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April 18, 2019, 10:38 a.m.

Newsonomics: The newspaper industry is thirsty for liquidity as it tries to merge its way out of trouble

Newspaper company CEOs will be the first to tell you a new round of consolidation won’t solve their problems. But it might give them another year or two of breathing room.

“People think nothing is happening, but that’s the farthest thing from the truth. Everybody is talking to everybody.”

That’s the best quick summation I can offer of the first few months of what I called 2019 Consolidation Games back in January. That line, offered last week by one newspaper chain CEO, is echoed by his peers.

The early-year big industry game-changing questions seem unchanged:

  • Will Gannett successfully fend off the seemingly inept armored assault of industry heel Alden Global Capital? Is Gannett’s aim to hire a new “name” CEO part of that defense?
  • Will Tribune ever find someone who wants to buy the company or merge with it — at a price it’s willing to accept?
  • Will McClatchy make a new effort to convince Tribune that it’s its last best hope?

These are all questions — involving 4 of the 6 largest newspaper chains in the country — that are all still much in play. But now you can add several new ones.

Where is GateHouse in all this consolidation action? It’s smaller than Gannett in revenues, but it owns 145 (mostly smaller) dailies, more than Gannett’s 109. Could America’s two largest chains find companionship in each other, bonded by their lonely finances?

What does the unending decline of print advertising mean for this universal urge to merge?

And what will the liquidity crisis in digital media mean for the wider publishing trade? Digital news assets are seeing their valuation drop, not just their colleagues born of print. That’s the reason there are so many would-be sellers — and so few buyers.

Parched

Let’s first consider that liquidity crisis, as explained by one of the few buyers out there these days, Bustle Digital Group CEO Bryan Goldberg.

“It’s a broken market. Not just in terms of prices we’re getting on assets — it’s a broken market in terms of just sort of a liquidity crisis. That’s how I describe it now: There’s just sort of a media liquidity crisis that’s driving prices to be even more nonsensically low. But there’s just going to be beneficiaries of that. I mean, that’s the nature of the market, right?” Which market? “I kind of view it like the real estate market in Florida was in 2010.”

So as new money dried up for ventures like Mic and The Outline, Goldberg saw specks of gold where others wouldn’t pan. He bought the remains of the failed millennial-oriented Mic for about $5 million and The Outline for a lot less than that. He’ll harvest Mic’s work for feature video through his expanding group of mainly women-oriented websites. With The Outline, he brings in founder Josh Topolsky, who’ll launch a tech vertical for Bustle later this year.

Last fall, he bought the rights to (but not the baggage of) Gawker for a mere $1.5 million; it’ll relaunch, probably in later summer. (It’s had some birthing pains.)

Goldberg was close to snagging an even bigger prize this month. As Univision tended the embers of its Gizmodo Media Group fire sale, Bustle was in the mix, but it wouldn’t exceed private equity Great Hill Partners’ $40 million bid. Great Hill, with serial entrepreneur Jim Spanfeller heading the operation, will now attempt to rationalize the diverse toy set of GMG, deciding what to keep (everyone says Lifehacker has the most value) and what to sell to other companies who may want to merge a vertical or two into their own products.

(How much of a fire sale was GMG? Univision had bought the assemblage of sites for more than $165 million three years ago, and it had hoped to get at least $100 million for them when it put them on the market last summer, after an internal Univision meltdown.)

In that wider digital media sphere, consider BuzzFeed’s and Vox Media’s recent cutbacks and reorientation. They no longer have the access to capital like from early investors like NBC Universal, now loath to double down given the universal damage to ad-supported publishing wrought by Google and Facebook. The 2017 fire sale of one-time high-flyer Mashable — for $50 million, about one-sixth of its top-end value circa 2015 — alerted us to the beginning of this end, one of the first signs of this liquidity crisis.

It’s the same liquidity crisis that afflicts local news, from the smaller players to the largest.

Jim Brady’s Spirited Media, even with some improving financials, couldn’t raise enough money to continue on and sold off its last site last week, Billy Penn to WHYY. In local, the entities swooping in with capital have often been public media outlets — along with Billy Penn, Denverite (Colorado Public Radio), LAist (KPCC), DCist (WAMU), Gothamist (WNYC), and New Jersey Spotlight (WNET) have all been snapped up as text-centric, cheap-to-experiment local journalism extensions.

And as we return to the Consolidation Games, any merger must be able to find financiers with stomachs strong enough to fund it. Liquidity, liquidity, liquidity.

