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Jan. 18, 2019, 10:22 a.m.
Business Models

Newsonomics: Tribune’s Thursday night surprise rescrambles the consolidation puzzle

Could the moves presage the major rollup that’s been increasingly talked about in America’s now-in-play, ever-struggling daily newspaper industry?

In a Thursday evening surprise, Tribune Publishing chairman and CEO Justin Dearborn is out, along with two company executives. Out, here, is a relative term as Dearborn’s three-year tenure, his first ever in the newspaper industry, could net him a payout of $8 million or more, while the other two could take in millions. Tim Knight, currently president of Tribune, will immediately succeed Dearborn as CEO.

Could the moves presage the major rollup that’s been increasingly talked about in America’s now-in-play, ever-struggling daily newspaper industry? Does the move tell us anything about the likelihood of Alden Global Capital successfully winning Gannett?

What will Tribune, Gannett, Digital First Media, and McClatchy — four of the major U.S. daily chains, all involved in this possible buying, selling, and mating — look like when the newsprint M&A dust settles?

The suddenness of Dearborn’s removal suggests that bigger moves are imminent.

One theory: Tribune — in play itself but left without a good buyer — seizes the moment made present by Alden’s Sunday night bid for Gannett. As Gannett itself scrambles to fend off Alden (expect a meeting between the two companies by the end of the month), both Tribune and Gannett see the same opportunity: A Gannett/Tribune merger.

Gannett now sees a Tribune merger as probably its best move, if Alden’s charge is a serious one. Tribune investors — led by former chairman Michael Ferro, whose group controls a quarter of the company’s shares — want to sell. Though Tribune rejected McClatchy’s mid-December offer of $16.50 per share, Alden’s blitz has altered the board game.

With Ferro nemesis Bob Dickey retiring, in part due to Ferro’s victory in defeating Dickey’s 2016 hostile bid for the company, Ferro could gain the merger he sought and crow about a victory. At the same time, he could exit Tribune and satisfy his own Chicago-based investors in the company. It’s no secret that it’s been Ferro — not Dearborn — who was seen as an impediment to a Tribune sale. Now, though, Ferro may have softened his stance.

In fact, to get such a deal done, sources say Ferro would be willing to drop his previous demand for a board seat on the merged Gannett-Tribune. (Ferro’s poor reputation has only gotten worse.) Or, if the Gannett deal is a bridge too far, Tribune could act on the offers made by the two companies (Donerail Group and AIM Group) that came in behind McClatchy in the fall selling sweepstakes.

With Tim Knight ascending to the CEO position, and the likely elimination of three high-priced executives earning more than a million dollars annually in salary, Tribune cuts expenses. Further, it may be able to charge the share-based compensation — totaling $10 million or more — now. That’s the clearing, or financial clean-up.

Both moves would help in its calculation of going-forward EBITDA (earnings before interest, depreciation, taxes and amortization), which often stands as the key number in calculating a sales price. The fewer the going-forward expense obligations, the higher the EBITDA, on paper at least. Buyers then pay a multiple of EBITDA; Alden’s offer stands at about 4.7x EBITDA. Raise the EBITDA by a million dollars, and a selling company could see a return of about $5 million. Raise it by $10 million and it could yield — depending on the negotiating skills and leverage of the buyer — as much as $50 million.

As the news sprinted across the web that Ferro’s long-time right hand man Justin Dearborn was gone overnight, people puzzled. With his quarter-share of the company, Ferro has long controlled the company, its board and management.

Why would Tribune dispatch Ferro’s right-hand man, Dearborn, and two Ferro hires — Ross Levinsohn, the former Yahoo head whose brief stint as publisher of the Los Angeles Times was ended by sexual harassment charges, and Mickie Rosen — so apparently unceremoniously?

The “clearing the decks” metaphor offered by one financial analyst is one good theory. The fact that David Dreier, the former GOP congressman whom Ferro put on the board in 2016, becomes chairman buttresses the case. It seems more likely that this apparent coup has Ferro’s hand on it than that he and his people are the victims of it.

While Dearborn, Levinsohn, and Rosen are now all immediately unemployed, they stand to reap millions of dollars in stock and other compensation, promised to them in agreements Ferro provided over his tenure as Tribune/Tronc chairman.

Upon sale of the company, Tronc/Tribune packages provide millions of dollars in payout. Even as they exit the employ of the company, their stock grant redemption should hold, say sources.

In March 2018, Dearborn’s compensation agreement was updated. He received “an annual base salary of $600,000 and…an annual cash bonus, with a target of 100 percent of base salary.”

The most current Tribune SEC filing totals Dearborn’s compensation, including stock awards, at as much as $4,397,500 in 2017 and $8,123,914 in 2016.

While Dearborn served almost three years in the job as CEO, both Levinsohn and Rosen’s values to the company are much less apparent.

Levinsohn joined Tronc as publisher of the Los Angeles Times in August 2016. He hired Lewis D’Vorkin as editor-in-chief, and D’Vorkin lasted four months in the job, upended by staff mutiny. Levinsohn himself was there for less than six months, as sexual harassment allegations resulted in a suspension. An internal Tronc inquiry cleared Levinsohn and he moved on to become CEO of Tronc’s L.A.-based digital play, Tribune Interactive.

Both he and Rosen, whom he had hired as LA Times president, have since quietly headed that effort, amid many staff complaints that they were being paid to do little.

