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March 29, 2017

Gannett's Failed Bid to Buy Tronc: a Whodunit

Tuesday’s busted deal between Gannett Co. and Tronc leaves two companies wobbling — and the state of the newspaper industry in a very public mess.

In the short term at least, many millions of dollars — to investors and company executives — have been lost, as one of the most mangled mergers in media turned south.

 

First published at POLITICO Media on Nov. 1

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And, after Gannett announced it would no longer pursue an acquisition of Tronc, saying “the terms were not acceptable,” both companies suffer. Gannett’s stock is sliding, and its biggest move to achieve the scale CEO Bob Dickey believes is needed for the largest newspaper chain in the U.S. to recover its footing has just been scuttled. Tronc moves forward with big plans in the mind of Chairman Michael Ferro, but a vocal minority of angry and distrustful shareholders and one (maybe two) lawsuits, which would have been avoided with a sale.

What did the deal in? It’s like “Murder on the Orient Express,” with so many suspects and motives frustrating a single, clean investigation.

Those close to the deal say that even as deal financing got tougher, Gannett’s feet got colder — chilled by investors saying its enthusiasm had gotten the better of its longtime financial chops. In the end, that combination led to Tuesday’s announcement.

As one savvy newspaper finance executive put it succinctly, “The Street thinks Gannett may have run out of tricks.” In other words, Gannett’s highly public pursuit of Tronc put a big spotlight on its strategy, just as that strategy’s effectiveness was rendered deeply suspicious given its recent financials announcement.

Certainly, Gannett comes out of the yearlong drama chastened, embarrassed and weakened. Its share price stabilized Tuesday morning at below $8. That’s a long ride down from its 52-week high of $17.91. Now, it must regroup.

Dickey’s pursuit turned into a bridge too far. As he emerged from the Gannett–TEGNA split two years ago, his earnest grow–consolidate–scale strategy first proceeded cautiously. He bought Journal Media and the Bergen Record, both at market prices, and then added marketing services leader Reach Local. Those seemed to be prudent measures, if you believed in the long-term scale strategy of being the Last Man Standing in the local newspaper marketplace.

As Dickey plotted his next big move, though, his prudence was tested by the current wild man of newspaper publishing, Michael Ferro, who had rebranded the august if tarnished newspaper publishing empire of Tribune Publishing as Tronc, initially to wide ridicule.

Tronc’s nine markets would have provided Gannett its first true national footprint, lots of icing on the cake of the recently rechristened USA Today Network. Adding the Los Angeles Times, Chicago Tribune, Baltimore Sun, Hartford Courant and two big Florida papers would have been a symbol of arrival. The little company that invented USA Today in 1980 would have both national scale for digital advertising, Dickey believes, and respect.

Ferro’s active and public resistance — “Gannett is trying to steal the company” — changed everything. While then-Tribune shares were trading at about what they are now, $10 and lower, Gannett first offered a modest premium, and then a bigger one, and then a still-bigger one. At about the $18.50 price that was included in final term sheets, that 140 percent premium built that bridge too far. As Gannett’s own disastrously down third-quarter earnings, announced Thursday, raised bigger questions about Gannett’s fundamental round-’em-up-and-squeeze-’em strategy, the deal unwound.

Financing of the all-cash deal foundered — and, recall, that those financing it, led by Jefferies LLC, were the second-tier, second-round choice for financing, after the big banks passed. As recently as Friday, the parties continued to scramble. Could the deal be put back together with baling wire, some kind of part-cash, part-stock deal? Could Tronc investor Patrick Soon-Shiong buy into the new expanded Gannett in a way that could preserve a sale?

As of Tuesday, this deal looks un-repairable, but, as I pointed out Friday, one broken deal just creates new possibilities. Could Gannett come back, in the months ahead, at a far lower price? Would the notion of splitting up Tronc — with part of it going to Gannett — regain currency? Several would-be deals are now being gamed out.

If Gannett is licking its wounds, and aiming to re-bolster investor confidence, Tronc’s future looks no more stable than its first turbulent year.

After market close Tuesday, it will announce its own third-quarter earnings — and they may be better than Gannett’s. One secret: Tronc has been aggressively cutting costs, including “circulation sales pressure,” which tends to depress future circulation revenues. One good reason to cut costs is if you are going to sell. That increases earnings, and that helps fetch a higher price.

Yet now, Tronc faces three big questions.

No. 1, what’s its operating plan for 2017? It faces the same deep decline in print advertising all its peers do, and will have to make significant cuts of its own (as Gannett forced itself to do last week, reducing workforce by 380 or so staffers, including many newsroom losses around the country).

Second, Tronc’s Tronckification efforts have seemed to be on hold, pending what looked like a likely sale. Will those publicly maligned efforts get new life, or will the company chart another path for next year?

Third, Ferro, Tronc CEO Justin Dearborn and the company’s board — all of whom long resisted the earlier Gannett offers — will likely face a new lawsuit, or multiple ones. Those suits will claim, as an initial one does, that those governing the company failed in their obligations to shareholders to maximize the value of their company. Inside dealing will also be further alleged. Most notably, though, expect a lawsuit, most likely filed by major Tronc investor Oaktree Capital, to detail a charge that Ferro’s original purchase of controlling shares is tainted.

For Tribune watchers, it offers the potential of Sam Zell-déjà vu. Tribune, after all, was taken for a wild ride by bottom-feeder investor Zell, and then four years of hellacious bankruptcy. How will the equally outrageous Ferro — a more tech- savvy but more self-promoting owner — ride out this next step of the Tronc journey? TV cameras caught him in the good seats at Wrigley Field over the weekend. So for today, both the Cubs and Tronc survive. But who can predict tomorrow?