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March 22, 2018, 2:29 p.m.
Business Models

Newsonomics: Is Tronc about to go on the market?

Even without the L.A. Times, it still controls a lot of important newspapers. Will it sell them to Gannett, Murdoch, local individuals in each city — or to yet another private equity firm looking to strip papers for parts?

It almost sounds like a riddle: What’s a Tronc without the L.A. Times?

As the Tronc sale of the Times and the San Diego Union-Tribune finalizes, now most likely in mid-April, the next question arises: What becomes of Tronc? Its eight remaining titles own an impressive history and still play important roles in their cities: the Chicago Tribune, The Baltimore Sun, the Hartford Courant, the Orlando Sentinel, the Sun-Sentinel in South Florida, the New York Daily News, The Morning Call in Allentown, Pa., and The Daily Press in Newport, Virginia. But Tronc as a company appears at sea. Sensing “blood in the water,” several media banker firms are now actively looking for would-be buyers, several top newspaper executives have confirmed to me this week. While Tronc itself hasn’t announced any “strategic review” or the hiring of its own banker for a would-be sale, more than a half-dozen industry sources noted to me that Tronc’s recently changed circumstances point in that direction. They expect more definitive indications of a Tronc-for-sale sign this spring. When asked for comment, Tronc said, “We don’t comment on industry speculation from unnamed sources. We are focused on executing our plan for digital transformation to benefit our subscribers and shareholders.”

Liontree is among those media bankers, those newspaper executives tell me. A boutique firm run by a Aryeh Boursoff, it declined to comment this morning.

What is that “blood in the water,” exactly? Within a short time period, the newspaper industry and those who work with it point to massive Tronc change, including:

  • Michael Ferro stepped down Monday from his board chair role at Tronc, hours before a Fortune Magazine story published allegations of sexual harassment. While his office presence can’t be what it was, no one has any doubt that Ferro still has the ear of Justin Dearborn, his longtime business partner and now both chair and CEO. Ferro’s Merrick Media, the group of Chicago-area investors he put together years ago, still owns more than a quarter of the company and has controlled its top management. One big question: How much continuing appetite for the newspaper business does Ferro still have, given the charges? And are his own investors ready to get out? One knowledgeable Tronc watcher told me the harassment allegations have “caused some of the wives of some of his associates to wonder about the ‘city apartments’ their Merrick Media investor husbands have kept.”
  • Patrick Soon-Shiong’s $500 million (plus $90 million pension fund obligation) acquisition of Tronc’s southern California properties substantially changes the nature of Tronc, roughly cutting it in half, leaving it with half the market power of Gannett or GateHouse Media. On the positive end, the cash infusion will eliminate some of Tronc’s $350 million in debt. Cleaning up its balance sheet will make it a more likely candidate for acquisition; buyers can then bring their own leverage, taking on debt, to such a deal.
  • It’s a company that couldn’t offer its own take on its own future. On March 7, Dearborn led a disastrous full-year earnings call with financial analysts. As Tronc reported an annual revenue loss of more than 11 percent (on a same store-basis), analysts asked, predictably, for “visibility.” Dearborn offered none, and hasn’t since. The share price tanked as much as 30 percent and has now recovered only a little from that drop. The lack of “guidance,” says one financial observer, may be rooted in reality: The company simply hasn’t yet figured out how it’s going to cope with the loss of the Times and U-T earnings. “It’s the overhead problem,” says that observer. The California properties, which made up about half the company’s size, will no longer be contributing to Tronc’s corporate overhead costs. The resulting issue: How much in the way of real earnings, or EBITDA, can Tronc make in the rest of 2018, especially given its poor operating performance?
  • Tronc has lost a number of acquisition bids over the last year, the most recent Cox’s sale of the Austin American-Statesman to GateHouse Media. As I’ve reported, GateHouse will very likely be the buyer of Cox’s Palm Beach Post, probably set to be announced in April, another blow to bidder Tronc. Without a significant acquisition, Tronc will continue to confront that big overhead issue. (Which is far from unique to Tronc: One reason that Alden Global Capital’s Digital First Media has opted to just keep cutting deeply at The Denver Post, rather than sell it, is that the Post makes a significant contribution to DFM’s overhead.)

That all prompts some big questions, if and as Tronc focuses on selling. What would it sell, and who would buy? Tronc would clearly prefer to sell the whole company to a single buyer, making the process faster and cheaper. But observers say it may well have to break up the company to sell it.

Gannett, of course, is the first potential buyer that comes to mind. It abandoned its takeover of Tronc a year and a half ago, amid a bizarre war of words, when it ran into financing issues — and it really hasn’t been the same company since. CEO Bob Dickey saw his share price halved and only tepid recovery since. Further, Gannett’s own 2017 financials showed ongoing weakness, down 9 to 10 percent for the fourth quarter recently released. This very week, Gannett begins new rounds of layoffs and buyouts; it has greatly changed its national and regional sales organization, with at least a half-dozen long-time high-level Gannett business-side leaders now gone. Ascendant is Sharon Rowlands, who came to Gannett along with her ReachLocal company when it was acquired in 2016. She now heads Gannett’s business side.

