Does Tribune Publishing's management really think the company is going to get $6 billion?
The newspaper said late Wednesday that it rejected an $815 million takeover offer from Gannett, calling it an "opportunistic proposal" that "understates the company's true value." Tribune (which reported first-quarter earnings at the same time) included some handy charts outlining how it came to the conclusion that a 63 percent premium wasn't a great idea for investors who had seen the stock drop by about that much in the previous year.
Gannett's $12.25-a-share bid values the owner of the Los Angeles Times and Chicago Tribune at 4.6 times the company's projections for Ebitda this year (excluding certain items). That looks measly, Tribune points out, compared to the 35.2 times Ebitda the Financial Times fetched in its sale to Japanese publisher Nikkei last year -- a valuation that would imply a price tag for Tribune of about $6 billion. Tribune also highlighted the Washington Post's 2013 deal with Amazon founder Jeff Bezos at 11.4 times Ebitda. That would suggest Tribune is worth roughly $1.9 billion, or more than double what Gannett is offering.
For some context of our own, here's how analysts and executives described the FT and Washington Post deals when they were announced: "No valuation rationale," "friendship premium," "trophy assets," "too expensive" and "a real surprise." Of course, that was when a Japanese CEO eager to expand his media empire and a billionaire Internet mogul were doing the bidding; Gannett is neither of those things. (And so far, no billionaire has emerged from the wings to plop down a big chunk of change for all of Tribune without concern for the return on his, or her, investment.)
It's just not realistic for a buyer like Gannett to offer a lofty multiple. The USA Today publisher is seeking a Tribune deal as a way to increase bargaining power with advertisers, but perhaps just as importantly as a means to cut costs -- about $50 million of them. And it's worth noting that when technology entrepreneur and now Tribune Chairman Michael Ferro inked a deal with the company for an equity infusion in February, he paid roughly $8.50 a piece for 5.22 million shares. The price implies a valuation for Tribune of around 4 times Ebitda, which is below Gannett's offer.
Tribune did point out a slightly more reasonable comparison: A group of peers including the New York Times, Time Inc. and Wall Street Journal-owner News Corp. command a median valuation of 6.4 times Ebitda. That multiple would imply a valuation of about $1.1 billion, or roughly $22 a share for Tribune -- not far from the highest price the stock ever reached since the newspaper publisher separated from its TV-station sister in 2014.
Perhaps, if Gannett is feeling generous and can come up with some more synergies, it could offer a price in that range -- and a bump of some kind might help get a deal to the finish line. But to expect much more of a premium would be getting a little greedy.
Tribune has been trading at a discount to other newspaper chains -- and there's a reason for that. The company reported a net loss last year and it's not clear that it will make money on a GAAP basis this year (Tribune reported a loss of more than $6 million for the first quarter). The seven publishers on Tribune's list of peers aren't exactly rolling in the dough, but most were profitable in 2015, or are expected to be this year. And many of them were earlier movers on the digital and paywall front.
Tribune is in the early stages of a turnaround, with new management only on the job for a few months, and it's just starting to roll out new strategies like an artificial intelligence-based platform meant to help it make more money from its content. As such, it's a little hard to judge that effort. But there were nevertheless some causes for concern in its first-quarter earnings. Excluding the acquisition of the San Diego Union-Tribune, sales were down for the quarter. Even including that deal, revenue fell short of analysts' estimates as digital gains failed to make up for dwindling advertising dollars. Earnings per share also came in lower than anticipated.
Tribune needed to lay out a clear explanation for why it thinks it's worth so much more than what Gannett is offering. It didn't do that.
--Rani Molla contributed graphics to this story.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
The calculation for the Financial Times multiple appears to be based on trailing Ebitda, per available numbers at the time of announcement. The implied valuation for Tribune is calculated based on projected 2016 Ebitda, per the figures in the press release.
Calculation uses Tribune's stated share count of 32.64 million.
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