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May 1, 2017

Newsonomics: Why Doesn’t Gannett Just Drop Its Tronc Bid, and See What Happens With Its Stock Price?

When officials at Tronc (formerly known as Tribune Publishing) canceled a September roadshow highlighting to investors in a half-dozen cities the bright future of the company just a day after announcing it, speculation began in earnest among Tronc’s close watchers. Was it as mundane as trouble with Air Ferro? Did the company fear underwhelming audiences on the tour? Or did it have something to do with the continuing efforts of Gannett, the country’s largest newspaper chain, to buy the company?

Gannett and Tronc do continue to talk to each other, with a shuttle diplomacy ongoing, confidential sources tell me. Company executives, long-standing and newer, talk, and then there are friends of the companies who engage as well.

 

First published at Politico Media

Follow Newsonomics on Twitter @kdoctor

 

Gannett is weighing two questions.

“How high can we go?” is the first.

Second, even the country’s most shareholder-friendly public newspaper company finds itself now running up financial limits, newly having to balance risk and reward of acquisition.

Gannett has been stymied throughout the process by chairman Michael Ferro’s “I am Tribune” tronckification of the company. The company still isn’t sure whether he will sell at $20 or something a little less, or whether it still finds itself in an old-fashioned deal-making Midwestern corn maze. In the direct, and side talks, what’s real and what’s a deke? Negotiating with Michael Ferro has become a bewildering experience of trash-talking and silences.

So, while a deal could be announced at any point, let’s riddle this: Why doesn’t Gannett CEO Robert Dickey just announce he’s suspending current efforts to buy Tronc – and see how far the Tronc share price falls how quickly? Then, the company could come back next spring – much better prepared than it was this year – for Tronc’s annual board election and shareholder votes.

In April, TPUB shares were trading at about $7.50. That price had seen a steady drop, as Michael Ferro had bought into the company – and it turns out, oddly, effective control of it – for the low price of about $8.50 per share. The shares that Michael Ferro had bought in early February were new ones, diluting the value of the all other shareholders’ stakes, and investors were unhappy.

Gannett’s out-of-the-blue offers have steadily pushed the share price up. On Friday, TRNC closed at $16.89, and have hit a high of $17.80, as speculators have bought up the stock. Those speculators include HG Vora Capital, which has become particularly noisy about Tronc selling itself to Gannett.

While you will find a minority of financial observers who think that Tronc’s doubling share piece is somewhat justified based on the fourth largest U.S. newspaper companies’ potential, most pooh-pooh that notion. They expect Tronc shares to drop, should Gannett publicly say it is dropping its bid (and further for Gannett shares to regain some of the 36 percent loss in value they’ve seen since Gannett CEO Dickey put Michael Ferro’s company in his crosshairs).

How far might it drop? Logic might say it would return to where it was – to about $7.50 – which would amount to a massive sell-off; but, of course, the stock market isn’t about logic. Some investors will continue to believe that Gannett will ultimately win Tronc, and hold on. Others will flee.
So, back to our question. Armed with that weapon of Tronc shares possibly cratering in a Gannett pullout, why doesn’t Dickey just pull up stakes – for now?

In short, Dickey believes that he is still close to a deal, although he has believed that for a while.

One shareholder suit, to be heard in Delaware, and the looming threat of another and more powerful one, which major investor Oaktree Capital

Management could file at any point, puts a lot of pressure on Ferro. Despite his public and private bravado, he should be worried that the courts could upend his Tribune coup, leaving his own investors angry and himself tied it in lawsuits for months, if not years. He should, goes most logic, see that a $50 million profit for a half-year-plus’ investment for his Merrick Media investors could avoid all those entanglements.

If he does, we could well see a deal any day. If not, then we’ll back to that question of Dickey’s next move.

Gannett is clearly toward the end of this run at least. Ever since that first offer, Michael Ferro has been playing “One Man’s Ceiling is Another Man’s Floor” for Dickey. Even with third Gannett offer, of about $18.50, which I reported here [“Tronc considers a sweetened purchase offer from Gannett”], Ferro has said, “thanks, and what else will you give me?”

Let’s also consider the calendar.

We’re just a little than four months away from the time that Gannett can next formally challenge the Tronc board.

Throughout this arduous process, I’ve pointed out the so-far fatal flaw in Gannett’s campaign to buy the company. It missed the deadline to file its own then Tribune Publishing directors slate, and that missed deadline has prolonged this drama.

By the beginning of February, and within the 30 days thereafter, Gannett can offer up its own alternative slate of more general shareholder-friendly directors, who could then negotiate a sale in the best financial interests of investors. The vote on board directors would occur next June.

Gannett missed the 2015 deadline to that and had its small army of strategic p.r. firms do a work-around. While it couldn’t nominate its own slate, it urged a “no” vote on Ferro’s slate and saw a strong protest vote. That protest vote, though, didn’t prevent Ferro’s board from election, and thus lost Gannett what may be as much as a year in winning the company.

Dickey, then, may now be telling Ferro he can walk away, prompting a Tronc share sell-off. And then lay out what should be obvious: that will add pressure on Ferro, at which point Gannett can return with a lower offer some time before that June, 2017 board election. At that point, Ferro could well be out of options, with jilted shareholders then able to force a new Tronc board to negotiate a sale.

While the media world has focused on media circus that Ferro’s half-year tenure has newly brought to Tribune papers, Gannett has its own issues.
Certainly, the price that Gannett would pay for Tronc is significantly more than it had originally penciled out as it weighed price and consolidation-driven savings. As it tries to finalize the buy, it has seen trouble on two fronts.

There’s that big 36 percent drop in share price to be sure, as the overall market hit all-time highs. Gannett’s long-time position as darling of the newspaper sector is now less dear. Despite being given a quite favorable balance sheet, as mothership Gannett split into two companies two years ago, its resources are now constrained.

A Tronc buy requires increasing Gannett debt. While company executives continue to believe that the vast short-term savings of combining the two companies’ operations justifies the buy – even at sub-$20 levels – Gannett is beginning to push up to the limits of what its finances can allow. . Even the financiers most sanguine about Gannett and its historical operating management chops have begun to doubt that the newspaper sector – no matter how consolidated – is a sector worth taking more chances on.

Let’s also add in how poor the operating performance of Gannett and Tronc, and their brethren, has lately been, quarter-to-quarter

One last point for all to ponder here. While Gannett still believes the added earnings from a Tronc deal justifies even the $19 price point, there’s no doubt it knows it will have to work harder to make the purchase pay out. That means even more focus on cost-cutting in every way possible, from all the national consolidation to the news staffing levels at the Tribune papers. That’s just of many journalism questions, and community service questions here, questions that have largely gotten lost in the shuffle so far.

We do see the question, though, of news funding running quietly through this process. Just last week, the federal Consumer Financial Protection Bureau levied its largest fine in its short history. Wells Fargo paid $185 million for a slew of bad deeds. It was the L.A. Times’ revelations that led to that fine – and whatever consumer protection it offers.

Investigative journalism watchers were further buoyed as Gannett, announced the hiring of Chris Davis. Davis, a highly regarded, multiple Pulitzer-prize winning investigative editor, took on a new job as vice president of investigative journalism at the USA Today Network, Gannett’s new moniker for its network of newspapers.

That move indicates a new seriousness for Gannett. The company’s papers have done much distinguished work over the years, but the company overall has never been considered a model of investigative reporting. If Gannett does end winning the L.A. Times, Chicago Tribune and Baltimore Sun, among the nine dailies, that’s what most important here: What does the next generation of Gannett’s journalism look like?

 

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