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Feb. 1, 2019, 10:55 a.m.
Business Models

Newsonomics: Amid screaming alarms, consolidation mania turns feverish

In an industry where expense reduction is the prime strategy, much more consolidation is likely on the way. Little regulation prevents it, and the financials all favor it.

Alden’s going to snatch Gannett! No, Gannett’s going to turn the tables and buy Alden’s Digital First Media! But wait, Gannett will reject Alden — is that a real offer? — and turn its attention to merging with Tribune! No, Tribune — having dispatched its CEO Justin Dearborn to clear the way for a deal — will buy Gannett, or accept the kind-of offer from Gannett to buy it, which it rejected last year? But, then, there’s McClatchy in the wings, having been spurned by Tribune at the holidays and now angling for a new deal with Tribune, or Gannett, or maybe someone else!

So go the fortunes of four of the six largest U.S. daily newspaper companies. The journalists’ Twitter is alight with Game of Thrones metaphors, but I think that’s misplaced. The action seems more Bravo-esque, The Desperate Housewives of Main Street, perhaps. Or, more prosaically, as one newspaper company exec told me Wednesday, “The pressure for consolidating is only intensifying.”

Those aren’t the only digital media soaps in action. Consider the draconian, get-ahead-of-the-recession first-of-the-year layoffs at both BuzzFeed and Verizon, and Friday at Vice. Take that as one end-of-the-decade sign that the VC-driven, digital media hockey stick of near-infinite growth is badly bent, if not broken. Infinity, it turns out, isn’t infinite. Then, there’s Conde Nast’s suddenly getting paywall religion, announcing it will — after years of dithering — paywall them all, in some fashion. “I’m not sure what they are doing,” one magazine industry pro told me this week. “They’ll lose 90 percent of their traffic.” And so, as Condé has dispatched CEO Bob Sauerberg on the heels of a $120 million annual loss, there’s more potential M&A.

Is it all connected? And how much does it matter?

There’s Jill Lepore’s “Does journalism have a future?” Or Farhad Manjoo’s “Why the latest layoffs are devastating to democracy.” Jeff Israely’s “2009: The internet is killing (print) journalism. 2019: The internet is killing (internet) journalism.”. Or AP’s: “Loss of newspapers contributes to political polarization.”

CNN blared: “Media industry loses about 1,000 jobs as layoffs hit news organizations”.

And The Newseum, the temple of what-journalism-once-was, looks as if it could be sold off for parts.

All in two weeks.

Yes, it all matters, and it’s all connected.

The state of consolidation games

As January plummeted to a close, attended by those thousand or more journalism layoffs, where do we stand with all the huffing and puffing around newspaper company M&A? (The companies declined comment on their potential buying or selling strategies for this piece.)

At this writing, Gannett, having taken several weeks, will soon formally tell Alden Global Management a polite no to its “offer” to buy the company for about $1.5 billion on January 14. Though the Gannett board, which met Thursday, is suspicious that Alden doesn’t have the financing available to complete such a buy — and Alden, sources say, didn’t respond to its request to show Gannett its money — its public suiting has awoken Gannett anew. And that may have been its game plan all along, in making its “offer.” On Friday the Wall Street Journal reported that Alden’s DFM has hired a financial advisor to press its buying case. (See my best reporting-informed speculation, below.)

So what do we do know about Gannett today?

Expect the company to soon complete its process of hiring a banker to work alongside its long-time advisor Green Hill. That banker will help Gannett assess its market position. Another way to put it: America’s largest regional daily newspaper chain, the globe’s second largest given its ownership of UK’s Newsquest, is in play.

“Ask the banker” will tackle these questions: Should Gannett sell itself — and at what value and price? Should it buy? If so, what? The company experienced corporate indigestion in swallowing whole the Journal Media group in 2016. Then, it kneecapped itself in making a hostile effort to buy out Michael Ferro’s then-new trophy Tribune Publishing/Tronc, later that year. It was enough to make Gannett publicly swear off buying more newspapers — even as its merger negotiations with then-Tronc (now Tribune Publishing again) continued.

Instead, CEO Bob Dickey, who’s headed into retirement this spring and was told to focus more on “digital” by his board, re-targeted his efforts in buying digital media. In fact, it was Dickey’s buy of digital marketing companies that gave Alden a talking point, as it stalked Gannett.

Meanwhile, Gannett continues to reel internally. In January it laid off dozens of people. It’s cutting back on its heavily promoted program of placing USA Today national news inserts in many of its 109 dailies, multiple sources told me. Those inserts have largely been standalone sections; now they’ll become more integrated with local newspaper sections. That saves on newsprint cost, which ran as high as $20 million annually when the sections were introduced five years ago. One potential result: less space for local news. And, of course, fewer journalists to fill the pages anyhow.

“I am getting the feeling that Gannett, especially with the January cuts, has moved a lot closer to DFM news staffing than is generally recognized,” one veteran news manager told me. “I see the El Paso Times [with a metro population of 844,000] shows 13 people on its news staff. The editor there retired some months back…One person told me their goal is not more than one senior editor per state…This all just makes me wonder if Alden really knows what has been cut in recent years. They wouldn’t have had the detailed financials, given that it’s a hostile offer.”

