Deals

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

Tronc Inc. is back in the news.

The owner of the Chicago Tribune announced late Monday that it's planning to acquire its crosstown rival, the Chicago Sun-Times. It's a deal that Tronc's chairman and largest investor Michael Ferro has been contemplating at least since last spring, telling the Chicago Tribune in a March 2016 Q&A, "Why can't we share financial costs and things like that, but let them run on their own?" Approval by anti-trust regulators is no guarantee, but the Sun-Times' painstaking (some would say sad) efforts to draw out any other suitors would seem to point toward the deal closing:

The background here is convoluted, but important: At the time Ferro did the Q&A, he had just stepped down as chairman of Sun-Times owner Wrapports and put his stake in that company in a charitable trust to avoid any perception of conflict of interest as he shifted his focus to Tronc. Would-be Tronc acquirer Gannett Co. then showed up in April and kept the company busy until the takeover drama ended abruptly in November with the buyer walking away. Since then, Ferro has gotten into a feud with a biotechnology billionaire brought in to help fend off Gannett, and Tronc has used precious cash to buy out an investor that had been critical of its handling of the Gannett interest.

Keep Up
Tronc has had more than its fair share of news
Source: Bloomberg

This company certainly loves its drama. To its credit,  Tronc walked away from a reported bid for Us Weekly that had questionable strategic merit, but now it wants to spend more of its cash on a target that may not move the needle much.

This deal is significantly smaller; Us Weekly wound up getting sold to National Enquirer parent company American Media Inc. for $100 million, whereas the Sun-Times's ongoing struggles suggest the newspaper won't command anything near the roughly $20 million that Wrapports paid for it back in 2011. But it's telling that shareholders appeared more skeptical of the Sun-Times deal. Shares of Tronc fell 5.7 percent on Tuesday on news of the bid, compared with a less than 1 percent drop as reports of the contemplated Us Weekly offer emerged, and continued their decline on Wednesday. 

Remodeling
Tronc's adjusted Ebitda has improved with cost cuts, but its cash balance declined in the first quarter. The buyout of dissident shareholder Oaktree Capital resulted in a $6 million charge,
Source: Bloomberg

Undeniably, there would be cost savings. Tronc already handles the printing and distribution of the Sun-Times so it would be fairly easy to consolidate other back-office operations. But with a deal this small, the boost to Tronc's financials may be muted. And then what? Both Tronc and Gannett have tried to consolidate their way toward survival and it hasn't really worked. This strategy of gobbling up rivals only works for so long and keeping it up takes cash.

Top-Line Troubles
Tronc projects revenue of $1.54 billion to $1.56 billion in 2017, implying a decline at the midpoint
Source: Bloomberg

Us Weekly posed an obvious culture clash, but at least it had a large, national digital audience that Tronc could theoretically tap into. The Sun-Times doesn't offer the same. It does have a minority interest in digital content network business Aggrego, but that venture is arguably still trying to figure out its identity after its much-maligned local news aggregator effort, the Sun Times Network, was shut down. Tronc also has a commercial relationship with Aggrego. 

The Sun-Times was a testing ground for some of Ferro's ideas of how to make money as a newspaper company in a digital world. (Read this Businessweek profile here). He did cut down the company's debt, in part through a sale of its suburban papers to Tronc (then still called Tribune Publishing) in 2014. But many other ideas fizzled and some -- including Splash magazine covering celebrities -- have already been acquired by Tronc.

In other words, it's not clear what Tronc gets from this Sun-Times acquisition that it really needs. There's no good reason for the Department of Justice to block the deal; the idea that two local struggling newspapers can create a monopoly in the Internet age is a bit silly. But independent shareholders -- what's left of them anyways -- should have questions. 

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