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April 25, 2017

Picking Up the Pieces of the Broken Gannett–Tronc Deal

As Gannett’s deal to buy Tronc unwound in real time Thursday, punctuated by historic one-day share price slides, those in and around the deal struggled for words to describe it. Collapse. Hit the wall. Game over.

However, for the money guys all around this deal, it’s a phenomenon they’ve seen before. It’s just a broken deal. The money guys don’t reach for the Kleenex, they open Excel. Broken deals mean one thing: opportunity. That’s why, as early as Thursday afternoon, new buying scenarios moved into the planning stages, ones of which we can already see, and detail, the outlines.

Some would now bury the Gannett–Tronc deal, but alternatives have emerged, several confidential sources have affirmed, that could satisfy both Tronc and Gannett shareholders. While the final shape and completion of a new deal is still speculative, all parties here have a powerful motivation to still get a deal done.

 

First published at POLITICO Media

Follow Newsonomics on Twitter @kdoctor

 

Square in the middle of them: Dr. Patrick Soon-Shiong, the Los Angeles billionaire and Tronc investor. As I reported just Monday, Soon-Shiong has been in “advanced talks” to take an ownership interest in his hometown Los Angeles Times, or an interest in the larger Gannett that is a reflection of his investment in the Times. Further, his notion of a “semi-independent” board overseeing the Times’ quality of journalism had gained currency. Soon-Shiong’s role in the almost-completed acquisition is unclear. What is clear now: his continuing interest – and his money, backed by a net worth of at least $10 billion – may now drive the next possible deal.

In a sense, it’s a simple calculus. Gannett apparently, doesn’t have enough funding to make the old deal work. Soon-Shiong does – and could buy the L.A. Times, and perhaps associated San Diego Union-Tribune – taking 40% or so out of the cost equation for Gannett. Gannett would still get Tronc’s seven other properties, including those it covets in Chicago (Tribune) and Florida (Sun-Sentinel and Orlando Sentinel), moving forward with its national scale plans. In fact, it is those other properties that provide more cost consolidation potential to Gannett, in any case.

Given the breach in the deal, the new deal could be “re-priced.” Instead of Tronc selling for $18 and change, the price could drop to the $15-16 range – still a relatively good deal for head-spinning Tronc shareholders.

That’s just one possibility for putting this Humpty-Dumpty of a deal back together again.

Of course, in all things Tronc – the name Tribune Publishing was rechristened with in June – the wild card is chairman Michael Ferro. Though Ferro had long fought Gannett’s hostile bid, the weight of investor pressure, lawsuit and potential (investor Oaktree Capital) lawsuit have led him to acquiesce. Ferro might even play a role post such a sale, either as an investor or board member, perhaps in a Soon-Shiong-led Times, or less likely in Gannett. (Even as the week’s action was moving forward, Ferro’s board again awarded his executives options that will pay off big-time in an acquisition, as Tronc just gave Julie Xanders, the company’s Executive Vice President and General Counsel, 19,714 shares from her employer. If the Gannett sale goes through, the shares would be worth several hundred thousands of dollars.)

In addition, other investors noodle, and calculate, their own plays. Gannett has moved from being a rock of the industry to one now in the soup with its peers – and that fact may have longer-term implications.

Certainly, Thursday’s drama has briefly re-riveted attention on the spiraling business decline of the newspapering. The New York Times pointed to the “wretched” condition of the newspaper business, given the Gannett’s announcement of its third-quarter earnings – a release that acted as the pulled pin in the grenade of the latest battle in this losing war that’s actually been going on for a decade.

As would-be dealmakers assess value, they try to make sense of Thursday’s bizarre cascade of actions. They try to parse how much this one-day intrigue is just that – and how much it marks a deeper spiral of inevitable decline and value loss. Let’s put that day into brief context.

As I’d written earlier, Thursday served as an internal deadline for Gannett, in its Tronc pursuit. CEO Bob Dickey, still moving tenaciously on his plan to grow Gannett to what he consider real national scale, planned to announce his purchase of Tronc’s well-branded newspaper properties, including the Los Angeles Times and Chicago Tribune, on his call with analysts. That call, he knew, would be a tough one. Gannett, like its newspaper peers, saw its third quarter go from the bad first half of the year to worse. The numbers – ones only his team and the, recently, the financiers backing his purchase of Tronc in a $1 billion deal – were ugly.

The collapse of print advertising – down 14.8% in the quarter – drove all the down numbers. 11.7% down in overall ad revenues, with EBITDA of $55.3 million, a major decrease of $41.7 million. In anticipation of the day, Dickey had done what he could. On Monday, he announced a two percent cost reduction throughout Gannett, jettisoning 380 or so full-time positions. He’d teed up the Tronc acquisition to bolster the central strategy of his two-year tenure: Gannett’s scale play and wide cost consolidation would lead to a rebound in the company’s fortunes.

Though Tronc chairman Michael Ferro had fought the Gannett buy most of the year, he had agreed to the sale. On Wednesday afternoon at 12:30 PT, the Tronc board was set to meet, and presumably approve the transaction at about $18.50 a share, a nice big financial win for many shareholders. That meeting, though, was abruptly cancelled. The reason, as Bloomberg’s Alex Sherman reported on Thursday: Jefferies LLC and SunTrust Banks Inc., the two companies financing the Tronc buyout had pulled out of the deal. Those companies – which I had reported became second-choice lenders to Gannett, after J.P. Morgan Chase and other first-tier banks said no to what they believed to be a risky deal — had seen the latest financials. Logically, they would have seen both Tronc financials, to be released Tuesday and Gannett’s. The conclusion: Gannett’s rosy projection of it being able to make the Tronc deal pay out over the next three years just didn’t pencil out.

Gannett issued its public report Tuesday morning, but Dickey had nothing to say about Tronc. In fact, in a highly unorthodox move, he refused to take analyst’s questions. As soon as the Gannett numbers were released, its share price began a steady day-long drop, a 17% drop to $8.21, its lowest price since 2009’s Great Recession. The darling of U.S. newspaper stocks had been chastened. In trading, today, it has hovered at the same price.

Meanwhile, Bloomberg’s report sent Tronc spiraling down 24% in a single day to $12.39, after seeing its trading freefall halted twice. (At its height the share price had reached $17.93 in anticipation of the rich Gannett deal.) Today, Tronc has so far moved up a bit, moving toward $13 a share.

Today, then, has become a day of reckoning and of waiting. Tronc investors assess the next deal, hoping to avoid a further loss of value to the $8 range – where Tribune Publishing stock sat before Mr. Dickey launched this wild adventure. For the newspaper industry, and all who care about it, it is the re-framing of the Gannett tale that is on everyone’s lips.

 

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