Why Gannett is likely to win its takeover bid for Tribune Publishing

(Updated to include Gannett comment that it will keep Tribune Publishing intact)

Despite initial resistance from Tribune Publishing's management, financial logic suggests that Gannett will ultimately succeed in acquiring the company.

Consider that Gannett's $815 million offer is a 60 percent-plus premium on the trading value of Tribune Publishing. Tribune's board has a fiduciary duty to consider the proposal (as it has indicated it will). And the board is obliged to accept the offer unless it has a plausible alternative for similarly increasing shareholder value.

By the Wall Street Journal's calculation shareholders would get about $400 million. The rest of the value of the deal is in assumption of debt and other liabilities.

Tribune Publishing stock was trading up more than 55 percent this morning, in the range of $11.85. That doesn't go all the way to matching Gannett's bid of $12.25 a share — but it gets close and represents a big jump from Friday's closing value of $7.52. (Gannett's shares were also up slightly).

So Wall Street is saying that a Tribune takeover, while not a sure thing, appears very likely.

My colleague Jim Warren reported earlier today that Tribune Publishing management was surprised and resistant to Gannett's offer.

A merger would surely dash the hopes of chairman Michael Ferro and his chosen CEO Justin Dearborn to try to build some sort of international digital news presence based at the Los Angeles Times.

But one can view Gannett's bid as an end-run around Ferro and Dearborn, appealing directly to other shareholders. The last paragraph of a letter to Dearborn accompanying Gannett's announcement says as much:

Given the substantial value represented by our offer and the other compelling benefits of a combination of Gannett and Tribune, we are confident that Tribune’s non-management stockholders will support our proposal.

One could also read mixed signals between the lines of Tribune Publishing's response. On the one hand, a press release contends that the company is in the early stages of a well-conceived turnaround plan. But the release also says it has hired Goldman Sachs as financial adviser and legal counsel to consider options.

The response is more of a maybe than a declaration of intent to fight.

Also, while today's action may have been a surprise, the offer letter was received April 12. So Tribune already has had two weeks to think it over. Gannett's semi-hostile takeover announcement today appears to reflect a judgment that management was dragging its feet in responding.

So why does Gannett want Tribune publishing? And what would it do with the company's 11 major dailies if it is successful?

Gannett said in its release that it expects it could realize $50 million in "synergies" — revenue increases and cost saving. Some of the savings could be simply from combining business and tech systems and eliminating duplications in management. But I would guess that Gannett would downsize staff at the individual papers — including in the newsroom.

Since its spinoff from the company's broadcasting division (now TEGNA) last June, Gannett has openly pursued acquisitions. A recently completed $280 million deal brought the Milwaukee Journal Sentinel and the former Scripps papers into the fold, now numbering 107 regional dailies and USA TODAY.

But CEO Bob Dickey told analysts in an earnings conference call earlier this year to expect more — and soon.

Besides the savings, Gannett could extend its content strategy of making sections of USA TODAY part of the regional papers and coordinating investigative projects and other news through what it is calling the USA TODAY network.

And the extended network footprint would add reach for national advertisers, print and digital — making the biggest one-stop newspaper audience buy even bigger.

As I reported earlier, Gannett is thought to especially covet Tribune's Sun-Sentinel in Fort Lauderdale and the Orlando Sentinel. They would join a Florida group that already includes Tallahassee, Pensacola, Fort Myers and now, with the Journal Media Group addition, Naples and the Vero Beach markets.

The Baltimore Sun and Morning Call of Allentown, Pennsylvania also fit a mid-Atlantic Gannett footprint that includes papers in Wilmington, Delaware and York, Pennsylvania and is up the road from company and USA TODAY headquarters in McLean, Virginia.

The Chicago Tribune and Los Angeles Times are a less obvious geographic fit and dominate substantially larger markets than Dickey had said Gannett was targeting. The company probably has plans to integrate those two operations. However, neither seems a match for substituting sections of USA TODAY coverage of national, culture, business and sports news for what the Tribune and Times staffs are producing.

To date, Gannett has not made big changes or newsroom cuts at the Milwaukee Journal-Sentinel, a strong regional paper with a prolific investigative reporting unit.

Also, Gannett would have the option of selling either the L.A. Times, the Tribune or both to local interests if the takeover goes through. That was McClatchy's strategy 10 years ago when it bought Knight-Ridder and soon after spun off the Star Tribune of Minneapolis, the San Jose Mercury News and other titles.

A Gannett spokesman told me Monday afternoon that the company will keep Tribune Publishing intact if its bid is successful rather than entertain bids for the Times and Tribune. He added that discussing details would be premature at this stage.

My bullish view of the odds for the offer going through needs a couple of qualifiers. Tribune's release alluded to "a number of contingencies" that came with the bid without specifying what those are. One of those points could be hard to resolve and make the deal fall through.

Tribune Publishing's board also has the option of seeking out another offer, possibly from a hedge fund white knight who would keep management and their plans in place (Gannett might then choose to up its bid).

Also one ought not to assume that the Department of Justice will quickly give the merger a green light. DOJ blocked Tribune Publishing's bid for the Orange County Register and Press-Enterprise of Riverside several months ago and was also slow approving the Gannett-Journal Media deal.

In both instances, the objections concerned too much concentration in regional markets (Southern California and Wisconsin). How the DOJ will feel about the huge national presence Gannett contemplates is untested.

Already this morning Common Cause and former Federal Communications Commissioner Michael Copps have issued a statement objecting to the deal on the grounds that it would reduce both choice and the volume of news coverage for readers.

So there remain a number of ways this deal could run off the tracks. Should it be killed, I would expect Tribune Publishing stock to give back the 50 percent-plus bump it's seen so far today.

That would leave a bunch of unhappy shareholders — most of them large institutional investors. I am betting on those share owners to flex their muscles by any means possible to get the deal completed.

Editor's note: Poynter receives funding through a training partnership with Gannett. The company has no influence over our news content.

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