The long and winding road to the GateHouse-Gannett merger — as told to the SEC

September 6, 2019
Category: Business & Work

SEC filings are typically dense bundles of legalese and boilerplate. The 384-page prospectus for the impending merger of GateHouse and Gannett, registered Aug. 29, is no exception.

But the document also includes a remarkably detailed account of negotiations that spread over seven months and dozens of meetings before terms of the deal were made final and announced a month ago.

Gannett, for most of that time, conducted a parallel negotiation with a potential alternative partner, “Company A.” Gannett apparently explored that option as a lever to negotiate hard for a favorable sale price and executive leadership lineup with GateHouse parent New Media Investment Group.

Company A is of course not identified. But a reasonable guess would be that it was Tribune Publishing, itself openly on the lookout for a merger over the last year. If that’s so, what might have been was a combination of Gannett’s USA Today and its 110 regional papers with the Chicago Tribune, Baltimore Sun and Trib’s other, mostly big city, titles.

Though Gannett ended up being bought by its smaller but better financed partner, New Media, the alternative deal would have had Gannett buying Company A.

The most persistent issue in the negotiations was price. Gannett’s board insisted until the last few days that it would not accept less than $12 a share. (It had earlier in the year rejected an offer from Media News Group/Digital First for that amount, so taking less might have courted a lawsuit).

New Media Investment pushed back that unexpected costs had been identified and $12 was too much. In the end it agreed to $12.06 a share, a nominal premium over what Gannett had turned down.

But there was a twist. The offer was part cash, part shares of New Media stock. The prospectus identifies as a risk that New Media shares might fall in value in the interim as more work was done finalizing the deal and getting both companies’ shareholders’ approval.

That is exactly what has happened. New Media shares fell by 25 percent in the days after the Aug. 5 announcement. They have rallied some since, but not back to where they were.

So Gannett shareholders now stand to get less than the $12 a share that its board and management had insisted was essential.

That makes it all the more critical for the two companies to realize cost-saving “synergies” estimated at $300 million. A big shortfall, identified as at least a risk in the prospectus, would negate much of the projected benefit of the transaction.

It was financed by a $1.8 billion loan from Apollo Global Management, a private equity firm, at 11.5 percent interest. New Media CEO Mike Reed has said that he hopes to pay down some of the principal early as well as the interest — which would require outstanding results or some selloff of assets.

The narrative makes clear that the two companies and their financial consultant/advisers carefully evaluated details of projected savings as the deal took final shape. So it’s safe to assume that consolidation scenarios and layoffs have already been mapped out — though they won’t actually happen until the deal closes later this year.

Another section of the report indicates that neither company, standing on its own, would expect 2020 revenues to be higher than this year’s, and then revenues would stay flat in subsequent years through 2025 — same if they are combined. But profits, as measured by cash flow, would jump if the merger goes through — another indicator of how crucial reducing expenses will be.

Other nuggets from the deal chronology:

  • “Preliminary talks” between Gannett and several companies, including New Media, took place in the previous two years. In early 2018, Gannett explored buying some of New Media’s assets, though it never made an offer.
  • When Media News Group’s hostile bid was announced Jan. 14, representatives of Company A called later the same day. Reed called Bob Dickey, Gannett’s then-CEO, on Jan. 16, suggesting New Media could offer a more favorable deal.
  • Early on, the two sides agreed that “digital is the best and fastest path to resume growth and to preserve and support great journalism” and that together they could “accelerate a digital transformation.” Reed said in his first discussion the day of the merger that only 25 percent of their combined current revenue comes from digital.
  • In April and May, “social issues” beyond the financing were discussed. As the notes of a May 14 meeting put it, that day’s update of New Media’s proposal indicated “it would look to Gannett senior management to help populate the combined company’s ranks.” Ultimately Reed agreed that Dickey’s successor, Paul Bascobert, would be operating CEO of the new company and that Gannett CFO Alison Engel would fill that job. The merged company will assume the Gannett name, continue USA Today and the USA Today network brands and be headquartered in Gannett’s building in suburban Washington.
  • On April 24, Gannett informed the CEO of Company A that it was postponing “any further discussions of a potential transaction.” Those talks never resumed.
  • As late as Aug. 3, New Media’s representatives presented a “final offer” of $12 a share. It was not accepted by Gannett. When they agreed to increase to “an implied price of $12.06 a share,” deal terms were completed and announced Aug. 5.

A later section of the report, highlighting reasons the Gannett board recommends shareholders approves the merger, notes: “the risks and uncertainties associated with, and inherent in, maintaining Gannett’s existence as an independent company.”

The same section lists as a plus for the merger that new hire Bascobert will be CEO of operations. It praises “his clear strategic vision and his track record of successfully pivoting companies toward a marketplace model and driving financial and operational performance for multiple marketing solutions companies and well-established media brands.”

That jargony sentence appears to be a reference to Bascobert’s most recent gig at wedding vertical, The Knot. Simplifying slightly, he was part of a team that converted The Knot from a web site that sold advertising to a new revenue model allowing couples to order directly and charged vendors all over the country to be listed on the site. The Knot was then merged with another similar site and sold to a private equity group.

It is not clear to me how that strategy transfers to a company with 263 daily papers and their websites. A Gannett representative told me Bascobert will not be available for interviews at least until the deal is approved by shareholders.

A further hint of the planned future comes in Gannett’s self description at the start of the prospectus. The first sentence reads: “Gannett is an innovative, digitally-focused media and marketing solutions company committed to strengthening and fostering the communities in its network and helping them build relationships with their local businesses.” (The two following sentences do mention journalism.)

The filing is meant to make the case to shareholders of both companies to vote for the merger, but dates for those meetings have not yet been set.

Because of the New Media stock price decline, there has been speculation that the deal could be voted down (or otherwise cancelled). Possible, but I would bet on approval. And at that point the two companies appear ready to pull operations together and roll out the promised “synergies.”

Rick Edmonds is Poynter’s media business analyst. He can be reached at redmonds@poynter.org.