Nieman Foundation at Harvard
Sixty-three cents. That’s all it took to buy a share of Gannett at market close yesterday.
The entire company — valued at $18.5 billion-with-a-“b” 15 years ago when it owned TV stations but many fewer newspapers, not to mention $823 million-with-an-“m” as recently as January — is today worth just $88 million. Gannett — the largest chain in the nation, delivering 25 percent of the nation’s daily newspapers each morning — now trades at 12 cents below the frozen level of its bankrupt peer, McClatchy.
The company’s board has prescribed a poison pill, announced Tuesday, as one stopgap treatment for its woes. It seemed to work at first; Gannett’s stock price shot up 57 percent, briefly even touching $1. But the optimism faded as the day went on, and GCI ended the day a few pennies below where it had started.
The company’s market value can’t fall much lower, mathematically speaking, but the questions about its future continue to multiply. Why did the stock fall off the cliff? Why the poison pill? What’s the next step with Apollo Global Management, the private equity firm to which Gannett’s owes nearly $1.8 billion-with-a-“b”?
In this new saga of Consolidation Games action, worlds are colliding: the worlds of supposed merger synergies, of coronavirus-driven shutdown, and of federal bailouts. They’ve combined to confront this new company with challenges that seem overwhelming.
Like all newspaper companies (and to some extent all media companies), Gannett has been battered by COVID-19’s assault on ad revenues. In the second quarter, sources tell me, Gannett will be down at least 30 percent in ad revenue, a number that parallels the overall losses industry-wide. (Some publishers continue to report projected losses as high as 60 percent, but 30 to 50 percent is the range most agree upon.) That’s for April; May is now expected to be similar, and at the moment, there’s not much reason to think June will be very different. It adds up to an unimaginable Q2 of losses for great majority of local newspaper publishers.
This pain coincides, ironically enough, with perhaps the most intense period of readership — and appreciation — by local news audiences in recent memory. But the irony has faded quickly as publishers, their employees, and soon their readers confront the resulting ratcheting down of the local news business.
It was that restructuring that provided the financial justification for the massive merger. (The deal closed in November with Gannett shareholders getting $12.06 per share — $6.25 in cash and the rest, now notably, in stock.) Gannett CEO Mike Reed has publicly promised the market $300 million in “synergies,” or cost savings. A number much closer to $400 million had become an internal target, sources tell me.
Now the company has announced $100 million to $125 million in additional cuts, first in the form of last week’s announced pay cuts and furloughs. That’s on top of the earlier $300 million-plus.
Let’s look at the action in progess. (Mike Reed declined to comment for this piece.)
Start with the pill. A poison pill is an attempt by a company to prevent or dissuade a hostile takeover by declaring that, should such an event occur, something terrible would happen. The pill in this case gives existing shareholders the right to buy shares at a 50 percent discount should a raider start buying shares in a takeover effort.
Financial observers describe it as a curious move here. We’ve thus far seen no efforts to buy up Gannett stock — quite the opposite, actually. It’s possible that such a buy will be signaled by SEC-required filings in the days to come, but it hasn’t yet been detected.
How desirable is Gannett, anyway, even at a share price perilously close to corporate pocket change? (Jeff Bezos just bought a house that cost almost twice as much as Gannett is worth.) $88 million plus a premium of 10-20 percent seems awfully cheap for a publisher that reaches the doorsteps of a quarter of the American newspaper reading public — many of them voters.
Of course, behind that purchase price lies the outsized debt any buyer would face. The deal makers, led and managed by Fortress Investment Group, took on that debt in what now seems like a case of extremely bad timing. In late February, Gannett announced it had paid down $45.2 million of its $1.8 billion loan from Apollo, a loan with an 11.5 percent interest rate at a time when the Fed is pushing rates as close to zero as possible.
Any Gannett buyer would have to pay off Apollo, or at least make a new deal with it. Who might want to, or could? Even the one player still active in newspaper M&A — Heath Freeman of the dreaded Alden Global Capital — would seem a long shot to put that deal together. The risk in the newspaper business has only gotten riskier.
But it’s unlikely even vaunted risk-taker Leon Black, Apollo’s founder and CEO — and a man Bloomberg recently called “the most feared man in the most aggressive realm of finance” — could imagine the COVID-inflicted damage Gannett has taken.
(That said, here’s a bit from that Bloomberg profile: “Black built his company, Apollo Global Management Inc., by buying struggling businesses with huge piles of debt at bargain-basement prices, imposing austerity measures on the staff, and extracting huge dividend payments and management fees. Many of Apollo’s most lucrative deals have been from companies other firms wouldn’t go near…’We’ve actually made our most money during recessions…Everybody else is running for the doors, and we’re backing up the trucks.'” Sound familiar?)
So, how able will Gannett be to keep making payments to Apollo and keep the business operating?