As we get further into 2019, I’ve spoken recently to a number of newspaper executives, and none say they can hope for anything better than a 4 percent decline in revenues, year over year. That’s the best-case scenario. And that means more and more cuts — despite even the least civic-oriented publishers now realizing that more newsroom cuts further depress subscription revenue, deepening the downward financial spiral.

The last few years of this is why all the chains are focused on mergers. The simple logic: Take two corporate headquarters staffs and turn them into one. Centralize every operation and cost center they can think of. And then project tens or hundreds of millions of dollars in “savings” over the next two or so years.

They’ll be the first to tell you that this strategy won’t save them — but it’ll buy some time.

They don’t want to think about what else they may have to do, but severely cutting back days of print is more than a whisper in the industry. And they all wonder how, if a recession comes, they’d manage to stay profitable.

Toward a May showdown

May 16 — the date of Gannett’s annual meeting — is the date that might reignite the M&A engines.

Before then, Gannett could make a big splash and announce a high-profile CEO to replace retiring Bob Dickey. It was Dickey’s announced departure — without a successor being named — that opened a door for Alden, via its MNG Enterprises, to take on the already-weakened company.

As it happens, Gannett is quite close to finishing its search and picking its next chief executive. But I’m told don’t expect that naming until after — probably soon after — May 16.

In the meantime, the PR squads of both Alden and Gannett send out regular releases bashing each other, setting up the battlefield. At that May 16 meeting, shareholders will vote on Gannett’s board of directors. In its proxy battle, Alden has proposed its own slate of directors (“on the Blue Proxy Card”), opposing Gannett’s chosen list.

Gannett’s Wednesday release: “Gannett Sends Letter to Shareholders Highlighting Eight Highly Experienced, Independent Director Nominees. Questions How MNG’s Highly Conflicted Nominees Could Fulfill Their Fiduciary Duty to Gannett Shareholders.” Gannett is right there’s a prima facie conflict here: Each of Alden’s board nominees has some tie to Alden or its owned Digital First Media. But then again, isn’t bald self-interest the sad lingua franca of 2019?

That would seem to make it easy for Gannett to make the case to its shareholders that Alden’s self-serving slate wouldn’t have Gannett shareholder interests at heart. The suspicions go even deeper, though, as to Alden’s real intent. Those who know Alden and its strategy of harvesting of newspapers’ real estate suggest this dark scenario: Even if Alden wins the Gannett board vote, they might not actually buy the company. They could just use their board control to sell off the real estate owned by all those Gannett papers across the country — and make a killing.

Alden, for its part, repeats this mantra: “MNG ENTERPRISES FILES SHAREHOLDER PRESENTATION ON ITS 41% PREMIUM PROPOSAL FOR GANNETT AND GANNETT’S MISGUIDED AND FAILING OPERATING STRATEGY.” (While Gannett tends toward title case, Alden’s MNG seems to prefer ALL CAPS.)

Gannett remains mildly optimistic that it will win the May 16 battle, but it knows that a good chunk of the votes will be swayed by two proxy advisory services. Institutional Shareholder Services and Glass Lewis will both issue analysis to institutional shareholders on the board director choices. Given Alden’s offer of $12 a share, in a down newspaper market, Gannett is nervous about those forthcoming reports. Could institutional shareholders, who own significant chunks of Gannett stock, decide to take Alden’s money and run? (Just seven largest institutional investors collectively own 52 percent of Gannett shares.)

That is, of course, they believe the Alden offer is “real.” As the parties have publicly bickered — echoing the once-thought-to-be-unseemly public cockfight between Gannett and Michael Ferro’s Tribune in 2016 — Gannett has repeatedly said that Alden hasn’t proven it really has the money to complete the $1.3 billion deal.

Alden recently provided an opinion from Oaktree Capital Management saying that Oaktree was “highly confident” that the financing could be arranged. Curiously, Oaktree didn’t say it would actually provide any part of the financing — just that it’s “highly confident.” We don’t know how much Oaktree was paid for that oblique opinion. But however much it was, it’s just more “newspaper money” getting thrown into the financial engineering pot.

(Those of us inflicted with memories of Tronc drama will remember Oaktree’s on-again, off-again supporting role as the company that frequently complained about Ferro’s self-dealing and planned to file a lawsuit over it. That complaint grew louder and louder until…Ferro bought Oaktree out for $56 million — an easy way to buy silence.)

