Deals

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

Tronc Inc., the newspaper publisher with a flair for the dramatic, is at the center of yet another power struggle. Once again, shareholders may wind up as collateral damage. 

Late Thursday, Tronc disclosed that it had struck a deal to neutralize Oaktree Capital Management, one of the most outspoken critics of its just-say-no campaign last year against would-be acquirer Gannett Co., by buying out its remaining shares and locking up a standstill provision. As the cherry on top, Tronc agreed to let Chairman Michael Ferro increase his stake to 30 percent -- well above the 20 percent threshold outlined in the shareholder rights plan the company adopted last May. This comes as Tronc boots its second-largest holder, biotechnology billionaire Patrick Soon-Shiong, off the board.

Treading Water
Tronc's stock price hasn't collapsed since Gannett walked away, but it's been plodding along around $14 over the past few months with little sign of momentum
Source: Bloomberg

There's a lot going on here but the effect is twofold: First, Tronc has just made it significantly more difficult for Gannett or any other buyer to try again for a deal. But also, the boardroom dispute clouds its proposition for creating more value on its own than what Gannett had offered. 

Soon-Shiong came on the scene at Tronc via an equity issuance that helped shore up its defenses against Gannett. His "unparalleled technology experience" was meant to be an asset as Tronc, formerly known as Tribune Publishing, invested in artificial intelligence and video as a means to milk more money from its content. He and Ferro had already been buying up blocks of shares from previously dissident shareholders, leaving them with stakes of close to 25 percent apiece going into Thursday. Soon-Shiong's trades and their proximity to the company's earnings release date are reportedly one reason why the board decided not to renominate him. He was also apparently "disruptive."

Soon-Shiong agreed in the final days of February to buy shares from Oaktree and activist investor HG Vora. He bought additional stock on the open market between Nov. 23 and Feb. 17. It's not clear why the timing of Soon-Shiong's trades was problematic for Tronc, but Ferro's agreement to buy a different chunk of stock from HG Vora in late December wasn't.  Soon-Shiong, for his part, maintains he and other board members had an agreement that let them acquire shares as long as they weren’t in possession of material, non-public information. 

It's also unclear how Soon-Shiong was "disruptive." Did he balk at the idea of a $100 million takeover bid for celebrity-gossip magazine Us Weekly? The financial payoff did look debatable. Or were his reported protests over Ferro's use of corporate assets the problem? According to Tronc's annual filing, it paid $2.7 million to cover executives' use of a private jet. That's even as Tronc said it eliminated more than $50 million in expenses via headcount reduction last year. Recall as well the pricey and arguably unnecessary California relocation package for CEO Justin Dearborn.

Maybe there were other issues, but sometimes a little disruption is a good thing, particularly on a board that's already been accused by shareholders of acting in its self-interest. 

Rebuilding Year(s)
Tronc projects revenue of $1.57 billion to $1.6 billion in 2017, implying a decline at the midpoint
Source: Bloomberg

Oaktree Capital's latest share sale deal with Tronc values its holdings at $15 apiece, which is what HG Vora got for its divestments to both Ferro and Soon-Shiong.  Notably, that's in line with Gannett's last public offer of $15, which Tronc rejected as "clearly inadequate as a control investment." Good for HG Vora and Oaktree that they locked in premiums when they could, but where does this leave everyone else? (The shares closed Thursday at $13.16.)

The odds of Gannett returning with a full takeover bid are looking slim in the short term as the company grapples with its own set of issues, such as almost half its market value being erased over the past year, and as Tronc becomes more entrenched with inside ownership. Soon-Shiong says he wants the right to raise his stake to 30 percent as well -- a fair ask -- but the chances of him mounting a successful buyout effort right now may also be low without support from the board and little means to wage a proxy fight at the April 18 annual meeting. 

Hard Times
Gannett shares have tumbled as investors questioned the merits of the Tronc deal and grew wary of earnings setbacks
Source: Bloomberg

To Ferro's credit, Tronc has improved adjusted Ebitda and cut down expenses, even with those private-jet bills. But getting the company's stand-alone stock price back up to the $18 range that Gannett reportedly offered in the final stages will likely require some kind of rebound in revenue.  Sales declined 4 percent in 2016. Acquisitions may help, but for both Tronc and Gannett the extra revenue infusion has tended to be more of a Band-Aid than a long-term solution.

This artificial intelligence push was supposed to break Tronc out of that pattern, but it was always debatable how effective that would be and looks more risky with Soon-Shiong now estranged from corporate decision-making. It was surprising that Tronc chose to license the Washington Post's digital publishing platform rather than build its own. 

As Tronc consolidates power around Ferro and big critical outside investors exit, small shareholders lack a strong advocate and potentially could be left without the same payout those larger investors were able to lock up. They deserve answers on what exactly went down with Soon-Shiong and what comes next for Tronc. As Soon-Shiong's spokesman put it, "all shareholders should be treated the same.”

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

  1. Soon-Shiong agreed to acquire a block of shares from HG Vora on Feb. 24 and then agreed to buy a chunk of Oaktree's stake on Feb. 28, per regulatory filings. Ferro's Merrick Venture Management acquired shares from HG Vora on Dec. 23. Tronc's fourth quarter ran from Sept. 25 to Dec. 25 and it reported results on Feb. 22. 

  2. The aircraft use was first reported earlier this month by media analyst and Thestreet.com contributor Ken Doctor. 

  3. Oak tree got slightly less -- $14.60 -- when it sold a chunk of shares to Soon-Shiong. 

  4. The Gannett deal eventually collapsed at the last minute as the sky-high premium Ferro demanded prompted financing questions.

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