After a summer lull, Gannett appears to be reviving its pursuit of fellow newspaper publisher Tronc.
Last we heard from this takeover saga, a larger-than-expected percentage of Tronc shareholders had withheld their support for the company's board slate, making it clear that they were fed up up with its strategy of using every trick in the book to try to thwart Gannett's takeover advances. Shareholder unrest has only continued to build, with a new activist investor emerging just last week and seeking talks about a sale of the company.
Takeover discussions already appear to be underway: Gannett has reportedly raised its bid for Tronc, formerly known as Tribune Publishing, to more than $18 a share.
That implies at least a 20 percent bump to Gannett's last bid of $15, itself a 99 percent premium that was rejected by Tronc as "clearly inadequate." It's hard to see how such an offer could be considered so deficient when the target in question is a newspaper company with shrinking revenues that sold a big stake to its chairman, Michael Ferro, for a whole lot less just months earlier. But nevertheless, a bump of sorts was to be expected and likely necessary to get a deal done. Even Tronc shareholders who have been supportive of a combination have talked about the potential for more value.
Unfortunately, a 140 percent premium may not be enough, either.
Tronc may counter Gannett's offer at about $20 a share, or Ferro could come back with something in the $25 range, Politico reported last week. If $20 is what it takes, that's doable for Gannett, but not ideal. At that price, the company would be paying more than 5 times Tronc's projected adjusted Ebitda for 2016, compared with its own multiple of about 4 times. Gannett would need synergies -- probably more than the initial $50 million number it gave -- for a deal to add to earnings in a meaningful way, according to data compiled by Bloomberg.
But if $25 is the magic number to get Tronc to sell, Gannett should just forget it. The math is a stretch, and there's also just no reason to push the price to such levels when it's still just bidding against itself. What has changed at Tronc since April when Gannett first made its approach and the stock was trading in the $7.50 range? To its credit, the company has used cost cuts to improve its profitability. But much of Tronc's turnaround is still theoretical and depends heavily on its plan to use artificial intelligence to milk more money out of its content.
It's not totally clear how this artificial intelligence thing will work and Tronc's "informational" videos don't shed much light. But the general idea is to increase the amount of revenue Tronc gets from its digital operations -- which is what every other newspaper publisher has been trying to do for years now with little success. Going digital is necessary, but it's also a leap of faith. Even if it works, a sales-growth renaissance is years away, at best. It's hard to justify a massive premium for that.
Meanwhile, Gannett shareholders have already started to show signs of discomfort with this drawn-out takeover saga. The stock has dropped about 25 percent since the company announced its initial bid for Tronc, compared with a roughly 4 percent gain for the S&P 500 over the same stretch. Acquisitions have been a key part of Gannett's survival strategy, but there are other, more reasonably priced and less difficult targets. Or Gannett could repurchase shares, something CFO Alison Engel has said its acquisition-heavy strategy has prevented it from doing.
Either of those options could be a better and perhaps more accretive use of resources than playing right into Ferro's hands with an overpriced offer.
At $25 a share, Ferro would be cashing out at almost triple what his investment company paid for its stake in Tronc just months ago. As Politico points out, by delaying this whole thing, Ferro has probably reduced the taxes he'd pay on such a big windfall as well. Tronc CEO Justin Dearborn and CFO Terry Jimenez, also recently locked in pay packages that would reward them with millions each should Tronc get sold.
Tronc shareholders may not care if they get a rich premium as well. But there's just something unsavory about this management team being rewarded with such a high payout.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Unfortunately, no vote was held on the decision to rename the company Tronc. But the Twitter universe seems to have made its feelings clear.
Indeed, revenue at Tronc's division that includes its digital operations rose 4 percent in the most recent quarter. But that was overshadowed by the declines at its larger media unit.
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