As the company looks for anywhere to trim, like all public companies, it eyes the calendar. In February, Gannett, Tribune, McClatchy, Lee and the other public companies will have to report their fourth-quarter, 2018 and full-year financials. They will be ugly. The question: How ugly?

Gannett has already announced cutbacks — but it won’t be alone as companies trim ahead of the earnings reports to show their commitment to shareholder value.

Fast-declining revenues are a certainty. But how did these declines impact earnings, and what do the CEOs forecast for 2019? As wheeling and dealing among newspaper chains continues, the price of assets — the valuing of merging, acquiring or selling — gets adjusted. The weaker the results, the more vulnerable the company. The more vulnerable the company, the lower a potential sales price or valuation in a merger.

There’s also financing to worry about. Financing is tighter now than it was in mid-2018, though it has eased some from December. That isn’t only the case for the ailing newspaper trade (see Tuesday’s news that Gamestop’s buyers couldn’t get financing to complete an acquisition). But it is truer of newspaper companies, given how tough it is to forecast going-forward earnings in an industry declining so rapidly. Any of these potential deals faces tough financing standards. “Lenders now want to see any deal include some deleveraging,” said one financial observer. “If it doesn’t, it won’t fly.”

How long will the consolidation games go on?

There’s lots of action ahead. For its entire history, the U.S. daily newspaper industry has been a fragmented one. In the beginning, local printers became publishers.  Most were one-offs, single proprietors. In the seventies, eighties, and nineties, chains — Gannett, Tribune, Knight Ridder, Advance, Hearst, MediaNews, Lee, and more — grew. But they were still outnumbered by the number of family-owned concerns across America. Importantly, no single company dominated the landscape.

Today, Gatehouse (under New Media Investment Group) leads the pack with about 155 dailies. Amid all the would-be M&A hysteria, Gatehouse CEO Mike Reed has stuck to his knitting and his strategy of buying up remaining family-owned, smaller circulation titles, some in small chains, as well as individual properties. It is an approach characterized by greater precision and less rancor — and the need to incrementally grow topline revenues by acquisition. Although the company performs at the top end of regional chains, it still is losing about five percent of its same-store revenues year over year.

Just this week Gatehouse bought long-time independent Schurz Communications for $30 million, adding 10 dailies and 10 weeklies to its total. Reed’s value-oriented buying — backed by ready, lower-cost financing through Gatehouse’s operator, Fortress Investor Group — has been steady. It will likely continue to buy, as it can more easily raise money where others can’t.

All totaled, three companies — Gannett, Gatehouse, and Digital First Media — now control about a quarter of the remaining daily titles. That’s a significant concentration, historically. But in an industry where expense reduction is the prime strategy, much more consolidation is likely on the way. Little regulation prevents it, and the financials all favor it.

There remain some newspaper chain CEOs who still see a straight line between maintaining, if not growing, their title’s journalism capacity and the product quality, mainly digital, to deliver. They are a minority, unfortunately. For one, fewer and fewer would-be buys — at the prices the market still demands as of this moment — appear palatable.

“Yes, we could buy select properties, but the multiple would have to be low enough, considering the reinvestment needed to maintain EBITDA through recession,” said one of the savviest, speaking of the Tribune titles. “And we just can’t justify the reinvestment necessary in these papers to get them through the recession.”

Q: How much does the fear of recession drive M&A thinking?

A: A fair amount.

The next recession may not happen anytime soon, but in the words of economist Sam Khater, there’s a “mental recession.” Corporate chiefs, in newspapers and in other industries, now largely assume one. For many thriving industries, that just means a re-calibration. For a newspaper industry in such a distressed state, this driver carries more weight. Buying any newspaper property may require more reinvestment and for a longer period if both revenues and profits take a further hit in a 2019-2022 recession.

The fear of recession is one of at least two drivers connecting those dots from Gannett/DFM to Buzzfeed/Verizon and Conde Nast. Everyone in the media business believes it is going to get worse — before maybe getting better.

Q: What is the other common thread?

A: Google, Facebook, and increasingly Amazon dominate digital advertising and will likely will take more and more share, especially into a recession. The most recent estimate is that they control 61.9 percent of the digital ad market, worth $111 billion. (For every one percent, you could pay the salaries of over 10,000 journalists, but I digress.) (Digital disruption has wounded every legacy news and information industry in the Western world and now it’s turned on the digital news disrupters as well.

Q: What does Heath Freeman, Alden’s president and Digital First Media magnate, really want? Is Alden a buyer, or a seller, or a lemon-squeezer?

A: There’s a one-word answer: Money. To his credit, in the stories often told by his former management, Heath and DFM are really straight shooters. They’re just greedy in the “Wall Street” sense, although today’s newspaper industry is rapidly redefining the possibilities of looting sinking ships.

