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March 25, 2017

With Soon-Shiong Investment, Michael Ferro Pulls Rabbit Out of His Hat

Say one thing for Michael Ferro: the would-be showbiz aficionado can certainly pull a rabbit out of a hat.

The chairman of Tribune Publishing proved it again Monday when he got his board to reject much larger rival newspaper company Gannett’s second offer of $15 per share to buy the company, thanks in no small part to the old magician’s trick of misdirection.

The board decision was announced contemporaneously with the big news the company had brought in a $70.5 million investment from Patrick Soon-Shiong, through his Nant Capital company, an investment through which Soon-Shiong becomes both Tribune’s vice-chairman and its second-largest shareholder.

That is, with one move, Ferro managed to push his second biggest shareholder agitating to engage with Gannett on a sale—Oaktree Capital Management—down a notch on the cap table (it had been in the top slot until Ferro’s own January investment put him in the lead position); and to bring in a new infusion of cash for the company’s strategic plans. If the trick works, it would have leave shareholders thinking, as he does, that Gannett is trying to “steal” a company with a perfectly bright future on its own.

 

First published at Politico Media

Follow Newsonomics on Twitter @kdoctor

 

Soon-Shiong paid the same $15 a share that Gannett had offered—although, curiously the investment is matched up with a separate business deal between Tribune and Nant.

Soon-Shiong is L.A.’s richest individual, his net worth valued at more than $15 billion. And this was not the first time he’d eyed the prize of the Los Angeles Times, Tribune’s most prominent newspaper. In November, he was reportedly “considering” a bid for the paper.

Further, Ferro and Soon-Shiong (who will own 12.9% of Tribune) will now control almost 30% of the company. Just as Ferro had tried to obscure the board’s rejection of Gannett’s first ($12.25 per share) offer with the unveiling of his Tronc tech future, the Chicago-based tech entrepreneur aimed to control the news cycle today.

And, so far, he has. While the press scurries to figure out the surprise emergence of health technology entrepreneur Soon-Shiong as a major Tribune player and to make some sense of what kind of next-gen-health tech-applied-to-news-tech gizmos he brings along, would-be acquirer Gannett “reassesses,” to quote one company release.

Gannett’s reassessment is understandable. We’ve got to wonder if Gannett resolve is flagging a bit. Ferro’s trick to keep Gannett’s hands off his company is as likely to work by sending Gannett away with buyer fatigue as it is by a rejection from the board, at this point.

Simple enough, if impressive. But assessing what has seemed to the public to be a very entertaining corporate pissing match, one big stealth issue has been near forgotten.

Even as Gannett has eyed Tribune over the past year, the business fortunes of newspapering have further deteriorated. Print ad loss accelerations magnify the basic issues of survival in this beleaguered industry. That’s nothing new, of course, and in 2015, it looked like further consolidation would act on that marketplace understanding. Gatehouse, with Fortress Investments funding, took a lead in consolidation, with Gannett, then moving rapidly as well, with the announcement of its acquisition of Journal Media late last year.

While the odds still favor consolidation, even Gannett and Gatehouse should be sobered by the worsening economics of the business. Yes, consolidators can take out lots of costs – I’ve figured Gannett can take $150 million or so out of Tribune – but those savings themselves could well be swamped as print advertising does what looks like a dance with death.

For its part, Gannett may decide to walk away from this deal, which at a greater-than-$15 price point may be getting too rich and too risky. After all, there are more fish in the sea. With print ad decline now in double digits at numerous dailies, others boards of directors may wave in Gannett CEO Bob Dickey. McClatchy, which has long done a balancing act, trying to navigate a digital future while paying down it with its outsized debt, could be next on Gannett’s shopping list. For the first quarter, McClatchy reported its print ad revenues down an astonishing 14.7% — two points lower than Tribune Publishing’s.

Gannett has found itself exasperated and plainly has a big decision in front of it. Dickey has run into an irrational actor in Michael Ferro. What new investor wouldn’t take twice the price for shares he bought just four months ago? What board wouldn’t engage with the biggest newspaper company in the country to complete an all-cash transaction?

Yet, Ferro’s evasions have so far worked. Just recently, he offered to provide Gannett with deeper financials — but only if it agreed not to wage a “proxy fight” for the company, as Gannett perceives the language. As I’ve written, that proxy fight could come as late as this time next year. Given that condition, the offering of the financials provided better optics for Tribune, but are ultimately meaningless, Gannett believes.

Late Monday, a Gannett spokesperson further explained to me:

“The NDA [non-disclosure agreement] does not have an explicit restriction on initiating a proxy contest, but the practical impact of its restrictions and limitations on Gannett’s ability to make public disclosures regarding Tribune would make a proxy contest unworkable. Under the form provided, Gannett would not be able to include any required disclosure in a proxy statement or tender offer document, for example, relating to discussions or negotiations that had previously occurred without Tribune having an ability to review and comment on the disclosure. There is also a two-year restriction on having discussions regarding Tribune with any ‘person’ with whom Tribune has a relationship other than in the ordinary course. ‘Person’ is defined to include the media. Gannett and its advisors are preparing a markup.”

