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April 25, 2017

Tronc Considers a Counter to Gannett's 3rd-Sweetened Offer

It’s apparently no longer a question of whether to sell or not, but for how much.

For four months, Tronc – the company formerly known as Tribune Publishing, parent of The Los Angeles Times and The Chicago Tribune among other similarly august titles in smaller markets – has steadfastly and publicly rejected the hostile takeover intentions of USA Today parent company Gannett.

But a recent quiet renewed offer from Gannett – its third – at a higher price point has Tronc moving forward with a counteroffer.

Contacted Thursday evening, Tronc declined comment on the offer.

The Tronc board, chaired by its largest shareholder and driving force Michael Ferro, met last Thursday in Chicago, confidential sources tell me. That meeting’s main topic: a formal counteroffer to an offer that Gannett made within the last three weeks. Though it is clear that the counter was moving forward, it is unclear at this writing whether it has yet been formally delivered to Gannett.

First published at POLITICO MEDIA

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I can report, however, that the latest Gannett offer arrived in the mid-$18-a-share range, and came out of an in-person meeting in Los Angeles. Among those participating: Gannett CEO Bob Dickey, Gannett chairman John Jeffry Louis, Tronc chairman Michael Ferro and Tronc CEO Justin Dearborn, sources say.

At the $18-plus price, Gannett would have raised its price by more than 20% above its second bid. It delivered that bid of $15 quite publicly in May.

The May bid in turn represented a further 22% increase from the Gannett’s first offer of $12.25 in April.
At an $18.50 price point, Gannett’s latest bid would make for about a 140% premium.

Yet, Michael Ferro – who may come off as one of the master dealmakers in the newspaper trade – says that premium isn’t quite sweet enough. How much more must Gannett sugar-coat it?

If the parties are finally closing in on a deal – and that’s the betting – Tronc’s counter would likely be about $20 per share or a little less.

Gannett, and its wobbly investors, might accept that as relatively reasonable.

With Ferro’s heart, though, still – according to multiple sources – set on proving out a newspaper model that he believes only he is capable of executing, Tronc’s counter could still be a bigger, “go-away” price, in the $25+ range.

All parties may believe they have learned lessons from the wild, public smack-talking and corporate intrigue that amazed the media world this spring when Gannett first came calling. They have gone largely quiet, and kept the information about talks between the two companies to a much smaller circle of confidants.

Gannett’s apparent takeaway: each new public offer only has set a new floor for Ferro. Further, Ferro used each bid as him as a club to further berate Gannett, as Tribune execs, among others, hurled epithets accusing Gannett of “trying to steal the company.”

To be sure, it’s no surprise that Gannett would need a third bid to win the company; that’s what it expected from the outset, sources have long maintained.

But a fourth bid? At a $20 price point, that would be about a 166% premium, a price that blows away many in media industries.

We believe the answer is yes, and that a deal may be struck soon. Why, then, would these two parties finally shake hands? If one is paying an astronomical premium and the other doesn’t really want to sell, what’s the logic on either side?

 

The Gannett Buying Imperative

If indeed Ferro’s much-ridiculed Troncification of Tribune Publishing – most recently lampooned by HBO’s John Oliver [“Newsonomics: After John Oliver, the you-get-what-you-pay-for imperative has never been clearer”] – now yields to Gannettization, the acquisition marks the biggest win in Gannett’s strategy since it was spun off as a newspaper company from the larger Gannett media empire.

Gannett already stood as the largest daily U.S. publisher before the mother company divided its media assets into two groups (TV-digital, newspapers) last summer. Since then, CEO Bob Dickey has surprised the industry with a supermarket sweep through the tired aisles of American newspapering.

Where others see empty shelves, and peeling linoleum, he sees scale and the value of the incremental – if highly challenged – new revenues his new properties will yield.

As he told financial analysts in July, “By the end of the third quarter, we expect that annualized revenues acquired in the last twelve months will be more than $800 million, and the annualized digital component of our revenues will approach $1 billion. Additionally, we continue to pursue cost improvement initiatives in our core operations as well as recently acquired assets, particularly in the printing, packaging and distribution channel.”
Importantly, he could – for most of 2017 – add Tronc’s numbers to those totals.

Since Gannett’s own operating performance mirrors its industry peers, showing accelerating print ad declines, “new” Tronc-derived revenue makes those top-line revenue numbers look better. (Even with a down second-quarter report, some journalists reported – and some investors may have believed – that Gannett’s growth was in the black.)