Amid all that change, one close observer says Gannett is now more focused on digital business acquisitions than on newspaper ones. Then there’s the question of how a Gannett/Tronc stock merger could be structured, with Tronc’s market valuation an issue. Could Gannett pay cash?

“They’d have a harder time raising money,” one dealmaker told me. “They didn’t do well with [their latest transactions] of Journal Media, the Bergen Record, or ReachLocal,” he says. If Gannett’s once-high regard on Wall Street has tarnished, can the company put together a deal for Tronc? If its appetite for acquiring all of Tronc has diminished, how much would it be interested in spending less to pick up part of Tronc, particularly in south Florida and Chicago, matching up with close-by properties for cost-saving efficiencies? One plus out of Ferro’s recent “departure”: Ferro, considered an untrusted and unreliable dealmaker by Gannett, presumably wouldn’t be at the bargaining table. Gannett’s Dickey and Tronc’s Dearborn, on the other hand, maintain a serviceable relationship.

We can figure that Tronc, as a single-class public company, could expect a premium of about 20 percent above its current value. That would put it at about $500 million, or $18-plus a share. (Interestingly, though hard to compare, given the Times/U-T divestiture: That’s about what Gannett was ready to pay in the fall of 2016.)

There aren’t many newspaper companies in a position to be able to afford that price, and those that might are unlikely suitors for the whole company. GateHouse Media, the fastest-moving acquirer of papers with 142 daily titles, wouldn’t want Tronc’s big metro newspapers; they don’t fit the company’s buying strategy. Neither would Hearst, a company with great wherewithal, be interested in the whole package. But either one, along with numerous other would-be buyers, would be interested in individual properties. Newspaper execs peg The Baltimore Sun and the Hartford Courant as two of the harder sells, given market and/or operational issues, and it’s tough to imagine someone buying the money-draining New York Daily News. Still-growing Florida remains a relative hotbed of newspaper competition, and Tronc’s two smaller dailies — in Allentown and Hampton Roads — could fit in numerous portfolios. The Chicago Tribune remains attractive on its own.

Who else is out there? Perhaps a “financial buyer,” say some deal-watchers. As Tronc reduces its debt, a company like an Alden Global Capital could see an opportunity: buy the company, issue debt on it, and begin the now-well-acknowledged milking process Alden’s DFM is perfecting.

Then, there’s a name that’s hard to forget: Rupert Murdoch. Murdoch has been a big-city player for a long-time, still owning the New York Post after selling off the Chicago Sun-Times three decades ago, forced by then-extant FCC rules against owning dailies and TV stations in the same market. Now, with the FCC having removed “cross-ownership” strictures, might Rupert — about to divest most of the entertainment empire he built, selling to Disney — “retire” back into his soft spot, newspapers? Though he’s lost his shot at the L.A. Times, he could win the Chicago Tribune.

Such a piecemeal selling process would be more onerous for Tronc, but it might be its only way forward.

Another experienced dealmaker, with a good dose of cynicism, says that a waiting game makes more sense for buyers. Given the growing uncertainty around Tronc, “Gannett [or others] would be wise to let Tronc report another quarter or two of crappy results.” Consider all the uncertainty left after Tronc’s last analyst call. Come August — when it will announce almost a full quarter without the California earnings contribution — Tronc’s investor confidence may have further slipped.

Whether it happens earlier this year or later, it’s going to be odd imagining a 2018 newspaper industry without Michael Ferro. His bravado has shaped so many of the industry’s storylines over the past two years. Even as he may be departing the stage, though, consider two more “final touches” to Ferro’s tenure. First, even though he has retired and been accused of attempting to use power (as a principal in Wrapports, his predecessor company that had bought the Chicago Sun-Times, relying on a number of the same investors in Merrick Media today) to win sexual favors, Tronc says it will continue to pay him a consulting fee.

That fee of $5 million a year — already a suspect transaction when it was announced in December — now seems even more out-of-bounds given the termination of his Tronc position. Tronc tells me that Ferro’s management consulting contract is “at the company’s discretion,” presumably meaning that its second and third years could be severed.

Then there’s the question of what Tronc will do with half billion in cash that Patrick Soon-Shiong will soon fork over.

“I wouldn’t be surprised to see the company issue a $4 a share dividend,” says one of the Tronc watchers. That would mean a roughly $35 million payoff to Merrick investors, as well as to Soon-Shiong himself, who still owns about a quarter of Tronc. It would be a parting gesture that will raise further cries of self-dealing — but the criers would just have to take their place in line with all the other outrages in today’s strip-mined newspaper business.

Photo of the Baltimore Sun clock at Camden Yards by Keith Allison used under a Creative Commons license.

POSTED     March 22, 2018, 2:29 p.m.
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