Tribune’s Anti-Gannett Strategy: Tronc, The Lagos Gambit and Stalling
Now, in the likely last chapters of the Tribune saga, parody precedes event.
As Justin Dearborn – sans his boss, Tribune board chairman Michael Ferro – outlined the company’s new “billion-dollar” thinking Wednesday, a column in LA’s Downtowner proceeded to steal his strategic thunder.
Entitled “Inside Michael Ferro’s secret content monetizaton engine,“ Jon Regardie’s piece plumbed what he surmised to be the finer points of the “content monetization engine” strategy Ferro has outlined only in hazy ways so far, and only to a journalist in his own employ.
Dearborn, then, actually offered only a few details more than Regardie’s comic version, in his Wednesday talk to financial analysts.
First published at Politico Media
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As the new CEO explained the upside of Tribune Publishing’s down financials, he also limned the new Tribune transformation strategy, though his conference call audience was small. Only three financial analysts signed in for the call, an unusually small number and a reflection of how devalued TPUB has become as a company.
Tribune’s new strategy, Dearborn argued, gave his board ample reason to reject Gannett’s recent offer to buy Tribune for $815 million, including debt assumption, a whopping 63% premium.
Chairman Ferro – absent from Wednesday’s call, as he was for the company’s overall 2015 report in March — has talked of harnessing Tribune user data to create large new revenue streams.
Dearborn explained that this new initiative would be called “Tronc.” “Tronc is a transaction-based revenue business model that we believe allows us to leverage our massive content creation capabilities more effectively.” (Tronc is a British expression for pooling tips, or more generally, pooling resources.)
The CEO talked about the Internet riches harnessing that technology could bring Tribune by pointing to the example of Buzzfeed, though that comparison misses many of the almost innumerable differences between a legacy newspaper company — even if one with the time and money to really “transform” itself — and a venture-juiced, digital-only, social news success, which is itself experiencing a bit of a stumble.
“In an area where content is being coveted and beginning to be recognized as more valuable than the platform itself, we have a great position to once again be rewarded for creating original, curated or verifiable content,” he said. “It has been reported that BuzzFeed raised money from NBC Universal at a $1.5 billion valuation. This is just one example of the billions of billions of dollars being invested in ad tech and content creation. BuzzFeed and other digital and native companies like them have innovated traditional publishers to-date, but we believe we have a fundamental advantage and that we create more original curated content.”
If “Tronc” made its public debut with this call, it was nevertheless The Los Angeles Times that took center stage in what we may call, probably briefly, the Lagos Gambit.
Lagos, Hong Kong, Mexico City, Moscow, Mumbai, Rio de Janeiro and Seoul were named as new overseas bureaus for the paper, chosen because they are centers of the global entertainment industry. It’s at first blush a fitting global topical franchise strategy in that it matches up with the specialty of the Times, Hollywood’s broadsheet.
The Times makes up between 30-35% of Tribune Publishing’s revenues, though a lower percentage of its profits. In now separating the Times as its own TPUB business unit from the rest of Tribune’s other dailies, Dearborn talked of it becoming “a megabrand all by itself” and “a global revenue generator.”
Consider those plans a showing-the-flag first defense against the Gannett offer, and ones that will likely provide a curious footnote historically. In fact, the notion of adding new international staff – however admirable it may appear to a nation that could use more global coverage – offered the odd resonance of another newbie Southern California publisher offering outsized expansion plans.
Just two years ago, Orange County Register publisher Aaron Kushner moved first into neighboring Long Beach and then greater L.A., after hiring much reporters to cover his Orange County communities. That foray – one without much of a business plan – ended in tears and bankruptcy.
Tribune’s plan seems smaller and more exotic, but it’s impossible to see how such coverage brings in any significant reader or advertising revenue in the next couple of years. The New York Times – well ahead of the L.A. Times in global brand appeal, breadth of international coverage and a five-year-established successful paywall – is just starting to monetize its global play, after many fits and starts, to take just one example of what the new Times strategy would have to compass before it is successful.
And revenue is what Tribune Publishing, a company living on borrowed financial time, needs. In its first-quarter results, it reported an ad loss that may lead the industry, most of which has yet to report. In the first quarter, it lost one of every eight dollars in ad revenue, or 12.4%, when comparing same properties to same properties (the performance of its spring, 2015 acquired San Diego Union-Tribune properly aside.) Overall revenues, on the same basis, were down 7.5%. Net income – when adjusted for severance and reorganization costs, the kinds of expenses that have become standard for many chains – showed a $6.6 million gain; without the adjustment, the company lost $6 million for the quarter.
