Nieman Foundation at Harvard
Alden Global Capital, the most reviled newspaper owner in the business, now wants to buy Gannett, the United States’ largest daily newspaper company. As reported Sunday evening by The Wall Street Journal — and then confirmed via early Monday morning press release — Alden, through its Digital First Media/MNG Enterprise ownership, has offered a 23 percent premium for Gannett.
Alden apparently told reporters it had been in recent contact with Gannett about the offer. But later on Sunday night, Gannett’s USA Today told a different tale, with a company source saying “there has been no communication regarding a proposal to the company.” But this morning, an updated version of the story acknowledged Gannett had “officially received an unsolicited proposal to acquire the company.”
This may be the first newspaper mergers-and-acquisitions story of 2019, but it definitely won’t be the last. Consolidation (and the cost-cutting that comes with it) remains the dominant strategy in the daily newspaper industry. If revenue continues to drop at or even near double-digit levels, the consensus thinking is that radically reducing expenses through consolidation is about as good a card as anyone has to play. Eliminate or reduce corporate staffs, centralize everything that can be centralized, and maybe in some cases continue to make small investments in newer revenue streams.
Digital First Media has just under 50 dailies and about 100 total titles in its portfolio. Gannett counts 109 “local media organizations.”
Alden’s DFM, of course, stands at one extreme of the industry, unusually naked in its strategy of extraction, investing as little as possible in the business as it harvests some of the highest profits in the industry. (Documentary film producers are now hard at work on telling the tale of the daily newspaper apocalypse through publishing’s bête noire.) Alden took a severe media beating last spring as it whacked one-third of The Denver Post’s newsroom, but Alden president Heath Freeman continues to see financial opportunity in what may be the final years of print.
As I reported less than a month ago:
Alden president Heath Freeman has recently noted some interest in buying other chains. His rationale is quite understandable: He’s optimized his cost-cutting enough to keep profits flowing smoothly, pushing only a tenth of his subscribers a year to cancel. He believes he could “optimize” other chains and, to their dying moments, extract higher returns.
The only surprises, then, are the speed with which Alden has struck — and its intended target. With a current market value of $1.1 billion and annual revenues that run to a little more than $3 billion, Gannett has long sat atop the newspaper industry, largest in the country and second worldwide (to News Corp), given its ownership of the U.K.’s Newsquest. (Gannett is the largest chain in terms of paid circulation, but The New York Times Co. has passed Gannett in market cap — fitting, given the extent to which the sweet spot in the newspaper business has shifted from local papers to a few national giants.)
So how will this bid play out?
Gannett is scrambling to respond. This morning, it issued a statement:
Consistent with its fiduciary duties and in consultation with its financial and legal advisors, the Gannett board of directors will carefully review the proposal received to determine the course of action that it believes is in the best interest of the company and Gannett shareholders.
Given the 23 percent premium on offer, Gannett can’t just say it doesn’t want to sell to someone like Alden. As a single-class public company, it’s duty-bound to maximize shareholder value. Expect it to hire an investment banker to “explore the company’s options.”
(One quick numbers clarification: In its press release, Alden refers to its cash premium as 41 percent instead of 23 percent. That’s because they’re citing the price Gannett stock closed at on December 31, $8.53, instead of the price it closed at Friday, $9.75. And in early trading this morning, Gannett stock was going for around $11.50, as traders bid it up closer to Alden’s $12.00 offer.)
What all this means is Gannett, like it or not, is in play. Even two years ago, that statement might have been dropped jaws — Gannett was clear it wanted to be the consolidator, not the consolidatee. But no longer: In an industry of unending downturn — and in a world flirting with a who-knows-how-deep recession to come — all bets on the conventional wisdom of newspaper ownership are off. Anyone with the appetite and dollars to buy can, whether it’s a Patrick Soon-Shiong or an Alden Global Capital.
How did Gannett get to this point?
It was long prized by Wall Street as the daily newspaper company with the best capital structure and most consistent financial performance. It led of the last wave of consolidation in the industry, pre-web, buying up dozens of family-owned newspapers around the country. (Investors liked that — journalists, not so much.)
But Gannett, like its peers, began to show its cracks over the past decade. It announced one new transformation initiative after another — in newsrooms, in ad sales, and more lately in digital subscription sales — but Gannett has never been able to turn the digital corner.
Gannett’s share price tumbled and has never really recovered. Neither did Bob Dickey’s standing; it’s no accident that Alden’s bid comes barely a month after Dickey announced his retirement, which is set for May.
Who will replace Dickey? A national search is now just taking shape. The company looked at its thin executive bench — cleared by years of executive re-organizations and poor succession planning — and decided that it has no successor inside the company. Just this last week, Sharon Rowlands, who had headed up the company’s business leadership and was passed over for the job, departed to become CEO of web.com, a digital marketing company.
Alden’s Freeman apparently celebrated the holidays by assessing this particular moment of Gannett weakness — a lame-duck CEO preparing to announce another quarter of trouble. And so he struck.
Sunday’s announcement has sent people running newspaper companies (or just eyeing them) to their chessboards, I found calling around last night. (Given the timing of the Alden bid, no company spokespeople were available to comment for this column. It doesn’t talk to reporters much, anyway.)
Think of it as a game of two-and-a-half dimensional chess — something’s missing, but we may not be sure what.