Four possible rationales have emerged for Alden’s bid for Gannett:

1) Alden looks at Gannett and truly sees lots of fat, despite all the skinnying Gannett management has done for good part of the decade. That’s why Alden’s bid freaked out so many Gannett employees: It could get worse.

2) Alden wants to juice Gannett’s share price so that its 7.5 percent stake, bought at about $9.68 a share, will increase. Alden cashes in and makes more money without actually having to strip any more parts from any new newspaper company. Alden’s $12 offer shot Gannett’s share price up from the $9 range, and it still rests at about $11. On paper, then, Alden’s got about $11 million.

3) Alden actually wants Gannett to buy it, as rumored recently. Would Heath Freeman sell anything? Yes — back to the single motivating principle, profit maximization. Is it likely that Gannett, which is stumbling its way into the new wilderness with a lame duck CEO, wants to buy DFM properties? No, and remember that CEO’s opinion above about how much any buyer would have to put into distressed properties. DFM properties are among the most distressed.

4) Alden wants to put Gannett into play. If someone else buys it, sending up the stock price, Alden wins. If Gannett is put into play along with Tribune, and with McClatchy eagerly seeking a deal, then maybe DFM could offload some or all of its properties as part of somebody’s roll-up strategy.

If you had to bet (don’t), you’d pick the fourth one. Alden does not appear to have the financing to make a $1.5 billion hostile takeover of Gannett possible, though its hiring of a financial advisor may tell us it’s more serious than some suspect. SEC law complicates the second option. The third one seems unlikely. Why not just cause more chaos in the flagging distressed industry and see what new hand Heath Freeman may have to play?

Q: Why is February 7 important?

A: That’s the date by which Alden would have to file an alternative slate of directors for a contested election at Gannett’s spring annual meeting. The maneuver would show Alden is serious. (Bonus points to readers who recall that Gannett CEO Bob Dickey fatally wounded his own hostile takeover of Tribune two years ago by missing the deadline to file an alternative slate in a Tribune board election.)

Q: What’s with these change-of-control clauses? Haven’t they played a major role in Tronc/Tribune Publishing’s directing of millions to a few top execs while whittling down their newsrooms?

A: Yes. Those with lots of experience in C-suite thinking say that “change of control” clauses actually carried some logic. The idea: Investors don’t want top management to reject a lucrative buy-the-company offer just to save their own jobs and incomes. Pay them well in the case of sale, and you’ve removed that disincentive.

In normal times in normal industries, that might make sense. In the newspaper industry of this wretched decade, it’s just been one more perverse incentive. As Howard Schultz gooped his intentions to run for president, journalists noted that he makes 1,049 times as much as the median Starbucks employee. I haven’t run the numbers in the newspaper industry, but it’s a number worth researching. These jobs should be well recompensed, but along the way some companies lost their ethical center.

Q: So what’s going to happen in February, or March?

A: The consolidation games push everyone into the pool.

Gannett will “assess its future.” That probably means rejecting Alden for now. Its likely next move will be to pick up the talks with Tribune that it abandoned in 2018. Now that Ferro lieutenant Justin Dearborn has been dispatched (deemed more likely to mess up a Tribune sale than help lead it), and Ferro himself has told people he would give up his long-time demand of a board seat, a deal is more likely. It would involve a stock swap, with the valuation of who gets what chunk of mergeco still the contentious issue. And who would lead? New Tribune CEO Tim Knight is the last man standing in those two companies right now, but is he “digital enough” for Gannett’s board?

Tribune badly wants to sell, but hasn’t closed the deal. It rejected a $16.50/share offer from McClatchy in December, and now trades at around $12. Suitors have included Will Wyatt’s Donerail Group and Jeremy Halbreich’s AIM Media. But in the wake of rejecting McClatchy, it couldn’t move on either of those deals. Price and financing are issues. It will likely turn to Gannett again. Importantly, Patrick Soon-Shiong, who owns 25 percent of Tribune, recently gave the Tribune board the ability to make its selling decision, giving up blocking rights. He wants out, and knows removing more obstacles to sale may finally seal some deal.

McClatchy was sorely disappointed that it failed to win Tribune. It would been more icing on CEO Craig Forman’s “deleveraging” cake, as he has pushed out the company’s big debt off into the 2020s. With Dearborn out, Soon-Shiong standing down, and Ferro’s interest maybe waning, could the deal be revived?

Or could Gannett solve its current identity problem by buying McClatchy? That would give Gannett an even bigger national footprint. But McClatchy’s $745 million debt (well down from what it borrowed to buy Knight Ridder 13 years ago) is a sticking point.

Still, financial analysts tell me that either the Gannett/Tribune deal or Tribune/McClatchy deal could result in $100 million or more of “synergies” — those cost savings that drive all of this action.

Finally, consider a few other players. Lee, a big chain of small dailies, could find a new partner. Gatehouse and Hearst will hang around the periphery, glad to pick up selected titles that may fall out of any big deals — if they can pencil them out to their satisfaction.

Photo of newspapers by dfinnecy used under a Creative Commons license.

POSTED     Feb. 1, 2019, 10:55 a.m.
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