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April 29, 2017

Triple Witching This Week @Gannett? 3Q Earnings, "Significant Layoffs" & Tronc Closure

Early in the month, I reported an “imminent” sale of Tronc, publisher of a trove of newspapers including big-city broadsheets like The Los Angeles Times, Chicago Tribune and Baltimore Sun, to Gannett, publisher of USA Today as well as a vast array of regional newspapers around the country. Given the always-to-be-expected unexpected delays in getting a deal done, “soon” would have been a better choice of words. “Soon” is still the best word, but now, we can attach a few specific considerations to the timing.

Next week appears to mark a witching hour, in which a trio of portentous elements and significant dates converges to create a massive and transformative shift in the fortunes of the daily news business.

Watchers with interest in the coming deal have been looking for the announcement that the U.S.’s largest newspaper company would finally snap up the company formerly known as Tribune Publishing, in what would be a $1 billion deal, Tronc debt included.

 

First published at POLITICO Media

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First: Keep your eye on Thursday, Oct. 27. That’s the date of Gannett’s third-quarter earnings call. Such reports, led by CEO Bob Dickey and CFO Alison Engel, are usually routine events. For newspaper companies, though, they’ve become difficult of late, as the cratering of print advertising has driven down financial performance. That will likely be the case Thursday as well for Dickey, as Gannett, along with the rest of industry, continues to see 5-8% losses in print ad revenues. Executives look for other lights to shine on the balance sheet, and for many it’s been possible at least to cite digital growth. Financial analysts on the call will expect Dickey to answer the Tronc question with a yes or no.

Second, Gannett is on the brink of announcing another downsizing. Given its tough financials – and with the added pressures brought up by a share price that’s dropped more than 35% since Gannett began its pursuit of Tronc in the spring – the company is moving to make “significant” headcount reductions, several confidential sources have affirmed. While Gannett continues to focus on non-newsroom consolidations of everything from back-office functions to printing and production, these cuts will also include journalists, as past cuts have. Only a relatively few Gannett executives see the whole picture of reduction here, but the new cut will be as high as 10% of newsroom cost at some properties, I’m told.

As one savvy, one-time Gannett insider observed, “The end-of-year timing of the cuts is a age-old method by Gannett of clearing the books for a more lucrative balance sheet in the coming year. Gannett, for years, has made a conservative analysis of the coming year and often cut in the fourth quarter rather than the first, as some media companies do. That is the system in which Dickey and his long-time trusted ally John Zidich [now president of domestic publishing] developed as managers in the company. Maybe it’s prompted by the need to put something in the reserves in the continuing quest for Tronc. Another factor could be that this is the first time Gannett has not had TV stations (now with the spun-off TEGNA) to boost up revenues in a big political year.”

The third and last element is blowing in from Chicago, where the deal, multiple sources say, has been held up by an endless pile of paperwork. Though both parties have agreed upon a deal, with price specified, probably in the $18.50-$19 range, their hold-up is paper, ironically, in an industry that continues to choke on it.
“Final” due diligence has been going on through the month, with contract (payables and receivables calculations) review and other financial and legal necessities. Those needed Ferro signatures have been slow in coming. So, Gannett has been left to decode the meaning of “yes,” though still believing the deal is indeed getting done. Will it get “done” done?

Is then Oct. 27 a deadline? Well, yes and no. Gannett could well – and may have – issued an ultimatum to the fickle Ferro: Get the deal done by then, or we’ll walk away. That wouldn’t be unreasonable given both the torturous negotiations and how business is usually done in M & A. Yet, gamesman Ferro might also well interpret that as a sign of Gannett weakness, and use it as leverage to pry more money out of the company.

In this most unusual of newspaper transactions, Michael Ferro remains the wild card. Multiple pressures lead to his final signature, though they have been in place for months. His Merrick Ventures partners want the deal done, and the threat of big Tronc investor Oaktree Investments-led lawsuit hangs, like a cleaver, over Ferro’s neck. Just as Gannett has remained patient over the months, redrawing from its earlier hostile P.R. tactics, Oaktree, a major player in the Tribune drama for years, has been waiting on the sidelines. Much better for it to take the money – with a big payout on its investment – then find it spending lots of money, and time, in the courts, litigating what it believes to be Ferro’s self-dealing over time and failure to represent his shareholders, as securities law requires.

What seemed like a straightforward move to acquire more scale – CEO Dickey’s major goal since he’s led the newspaper company split off from mother newspaper/broadcast/digital Gannett two years ago – has now turned into something of a high-wire act. He’s had to increase the price offered for Tronc’s papers by about 50%, since his first offer of $12.25. That price itself seemed a sizable premium over what the company’s shares were going for – six months ago. That’s meant more difficulty obtaining of debt financing, and more scrutiny of how his scale strategy is likely to play out, given accelerating declines in the newspaper industry.

The likelihood that significant new job cuts will coincide with his buying, and perhaps “overpaying,” for Tronc, only makes the optics harder. His case: The new cuts, like all the previous ones, are essential, given lost revenues and the need to maintain profitability levels in the investor marketplace. The Tronc deal, he’ll say, if and as it finalizes, simply is another smart strategic step in further reducing costs – that consolidation of newspaper operating costs from Florida to Chicago/Milwaukee. He’ll talk about how the addition of

Chicago and L.A. markets finally makes Gannett a real player in the national digital ad business, as its USA Today Network branding aims to get more traction.

That L.A. gambit – a core of Michael Ferro’s highly publicized strategies earlier in the year, strategies that have assumed a low profile over the summer, as I’m told digital consolidation efforts have slowed within the company – has become more core to Gannett, as well, it appears. While earlier on, it seemed like Gannett might mitigate its deal risk by reselling the L.A. Times, and perhaps the San Diego Union-Tribune, its national ad ambitions now seem to indicate otherwise. One wild card there to watch, as a deal finalizes. Might Patrick Soon-Shiong, the L.A. billionaire and long-time Times wannabe acquirer, wangle a buy of the Times – and keep the Times in Gannett’s editorial and ad networks. That possibility remains today, or on one of the difficult tomorrows to come.

Bob Dickey will tell the markets next week that at even this astronomical price, the deal will pay out. That payout has got to include at least a three-year scenario, and, few in the industry would like to write in ink a forecast for the actual shape, size and nature of the regional newspaper industry come 2020.

 

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