Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Finally someone is showing some financial sense in the takeover saga between Gannett Co. and Tronc Inc.

After two rejected bids and months of back and forth, the two companies have reportedly agreed on a deal whereby Gannett would pay about $18.75 a share for Tronc. But now that the newspaper publishers have finally sorted out the price, people familiar with the matter tell Bloomberg News that lenders are withdrawing because they're concerned about the health of the businesses at the proposed valuation.

Gannett and Tronc are still trying to salvage their merger, but perhaps this should be a wake-up call. The reported price tag makes about as much sense as the company formerly known as Tribune Publishing's decision to change its name to Tronc.

At $18.75 a share, Gannett would be paying a 149 percent premium to Tronc's share price back in April, before the companies' deal talks became public. That's despite the fact that no other bidders have emerged. As far as we can tell, even after its fancy rebranding, Tronc is also still just a struggling newspaper company and hasn't started selling self-driving cars, cancer treatments or iPhones.

There Goes the Premium
M&A speculation was propping up Tronc's stock. The shares dropped to about $12 following the Bloomberg report on Thursday.
Source: Bloomberg

To its credit, Tronc has used cost cuts to improve its profitability. But much of the company's turnaround is still theoretical and depends heavily on its head-scratcher of a plan to use artificial intelligence to milk more money out of its content. Who knows, maybe Tronc's digital efforts will succeed where other newspaper publishers' have failed. But Gannett didn't seem to think so when it called the strategy "substance-free, newly developed and unproven." How do you justify a big premium for that?

The purported offer amounts to about $890 million including debt. That's about 0.5 times Tronc's projected revenue in the last 12 months. By comparison, Jeff Bezos paid 0.4 times the revenue that the Washington Post's newspaper division earned in the fiscal year prior to his $250 million acquisition of the business in 2013 -- something an analyst at the time dubbed a "friendship premium." Let's just say the Amazon billionaire doesn't have the same financial pressure as Gannett does to make that takeover pay off.

Gannett's grander vision is to consolidate its way to better deals with advertisers and enough heft to give its papers a longer lease on life. But so far, takeovers have failed to fully stem the declines analysts are anticipating in its future revenue. 

Are Acquisitions Enough?
Gannett's revenue will get a boost this year after a series of deals, but after a while, the benefit will wear off.
Source: Bloomberg
M&A volume does not include Tronc as it's not clear that deal was factored into analysts' revenue estimates. Deals whose value was not publicly disclosed are also not included.

Gannett's recent purchase of Journal Media Group Inc. and digital marketing company ReachLocal Inc. will help boost its revenue this year, and perhaps a Tronc deal will lend a helping hand in 2017 and 2018. But what happens after that? Gannett reported a third-quarter loss of $24 million on Thursday.

The Tronc purchase increasingly seems like an expensive Band-aid. It's not clear why this deal -- as opposed to smaller, more reasonably priced targets or share buybacks -- is the best use of capital. Shareholders have become increasingly skeptical, pushing Gannett's shares down 37 percent even before the bottom dropped out from under them in the wake of Bloomberg's scoop. 

Moved to the Back Page
Gannett shares have now fallen 48 percent since the company's interest in Tronc was made public.
Source: Bloomberg

It's also not the best endorsement of Gannett's stand-alone business that it was willing to push ahead with a deal after months of antics on the part of Tronc's chairman and largest shareholder Michael Ferro. These reportedly include: adopting a poison pill; entertaining the idea of bidding on Gannett instead; diluting shareholders by issuing equity to business associate Patrick Soon-Shiong; offering to buy out dissident shareholders; demanding "a piece of the action" in any deal; granting the company's CEO a hefty and perhaps unnecessary relocation package; and setting his top Tronc lieutenants up to pocket millions should the company get sold.

A stronger company would have walked away a lot sooner, or waited a while until Tronc eventually got cheaper. The irony is that after all this, financial realities may now force Gannett to make a decision it arguably should have made a while ago. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net