That’s a cash flow analysis that will change depending on the shutdown’s length and depth. This lost second quarter will eviscerate anticipated profits. In addition, Gannett and all publishers will find it increasingly difficult to collect on some first-quarter-run advertising payments; many advertisers are on life support themselves, unable or unwilling to pay their bills. Small businesses ask publishers like Gannett to “accommodate” them, given the extraordinary circumstances.
Given all that, sources tell me that Reed and Apollo are talking about a similar kind of accommodation that would ease the financial pressures on Gannett.
Apollo is in the catbird’s seat here. As Gannett’s chief lender, it has first call on the company should it be unable to meet its contractual obligations. Beyond the payments themselves, the Apollo loan includes a number of fairly standard covenants that put clear limits on the company’s spending and debt issuance. (You may remember that Gannett was not allowed to issue a shareholder dividend in Q1 because Apollo wouldn’t allow it “in line with our credit agreement.”)
In this deal, Gannett could find itself running afoul of “gross leverage ratios” — essentially how much cash flow it’s generating compared to the debt it has on its books. Violating covenants can provide lenders the ability to make demands on the borrower.
There are contracts, and then there’s the world of the moment. If Gannett’s financial fortunes worsen — as an economy stays shuttered or sputters through soft opening after soft opening — does Apollo really want to push for control of the company? Right now, it’s a passive player, as one financial observer puts it, “but it’s clearly in charge of the capital structure.”
Apollo continues to be one of the most active PE companies in and around news media. After failing to acquire Alden’s Digital First Media in 2015, it bought Cox’s local broadcast properties last year. Just a week ago, it dropped a bid to add to its broadcast holdings, abandoning talks with big player TEGNA, the broadcast offshoot of the Gannett split of 2015. Clearly, it’s got more appetite for the media business right now than most of its brethren. But how much does the barren landscape of local newspapers still offer Apollo a business case for ownership?
Down the road, we could see both the “D” and “B” words arise. Default, on the loan obligation. Bankruptcy, as in Gannett’s inability to go forward given the twin pressures of its debt and advertising depression.
Those aren’t the words being discussed right now, most observers believe, but they could well lie ahead. Chatham Asset Management, long McClatchy’s major lender, will become its major shareholder — and thus controller — when the company exits bankruptcy, likely this summer. That sort of prepack bankruptcy is one plausible scenario that could be forced by Apollo — but only one.
There’s another “D” word that Gannett has already acted on: dividend. Dividends have been pivotal in propping up publicly traded newspaper stocks over the past several years. Even if investors didn’t believe a newspaper turnaround was likely, they knew that predictable dividends would pay out quarterly cash. Last week, assessing the immediate damage, Gannett took the quick step of suspending its planned Q2 dividend, a sign of its duress.
Why did Gannett shares tank to less than a dollar over the last week? A big part of it is that cessation of the dividend, financial observers say. Institutional funds, which had been holding shares for their dividend payouts, began to abandon it. Some had to, given the rules of their funds; others just thought it was a good time to get out.
Open at the stocks app on your phone and check out the next ring of descent in the financial hell of public newspaper businesses. Bankrupt McClatchy is frozen at 75 cents, no longer a creature of the market. Gannett closed yesterday at 63 cents. Lee Enterprises, too, has dropped like a stone, to 85 cents, just a few months after buying Berkshire Hathaway Media. Only Tribune Publishing, because of its likely merger with Alden Global Capital’s MNG Enterprises in the next few months, has maintained any significant value at $7.37 a share — and that’s still down by almost half in six months.
The end of publicly traded newspaper companies will soon be upon us. They may have seemed like a great idea 15, 25, or 35 years ago, but it’s now mostly private owners of financial capacity and vision who seem to stand a chance of finding a way forward for local news.
What about the federal bailout, you may ask? Gannett is too big for the now-chaotic Small Business Administration loan-to-grant program, which is limited to companies with fewer than 500 employees.
It will be eligible for the Treasury program, whose regulations are still in progress. There it will face intense competition. Unlike the SBA program, which is intended to spend taxpayer money, the Treasury program is intended to make, or at least not lose, money — much like the Great Recession’s politically maligned but economically successful TARP. Gannett’s case may be hard to make on that question, especially in the longer term. Plus, bailouts are inevitably influenced by politics. Given this administration’s war on the press, how much will that further disadvantage Gannett and other larger newspaper companies? We don’t yet know.
Admid all this drama, Gannett welcomed a new chief financial officer Monday. That’s a tough job to walk into, but Douglas Horne’s most recent experience may make the challenge seem more reasonable. Horne left his post in November as global controller for the We Company, parent of commercial real estate leasing firm WeWork. The euphoric rise and spectacular collapse of WeWork — now embroiled in a major public fight with its funder Softbank — has been quite a story to behold. So maybe he’s the one person for whom Gannett’s current crisis will seem relatively tame.