Against those bleak financials and outline of a publicly sketchy new strategy, CEO Dearborn was able to announce that the TPUB board had unanimously rejected Gannett’s offer. In the war of words that has seemed unseemly in the staid old newspaper trade, Dearborn added on in a letter, calling out Gannett’s “disingenuous comments” and “opportunistic” offer.
Of course, it was opportunistic: Ferro himself presented the opportunity. Gannett, in fact, had been vetting the possibility of a Tribune buy in 2015, my confidential sources report. Closing his first major acquisition of Journal Media just last month, Gannett CEO Bob Dickey seized the time to pounce — after Ferro’s own opportunistic putsch won him effective control of the company at the beginning of the year.
Consider the timing of a bid. Dickey knew Ferro, with his own dreams of building a digital newspaper-based company, would loathe a buyout. Gannett waited until Tribune released its annual financial filings in March, in order to get the best-possible public view of its deteriorating financials (a look that may have been clouded by the serial misadventures of Tribune financial irregularities , disclosed here (POLITICO: “Fixing the financials at Tribune Publishing”), and which resulted in the firing of the TribPub chief financial officer).
Then, Dickey gamed out his timeline. He knew that Ferro would move to assemble an even-friendlier-to-Ferro board on June 2, when two current members step off. In early May, then, Gannett and Tribune find themselves right in the middle of the opportunity (or opportunism’s) window. The timing explains Gannett’s aggressiveness, or in corporate speak,, “hostility,” in offering Tribune a bear hug it would have a hard time not embracing.
Make no mistake, though, that this foray isn’t over.
Consider other language in Dearborn’s letter: “After thorough consideration, the Board has unanimously concluded that it is not prepared to engage with Gannett about a combination of our companies based on the value you indicated in the Proposal.” Note: “Based on the value you indicated.”
Gannett will up its price some, though it can’t be happy with today’s financial report. Price and pressure are now the name of the game.
Oaktree Capital Management, TPUB’s second largest owner and investor that shied away from pushing for a sale last year, has apparently had enough. It floated, confidentially, its support of a sale this week. Other institutional shareholders are likely to agree, privately or publicly.
Then Gannett has already asked Tribune shareholders to withhold votes for the current slate of Ferro-approved directors, to be voted in the run-up toward June 2.
Further, there’s always the possibility – or threat – of lawsuit. Such a suit could come from big shareholders and/or Gannett. After all, the number one duty of the public company boards is to maximize shareholder value.
Interestingly, on Wednesday’s call, there was no mention of the two banks, Goldman Sachs and Lazard Freres, which Tribune said it hired to work its way through the Gannett offer. It’s not clear, then, how and with whose help, the company is assessing its own strategic value now.
Whatever the journalistic merits or demerits of Gannett gaining ownership of Tribune papers, there’s no doubt about the high financial quality of its bid. It’s a bona fide, all-cash, huge premium offer for a company whose own financial prospects have dimmed ever since mother Tribune Company orphaned it with significant debt and a kick in the pants in mid-2014.
In fact, as Gannett’s Dickey has pointed out, the board itself has to consider its own valuation of its own share price.
In fact, it was Ferro’s purchase of 16% of TPUB back in January that established a new market price for the stock. As the TPUB board cut out the company’s dividend simultaneous with it sale of (diluting) shares to Ferro, it had valued itself at about $8 a share. What might justify now believing that $12.25 a share – Gannett’s offer – is an insult, to be summarily rejected? Board members, of course, aren’t talking, but have been swayed apparently by the picture that Michael Ferro and Justin Dearborn paint for them, a picture of untapped riches in the L.A. Times branding and use of “big data”, sources of big money that have eluded everyone else.
Ferro still stands strongly in the public background here, but the stonewalling of the Gannett offer seems entirely characteristic of the tech entrepreneur (“Can Gannett pry Michael Ferro from Tribune chair?”)
Likely, this will be a test of wills. Tribune chairman Michael Ferro will try to block Gannett, while Gannett must decide how much public and legal pressure it is willing to exercise to win the company. I expect this test of wills will be decided sooner than later. In this case, while Tribune management passions may be high, the numbers are on Gannett’s side — and numbers usually triumph in these cases.
