October 26, 2016

With Gannett’s third quarter earnings due Thursday, there is at least a chance that its six-month bidding drama to take over Tronc will finally be resolved.

The deal still makes all kinds of sense, especially for Tronc shareholders. But I can’t help wondering whether Chairman Michael Ferro may be head-faking with all those serious negotiations and still wants to try a turnaround his way.

Let me count the reasons the combination makes financial sense (as I first wrote when Gannett made it’s initial bid April 25):

1. The price is right. Gannett has upped its first offer of $12.25 a share to $15 and is reportedly now willing to pay north of $18. That is more than double what then-Tribune Publishing was trading the Friday before the bid ($7.52). What a sweet return for everyone — actually a bigger percentage premium than Rupert Murdoch’s offer the Bancroft family couldn’t refuse for Dow Jones nearly a decade ago.

2. Tronc’s value, part one: The company’s 11 properties, including the Los Angeles Times and Chicago Tribune, would be a crown jewel for Gannett’s announced strategy of scaling up by acquisition for a few reasons: Plenty of synergies and cost savings, an expansion of its national footprint into California, a stronger story to national advertisers and excellent journalism to expand the offerings of the USA Today Network.

3. Tronc’s value, part two: Let’s stipulate that the Tronc name and the goal of 1,000 AI-produced videos a day have been badly explained and widely ridiculed. But take away those distractions — and steps toward producing more video, drawing on the best tech tools to speed the assembly and distribute them in a targeted way, is something Gannett, along with most other publishers, wants to do right now.

I have a hard time judging the extent to which the Tronc vision is being implemented. But Ferro and company do not seem to be running the joint into the ground. And efforts of the previous Jack Griffin-Denise Warren regime to catch up on digital basics are having some revenue payoff this year.

I was also told over the summer by Sandy MacIntyre, the Associated Press’s director of global video news, that the notion of a new L.A.-led international entertainment digital report (one of Tronc’s three announced new strategies) is not half-bad. A robust video-oriented service with A-list movie celebrities at the center, MacIntyre said, is a great opportunity and a market with room for more players.

4. Tronc’s legal troubles go away. I’m not a lawyer nor privy to what Ferro’s legal advisors are telling him. But by my count, he has been sued at least twice by shareholders who objected to new stock being issued diluting their holdings. And two substantial minority investors have now said publicly and forcefully that Ferro needs to get back to the negotiating table and extract a better offer from Gannett. That much he has done.

The day a deal goes through, none of these parties would seem to have much to complain about — let alone sue about.

5. The market says yes. Tronc stock closed yesterday at $16.95. That’s a whole lot closer to the $18.50 a share on the table than the $7.50 before Tribune Publishing was put in play. (I don’t necessarily think that Tronc would fall all the way back to that level should Gannett withdraw its bid). The market still seems to expect a transaction.

Conversely Gannett shares closed Tuesday at a year-to-date low of $10.00, compared to $16.74 Jan. 6. That decline reflects some disenchantment with Gannett’s growth strategy in light of a very rough revenue year.

But in a backward way, I see it as another indicator that investors expect the deal to be completed. The market tends to back away from companies making a big acquisition, waiting to see how the new property is digested. (See AT&T this week).

6 Gannett has a safety valve. I cannot figure out what combination of cash and borrowing would finance the deal. But if this over-extended its balance sheet, Gannett could easily sell some properties and reduce leverage — unloading smaller Tronc papers or others in its 100-plus regional stable.

The upcoming earnings reports (Tronc’s is due after the market closes Tuesday) also have a moment-of-truth potential.

In announcing a 2 percent staff cut earlier this week, Gannett telegraphed that results will not be good. But bad enough to force management to pull the plug on the offer?

Current Tronc management has twice said it will generate $170-175 million in 2016 EBITDA (earnings before interest, taxes, depreciation and amortization). A big miss would call their credibility into question and up pressure to take Gannett’s money and exit.

The cadre of top executives Ferro installed all have very generous separation packages in place. (And this may be a good place to note that a legitimate point of golden parachutes is to give executives financial security if they accept a takeover bid that will put them out of a job).

Ferro and his co-investor, Los Angeles billionaire Patrick Soon-Shiong, are another story. Each would get a fine and quick return on the Tronc stock they have bought. But both have given convincing signals of wanting time to execute their futuristic vision.

As I observed in an earlier post, Ferro and Soon-Shiong either really, really mean it or are great poker players patiently bidding the Gannett offer up.

At risk of betraying a bad attitude, I find myself, like weary commentators on the election, about ready for this phase to be over.

I would still bet on a deal, but I’m more 60-40 than 80-20. (Veteran analyst Doug Arthur expressed similar reservations Tuesday).

Should the takeover happen soon, a host of fascinating questions follow. How and how quickly could Tronc be integrated into Gannett? What variations of the Gannett way would be appropriate for two regional papers far larger than any the company has owned?

Most of all, the sequel would be a tough test for the expansion strategy Gannett CEO Bob Dickey began putting into place well before the company separated from its parent’s television and digital holdings (now TEGNA) in June 2015.

I foresee a wave of “Can Dickey deliver?” stories coming. You read it here first but not last.

Correction:  The original version of this post identified Michael Ferro as Tronc’s CEO.  He is Chairman and a major shareholder.


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Rick Edmonds is media business analyst for the Poynter Institute where he has done research and writing for the last fifteen years. His commentary on…
Rick Edmonds

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