Start with the Alden bid itself. The offer’s in cash — a rather pricey pile of it, at more than $1.35 billion. Does Alden have that money available today? If not, can it get it? Financial insiders note recent volatility in credit availability and say that some deals planned for December have been slowed as a result. Overall, 2019 projections show credit nervousness.
Consequently, Gannett may first simply ask Alden to show its wherewithal. Alden has quietly built up a 7.5 percent stake in Gannett already; as one keen observer of the industry told me Sunday evening: “Do you think they’re really trying to buy the company or just pumping up the value of their equity stake?” (Just from this morning’s bump in Gannett’s share price, that 7.5 percent is about $16 million more valuable today than it was yesterday.)
Alden has let it be known that it plans to be an activist investor. Its offer letter sent this morning notes that its existing stake makes it Gannett’s “largest active stockholder.” And it spared few feelings in describing how it sees Gannett’s current management and strategy:
Because we know how to consolidate and operate successful newspaper businesses over the long term, we have approached members of your Board and management on multiple occasions about a potential strategic combination. Despite our overtures, Gannett has not meaningfully engaged with us.
Gannett has lost 41% of its value since its debut as a public company two and a half years ago, significantly underperforming its peer group and indices. During this period, Gannett suffered from a series of value-destroying decisions made by an unfocused leadership team — overpaying for a string of non-core aspirational digital deals and pursuing an ill-fated hostile for Tribune Publishing, all while Gannett’s core revenue, EBITDA, margins and Free Cash Flow continue to decline. With Gannett’s CEO departing by May and its key digital executive leaving later this month, there’s now an even greater leadership void. Frankly, the team leading Gannett has not demonstrated that it’s capable of effectively running this enterprise as a public company. Gannett shareholders cannot sit by and watch further value erode while the Board casts about for a strategy and a leader, especially when there is an opportunity to maximize value right now. We believe Gannett shareholders deserve better.
Accordingly, MNG proposes to purchase Gannett for $12.00 per share, representing a substantial cash premium, and requests the Board immediately take the following actions to maximize value for stockholders:
- Enter into discussions with MNG about a strategic combination;
- Hire an investment bank to conduct a review of strategic alternatives, including a potential sale of the Company;
- Commit to a moratorium on digital acquisitions; and
- Commit to a feasible, strategic and financial path forward before hiring a new CEO.
(Emphasis very much theirs.)
If that “moratorium on digital acquisitions” doesn’t make it clear enough, the letter also says Gannett has lost its way by focusing too much on all this newfangled digital stuff:
We believe that Gannett’s newspaper business could be improved and made more profitable by optimizing the Company’s cost structure and showing discipline in capital allocation with a goal of optimizing EBITDA and Free Cash Flow per share every year. However, instead of focusing on its core newspaper business and acting as the industry consolidator pitched to investors at the time of the spin-off, the Company has spent approximately $350mm on digital acquisitions since 2015…
Despite the Company’s poor stock and operating performance since the spin-off, the Company seems to be doubling down on its current strategy. As we have heard from senior leadership, and as reported in the news media, the Board appears to be looking for a new CEO with a digital rather than newspaper background.
(Another bit from the letter: “When other people won’t step up, we do. We save newspapers and position them for a strong and profitable future so they can weather the secular decline.” It certainly is…interesting to see a hedge fund best known for laying off journalists positioning itself as a bold guardian of grand newspaper tradition. As one recent study put it: “At a time when other major newspaper chains were struggling to maintain single-digit operating margins, executives at Digital First had posted an operating margin of 17 percent, apparently by cutting newsroom staffing by as much as twice the industry average.” DFM has also closed or consolidated 21 newspapers since 2014.)
Last month, I predicted: “A Gannett/Tribune combo may re-appear in 2019…Gannett could buy Tribune — or vice versa.” That possibility — which I believed was warming on the back of a stove — will now likely move to a front burner.
Sources tell me he’d likely be more amenable to a Gannett deal today — a victory in that two-year-old battle. The immediate question: How much cash and stock would it take to bring the companies together? Could a stock-only deal pull it off? And, importantly: Can Gannett make the case to its shareholders — especially those who bought speculatively and could sue — that a Tribune merger, creating a huge daily newspaper company by historical standards, is a better deal than that pile of cash from Alden?
Finally we have the private equity players, like Will Wyatt’s Donerail Group, which made its own bid for Tribune, or Apollo Global Management, which has been sniffing around the ragged edges of the newspaper business for years. (In fact, it came close to buying most of Digital First back in 2014.) At a time of anything-is-possible chain consolidation, might these companies assess and bid?
If you want to fully understand the dismal state of the industry, consider that Craig Forman is likely to be the only CEO among all these big companies who’ll still be in place by midyear. As noted, Dickey is retiring at Gannett. With Tribune Publishing likely to be sold sooner rather than later, Ferro acolyte and CEO Justin Dearborn has told associates he’ll hit the door at the same time.
Then there’s Digital First. It doesn’t even have a chief executive officer. When DFM CEO Steve Rossi retired in fall 2017, the company opted not to replace him. Its chief operating officer, Guy Gilmore, now runs the company from that position. One more way Alden has shown its commitment to cutting costs and reducing headcount, I suppose. And a trivia question: Where did Gilmore spend 20 years working early in his career? Gannett.