Corporate observers knowledgeable in wider strategies point to Gannett’s roll-up-the-industry strategy as similar to many others. They point to both Blockbuster and Waste Management as textbook examples of roll-ups in declining industries. “It only works if you keep buying,” one newspaper financial executive told me today.

Dickey’s grand plan for the American press: consolidation in key markets. Just in the past year, Gannett has bought the former E.W. Scripps’ 14 daily newspapers, the Milwaukee Journal Sentinel, and the Bergen (NJ) Record; next up: Tronc.

In Gannett’s last quarter public report, Dickey set a goal of growing the company to between 125 and 140 titles. The Tribune/Tronc transaction puts him closer to that goal at about 119, depending how Tronc’s regional titles are counted.

One last point to consider on Gannett’s willingness to again raise its price. Since Jan. 21, Gannett’s share price is down 15.93%. Further, it is underperforming the S&P 500 by 32%. Much of that decline came after its Tribune/Tronc seeking began. Is that swoon a new concern for Bob Dickey as he rolls the next set of dice?

 

Why Ferro – and the Tronc board – may be ready to sell

Make no mistake, Michael Ferro is a highly complex character [“Meet Michael Ferro“]. Although his expansive ideas for revolutionizing the newspaper trade spring from a few good basic notions, he’s oversold them, and suffered publicly for it. Yet, he believes he’s a man on a mission – and that Gannett has unfairly interrupted it. That’s one main reason he rejected Gannett’s business-as-usual approach with great rancor.

Yet, he’s also a master dealer in corporate assets and that’s how he made his money: knowing when to sell at the right trade. He, too, prides himself on that. If Gannett were to pay $18.50 per share, Ferro’s investment company, Merrick Ventures, would gross more than $50 million on the transaction. Merrick paid about $8.50 per share for its 5.2 million shares. Not bad for an investment made in January of this year.

Still, the net takeout of Ferro and his largely Chicago-based investors may well be improved by the four-month delay in this transaction. Had Ferro agreed to a deal in the spring, it likely would have closed by fall. Now, though – especially with expected Department of Justice review of a merger as large as Gannett and Tronc/Tribune, a review I hear is more likely than not – a closing would well be put off to Feb. 1. That passes a one-year point in Merrick’s investment, and would likely result in a reduction of taxes to be paid, financial sources say.

Further, the delay in getting the deal done has allowed Ferro to “take care” of his two newly appointed lieutenants, Tronc CEO Justin Dearborn and CFO Terry Jimenez [“Tronc awards potential millions to two top executives”). Given the likely Gannett price, Dearborn could clear $6-7 million and Jimenez half of that amount. Both have been on the job for less than six months. More jaded observers of that Tronc board-approved Aug. 3. grant of stock and options have called it “The Chicago Way.”

That Chicago Way may raise eyebrows outside the Windy City, but that’s not Ferro’s concern. What he cares about is the law. As one lawsuit wends its way through the Delaware courts, and a second potential suit from Tronc major investor Oaktree Capital hangs in the under-review Tronc balance sheets, Ferro’s main motivation in taking Gannett’s money and running may be quite simple.

Critics, in the lawsuit and elsewhere, point to his Merrick Ventures being allowed buy what turned out to be control of the company for less than $9 a share.

That acquisition occurred just months after a would-be offer of as much as $12 a share for the company had been rejected by the board, sources say.

If Ferro’s Merrick Ventures’ original purchase of Tribune Publishing shares were to be found wrongly approved by the then-board, it’s anyone’s guess what the remedies would be.
It is clear, though, the new Tronc would generate a legal mess perhaps to rival the one former Tribune owner

Sam Zell created with the five-year bankruptcy from hell. On the other hand, if Gannett buys the company, those who filed the suit and others would cash out well themselves, and presumably any legal trouble would fade into the Delaware courts woodwork.

Put all that together – the satisfaction that comes with killer investment and the avoidance of a legal quagmire for Ferro and his investors – and the logic seems clear. Take the Gannett money —sweetening to Bob Dickey’s breaking point blood sugar – and call it a quite successful, and enjoyable year.

And yet, there is that intangible ego. The Newspaper Man of the Century, Michael Ferro. He could hold out for still more money, or try to hold on to one or a couple of the papers. Of course, Ferro retaining the L.A. Times would upset the pricing and some of the scale economics of the Gannett buy. One way or the other, we should soon see which Michael Ferro asserts himself as Gannett’s spring offer turns to early fall.

 

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