch misread the situation. As recently as News Corp.'s conference call on Thursday, he acted as if he had a deal with Zell: "I trust Mr. Zell absolutely. He's famous for being a man of his word, and we think everything is in hand." Murdoch insisted there was no need to sweeten his company's Newsday bid. "We're certainly not in the business of getting into an auction here," he said.

But, of course, that's exactly what Zell was conducting. The Dolans understood this perfectly. They offered everything Murdoch did at a higher price. Soon, Cablevision will be Newsday's majority owners.

The Newsday sale is an important victory for Zell. After all, Tribune needs cash to pay down its debt. The newspaper publisher has to repay $650 million in December. There's another $750 million payment looming in May 2009.

So Zell will surely have to sell more assets. Next up is the Chicago Cubs franchise. Analysts say the Tribune CEO could get as much as $1 billion for the baseball team and related assets like Wrigley Field if he handles the sale right. The last thing Zell needs is to look desperate right now. Anybody who thinks he's an easy mark after the Newsday sale is in for a disappointment.