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June 8, 2018, 11:45 a.m.
Business Models

Newsonomics: Why is Michael Ferro slowing down Patrick Soon-Shiong’s deal to buy the LA Times and San Diego Union-Tribune?

“Any would-be scenarios involving Tronc include odd tradeoffs, weird valuations, and questions of sheer feasibility.”

Michael Ferro’s deal to get paid a 34-percent premium for his Tronc shares vanished as strangely as it appeared. Just seven weeks after Ferro announced that Sargent McCormick was the lead buyer of Ferro’s Merrick Media 25-percent stake in the company, McCormick turned his pockets inside out on Tuesday evening. He released a hurried statement, just as Ferro himself announced the “breach” of the agreement in a Securities and Exchange filing. That statement, in part:

McCormick Media, a subsidiary of the Harvester Trust, has announced that, at this time, it will not move forward with the stock purchase agreement with Merrick Ventures. That said, McCormick Media remains interested in exploring opportunities to complete this acquisition of Tronc shares which will enable the organization to continue its mission to serve the Chicagoland community and revitalize the independent voice of the Chicago Tribune.

The big, and likely final, conclusion of observers of the deal, as I reported last week, was that McCormick and his partners — former San Diego Union-Tribune CEO John Lynch and radio exec Clancy Woods — never had close to the $208 million they committed when the “sale” was announced on April 13. Some close to the situation have speculated that McCormick believed he could convince fellow Harvester trustees to pony up the funds, but failed to do so. (McCormick Media’s full statement is at the bottom of this post, and McCormick declined to comment beyond it.)

Short story: For now, Michael Ferro is back.

Longer story: Tronc being Tronc, the Ferro/McCormick Media deal plays out in just one ring of the circus, and these Tronc rings are always interconnected. As “final” negotiations have moved toward what seemed to be closure on Patrick Soon-Shiong’s agreement to buy the Los Angeles Times and San Diego Union-Tribune, those talks are stalled, sources told me; expected documents are being “slow-walked.”

Why? Ferro seems to have reached back into the company’s affairs. Ferro stepped down as board chair on March 19, following allegations of sexual harassment. Now, sources say, Ferro, newly anxious to sell his Merrick Media stake in the company, is exerting pressure within Tronc. His overtures include those to Tronc board members, urging them to ask Tronc’s top management, CEO and chairman Justin Dearborn and CFO Terry Jimenez, to slow down the sales finalization. We don’t know if Ferro has also talked directly to Tronc’s two top managers. What we do know is that the closing of the California newspapers sale, first expected at the end of the first quarter, has moved slowly. Soon-Shiong expected it to close as soon as this Monday, but when the McCormick Media deal fell through earlier this week, the slow-walking kicked in.

Ferro may be trying to buy time to find another buyer for his Merrick Media shares. He is apparently applying new pressure on Soon-Shiong to buy out either the Merrick shares and/or essentially the whole company, taking all of Tronc private, not just the Times and Union-Tribune. If Soon-Shiong won’t bite (he previously rejected such overtures), Ferro wants to find another buyer for all of Tronc. The likely thinking is that Tronc is more sellable with the California papers than without them. If so, that would require stopping just short of the finish line of the nearly $600 million Soon-Shiong deal.

For most companies, and by most lights of corporate governance, such maneuvering would seem out of bounds. But accusations of self-dealing and self-aggrandizement have characterized Ferro’s tenure. Any would-be scenarios involving Tronc include odd tradeoffs, weird valuations, and questions of sheer feasibility.

Why does Ferro want so badly to sell? As I reported previously, sexual harassment allegations against Ferro have generated waves of personal and family issues not just for Ferro, but for his Merrick Media investor partners in Chicago. They want out of the Tronc investment and separation from Ferro. On paper, the McCormick Media deal seemed to satisfy all of them, providing a big premium and a clean exit. Now the exit is blocked, and Ferro needs to find another. Will the Merrick stake — which has meant effective control of the company — end up being sold at a discount?

Why doesn’t Soon-Shiong just buy the whole thing? The math involved is odd. Tronc closed Thursday with a market value of $591 million, which, as of this date, includes Times and Union-Tribune generated value. Interestingly, Soon-Shiong agreed to buy the Times — a “trophy” property — for $500 million, and to assume about $90 million in pension liabilities. Why not just pay a little more, buy the Merrick shares, and control the whole company? Soon-Shiong could then apply his ideas of an artificial intelligence–led news business transformation on a national scale.

But there are two problems with that scenario. First, Soon-Shiong has been clear that he doesn’t want to own more than the southern California newspapers. Second, he’s constrained in how much he can increase his stake in Tronc. When Ferro began seeing Soon-Shiong as a threat, he tossed him off the Tronc board and limited his ability to buy more shares. Of course, the Tronc board could undo those strictures if Ferro and Soon-Shiong agreed on a deal. That would leave the question of how the rest of Tronc’s shareholders would fare in such a scenario. Would Soon-Shiong buy them out, too?

What kind of leverage does Ferro have? Could he really stop the Soon-Shiong deal? We don’t know. If Ferro is really trying to change the Soon-Shiong buy to “all or none,” we’ll see legal questions galore. Soon-Shiong could sue. Any board member role, which might lead to the loss of what seems to be a lucrative deal for shareholders, would seem to put those directors in hot water.

Who else might buy Merrick’s shares — or the whole company? That’s the oddest thing here. Both bankers and brokers who traffic in newspaper property sales, see no apparent buyers, at a premium or lesser offer. “There are no likely strategic or financial buyers,” one told meThursday. Financial buyers might buy into the company for its cash flow, but with a nine percent year-on-year decline in Tronc revenues in the first quarter, projecting newspaper profits into 2022 is close to a fool’s game. Strategic buyers who might “cluster” their current newspaper properties with Tronc papers aren’t buying either. Gannett, which did want to buy all of (then-Tribune Publishing) Tronc two years ago, is now buying digital properties, not newspapers.

Added all up, it’s corporate newspaper mud.

Of course, this week’s Tronc storyline — driven by the McCormick Media deal falling through — may fade quickly. Soon-Shiong may finally stare down Michael Ferro and get his agreed deal done soon.

Even if that happens, Tronc — and its still-largest shareholder Merrick Media — will be left with a new question. Whats should they do with the cash they get from selling the California papers? Even after paying a sizable tax bill (which one observer of the Times sale agreement said could have been avoided if the rushed deal had been structured to be tax-efficient), Tronc will have one of the best balance sheets among its peers. On the one hand, current management could make the argument that it would like to enjoy that benefit, buying properties (such as the Virginian-Pilot) or making strategic investments, and moving Tronc toward becoming a less-dramatic, more conventional operating company.

Ferro may have other ideas, though. One that’s been floated: A cash dividend to shareholders of $2 a share, which would pay out $75 million in total, and $17.5 million to Ferro’s group. “Why not make that a really big dividend,” suggested one financial source. “Take on some new debt, and issue a $10 a share dividend. That would be real money.” As with most of the financial shenanigans we’ve seen employed at Tronc, such a move wouldn’t advance the business, the product that consumers receive, or the newsrooms. But it could be as plausible a scenario as any of the others.

POSTED     June 8, 2018, 11:45 a.m.
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