As I wrote from SEC filings in August 2017, Levinsohn’s package was huge: An employment term of three years, through August 2020. One million dollars a year in salary, $600,000 per year and an additional $100,000 per quarter. A cash bonus of up to 166.66 percent of his base salary. Stock share — exercisable on a vesting schedule of three years, in three equal installments over the term of his agreement — worth about $8.5 million at [then] current Tronc share pricing. Levinsohn would also receive 400,000 shares, plus 200,000 more in the form of stock options. The most current Tribune SEC filing totals Levinsohn’s compensation, including stock awards, at as much as $7,036,000 in 2017.

It’s unclear from this reading how and when exercisable those grants may be, but financial observers doubt that the let-go executives will forego that compensation. Further, a “change of control” at Tribune — meaning a sale — is the likely accelerant to these riches. That, as I’ve pointed out over the years, encourages executives to manage to a sale, rather than to better civic and reader service.

Such numbers will only further grill Tronc/Tribune’s many critics, who have accused the company of self-dealing and profiteering. “Tribune is still making money,” one observer told me. “They are taking the cash they earn in January, February and March and giving it Dearborn, Levinsohn and Rosen.”

Meanwhile, cuts to newsroom budgets have resulted in weakened Tribune products and dozens, if not hundreds, of additional job losses.

Tribune intrigue now joins Gannett intrigue, with January only halfway over.

We know the Gannett/Alden set-to should move well into February. Gannett’s been scrambling all week, getting its defensive ducks in a row. But Gannett is known as a “shareholder-friendly company,” meaning its defenses against unwanted suitors are weak.

Alden could take its case case to those shareholders by putting up an alternative slate of board directors. The deadline to file that slate is mid-February, a few months before the vote. (It was, curiously, Gannett’s failure to file an alternative slate on time in its Tronc takeover attempt of 2016 that fatally retarded its efforts.)

Expect a first meeting between Gannett and Alden by about month’s end. In the interim, Alden may be asked to demonstrate how it would finance a $1.4 billion cash acquisition. Speculation is growing that Alden only wants to shove Gannett into play, not actually buy it.

Public filings show that Alden paid an average of $9.69 a share for its 8.5 million Gannett shares. If it fetched $12 a share — bought by someone other than Alden at the price Alden offered this week — that would net the hedge fund $19.7 million in profit. After peaking at $11.95, a nickel under Alden’s bid, on Monday, the share price has drifted downward, but still surpasses the pre-bid pricing.

Inside Gannett, there’s great nervousness.

The company is trying to send out reassuring messages to its workforce. (Long-time industry watchers will note the irony here since Gannett’s own expansion led to worries, some well-justified, of the Gannettization of the papers it acquired. That was then, this is now, and as I noted two years ago, “Your Gannettenfreude will only take you so far.”)

Gannett employees’ woes are exacerbated by the knowledge that layoffs will follow a buyout offer. Even as Alden makes its laughable case that it can better manage Gannett, the company looks publicly weak as it cuts more staff and heads toward a full-year financial report in February that won’t be positive.

Further, there’s the little problem at the top. CEO Bob Dickey announced his May retirement in December. Company executives say uncertain leadership over the next few months is only a continuation of something that was a problem for more than a year.

“Bob was just checked out,” explains one associate. “He has spent a lot of time at his home in Bend [in Central Oregon, a long journey each way to and from Gannett’s suburban Virginia headquarters].”

“There’s no doubt he’s working when he is there, but he just has too little contact with top company execs,” added another.

Execs point to Dickey’s failed bid for Tronc as the beginning of the end of his tenure, which began when Gannett divided its valuable TV properties into TEGNA in 2015.

Dickey, too, was well-compensated as his company’s operating performance declined and it cut many journalists. His 2017 compensation was estimated at $8.7 million, following $6.9 million in 2016. In retirement, he will likely reap millions more.

At Tribune, Tim Knight moves into the CEO position. Long considered a “good operator” in newspaper publishing parlance, Knight kept his head down through the twists and turns of the Michael Ferro era at Tribune.

Within the industry, Knight has been considered the adult in the often fractious Tronc room. He’s the exec with decades of newspaper executive experience, leaving the Tribune Company after 13 years and then joining Ferro for four years beginning in 2011 as Ferro operated the Chicago Sun-Times. After a brief stint as publisher of Advance’s Cleveland Plain Dealer, Ferro hired him back at Tronc in March 2017. When Ferro left his formal position as chair of Tronc last March, Knight’s responsibilities continued to grow.

Yet, interestingly, as one source put it Thursday, “he’s not a deal guy.”

Knight’s tenure could be very short, depending on whether Tribune sells and to whom. But it’s also possible that he could become CEO of a Gannett-Tribune mergeco, the chieftain of the nation’s largest newspaper company.

On Monday, I noted the dearth of CEO newspaper leadership, as Digital First Media operates without one and Dickey heads to retirement and Justin Dearborn looked like a short-timer. Dearborn’s overnight disappearance surprises even me.

Now, Tim Knight (who was unavailable to comment Thursday night, as were other players in this story) joins the CEO group. He may have a parachute amounting to more than $4 million in potential compensation, but he’s in for turbulent skies and an uncertain landing.

Photo of Tribune Tower by Bernt Rostad used under a Creative Commons license.

POSTED     Jan. 18, 2019, 10:22 a.m.
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