So we see that there may be some negotiation going forward – at least about the NDA.

And that’s what Tribune says it wants: proposed revisions. In its statement to me later Monday, a Tribune spokesperson laid out the company’s position on the document:

“The mutual Non-Disclosure Agreement provided by Tribune Publishing to Gannett relates to the sharing of information in pursuit of a potential negotiated transaction and does not prevent Gannett from continuing to pursue its current withhold campaign or a potential future proxy contest. If Gannett has any concern about the provisions of the mutual NDA provided by Tribune, the customary way to express its concern would be to respond to Tribune with proposed revisions to the agreement.”

Ferro’s bringing in of Soon-Shiong, and his $70 million at that $15 price point, clouds Gannett’s strategy.

Are Ferro’s many moves protected within securities law, including Gannett’s broadside last week that Ferro had been willing to sell to Gannett, if he himself could gain financial and operating leverage in the expanded company? As Gannett and major investor Oaktree have weighed, and all-but-threatened, lawsuit to force the Tribune board into negotiation, that’s a key question.

Oaktree, long silent on Tribune Publishing corporate matters since its spinoff from the old Tribune Company two years ago, has been newly activist. It has called on the board to talk with Gannett, and today issued a call for that board to put together an “independent committee” to decide on the path forward.

Over the weekend, Oaktree apparently rejected a bid by Ferro to sell Oaktree’s shares directly to Soon-Shiong, at the $15 price point. Oaktree, which had seen its stake, diluted once already by Ferro’s own buying into the company when new shares were issued in January, rejected that overture. Why? Consider Oaktree’s rejection a mix of believing it can get more from Gannett, a deep distrust of Ferro and a concern for its own reputation. If Oaktree emerged with a $15 payout, but left other shareholders less likely to see a deal, the company’s standing could be damaged.

So, the big question: What’s next? Gannett would like to see a “withhold” vote of more than 25%, as it has asked shareholders at Tribune’s upcoming June 2 meeting to “withhold” their vote on directors, as a symbol of protest in not negotiating with Gannett. The company could sue, but hasn’t seemed reluctant to file.

Oaktree could take that lead, and in its rejection of Ferro’s transaction offer, may signal that it will do so.

Such a suit could take on those multiple concerns about how fairly Michael Ferro, though officially “non-executive chairman”, has represented shareholders’ interests.

Further, the filing of a suit would itself further increase pressure on the Tribune board to engage in negotiations; by the letter of the last press release, its rejection of the second Gannett offer wasn’t unanimous, though its first rejection was. Is the board cracking?

[Clarification] Late Tuesday, a Tribune spokesperson said that the board’s second vote had been unanimous, though the company’s press release on it had failed to note that. Before publication of this story, given that release, I had asked Tribune’s strategic communications advisor if it would comment on the vote being less than unanimous, and it didn’t respond on that point.]

In addition to the poison pill adoption, the charge of Ferro “self-dealing” and failure to negotiate a bona fide offer, Ferro’s latest maneuver may draw scrutiny.

Within Tribune’s press release today on the investment, the nature of Soon-Shiong’s involvement got more complicated.

From the release:

“Tribune Publishing also announced it has entered into a term sheet with NantWorks, LLC for a co-exclusive, non-transferable, fee-bearing license pursuant to which Tribune will receive access to over 100 machine vision and artificial intelligence technology patents for news media applications as well as access to and use of studio space made available by NantStudio, LLC, a subsidiary of NantWorks, LLC. Under the term sheet, Tribune Publishing will issue to NantStudio, LLC 333,333 shares of Tribune common stock and will be entitled to retain the first $80 million in revenues derived from the licensed patents royalty free, after which Tribune will pay to NantWorks a 6% royalty on subsequent revenues.”

So, in part, the new investment is a business deal.

How might it work? It sounds more long-term than an immediate salve for Tribune’s financial issues.

Soon-Shiong provided some vision to how that deal may work today, to Bloomberg’s Gerry Smith: “You’d be bringing to life whatever you see on the newspaper. Every page, every picture, every commercial is merely a TV channel activated by the picture itself through machine vision recognition.”

The deal is classic Ferro, its value impossible to determine by shareholders, or anyone else at this point.

Strip it all away and the Tribune board is now being asked to choose between Ferro’s Tronc strategy – now somehow augmented by the Soon-Shiong technologies – over a $15-plus cash deal.

If Tribune shareholders don’t show significant numbers to “withhold” their votes for board seats on June 2, then those shareholders, too, will have bet on Michael Ferro’s sketched out vision of an artificial intelligence future over cash in hand.

In the meantime, or soon thereafter, Gannett itself – battle-hardened – may well decide that Tribune’s just too much trouble, not worth the time, money and effort to contest.

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