Just yesterday, Alden — easily the most loathed operator in a less-than-loved industry — took another blow. The Washington Post reported that the Department of Labor is investigating Alden’s handling/mishandling of employee pension funds. Alden had invested nearly $250 million of Digital First Media employees’ pension funds into its own businesses — a possible violation of ERISA, which requires prudent and diversified handling of pension funds. (Gannett’s USA Today was happy to write about it too.) The Post reported that “90 percent or more of some MediaNews Group pensions was invested in two Alden funds based in the Cayman Islands.”

Of course, such allegations aren’t new. Julie Reynolds’ in-depth reporting on the documents tumbling out of a lawsuit filed by Alden investment partner Solus turned up a spate of similar questions. But news that the feds are now involved can’t help Alden’s reputation with Gannett shareholders.

Let’s take one final trip down the Alden/Digital First Media/Journal Register/MediaNews Group memory road — many names for many iterations of one company. One smart observer has noted that the company has changed how it appears on its newspaper websites. “Copyright © 2018 Digital First Media” has been replaced by “Copyright © 2019 MediaNews Group, Inc.”. “Digital First Media” — the so-ironic-in-retrospect moniker that once-high-flying CEO John Paton gave the company after its double-bankruptcy birth at the end of 2013 — has been swapped for MediaNews Group, one of those two companies that later formed DFM. For a chain best known for milking print — and providing relatively little investment for digital — that’s probably a better choice than Digital Last Media. In fact — full circle — one of Alden’s central contentions about why Gannett management has to go is that it has overinvested in “digital.” (Cue the image of Slim Pickens enjoying his final descent in Dr. Strangelove.)

Plan B — or B, C, and D

As with all the M&A talk, there are so many details still to be worked through. But know that there are many more conversations going on between these newspaper chains than have been reported publicly.

Assuming it can win its proxy fight, Gannett will be looking toward an Alden-out-of-the-way future. Its banker, Goldman Sachs, is plumbing the possibilities. Among those it’s talking with is Lazard, which represents Tribune. Gannett and Tribune talked merger last summer, but that round was bedeviled by both irreconcilable valuations and Michael Ferro’s dyspeptic personality. Now, with Ferro (somewhat) out of the way and Tribune shareholder Patrick Soon-Shiong having agreed to let the board decide on a buyer — not to mention worsening financials for everyone involved — a deal might be reachable.

Given Gannett’s imminent new CEO, it’s assumed that Gannett management would largely survive, and Tribune execs would unfurl their golden parachutes toward the closest beach.

For Tribune, Gannett may be the partner that works best. Activist investor Wil Wyatt has been trying to pull off a buy-and-split-it deal for Tribune. Sources say Wyatt has likely buyers lined up in Chicago (for the Tribune) and Baltimore (for the Sun), but can’t find buyers elsewhere at prices it would need to make a deal work.

Then there’s McClatchy. It too badly wants a deal to buy time, but in December it refused to raise its $16.50 cash-and-stock offer for Tribune — a deal Tribune unexpectedly rejected. That deal could be rekindled. (Tribune is trading at around $11.70 today.)

McClatchy/Gannett? Highly unlikely, given the resulting debt load McClatchy would carry into such a deal.

Let me offer up a new match. What about Gannett/GateHouse? Now that would be a rollup. Together, they would own 254 dailies — 20 percent of the country’s total.

The two companies actually share a number of strategies. Both have done a lot of centralization of functions; both have made big forays into local digital marketing. While their cultures and management styles differ significantly — and GateHouse is oriented toward smaller markets than Gannett — it’s a time when odder marriages become possible. And the combo would really provide what all of these players are looking for — those tens and hundreds of millions in two-year savings from consolidation synergies.

The ground has also recently shifted under GateHouse, formally known as New Media Investment Group. CEO Mike Reed has threaded the needle more successfully than most of his peers. He’d been a savvy buyer of properties, at good prices, and investors had liked his transformation model, which focuses on centralization and local commerce. (He explained it here at the Lab last summer.) But though GateHouse’s 2018 performance was at the high end of the industry — a revenue decline of only 5.3% — Reed failed to meet his flat target of 0 percent revenue change year over year. Investors believe the bloom is off the GateHouse rose, and they’ve taken its share price from $19 last July to under $11 now.

Given all that, GateHouse’s ability to keep growing — buying more newspapers from smaller and family chains that want to sell — is now limited.

So might Plan B for GateHouse — and its managing partner, Fortress Investment — be a merger with Gannett?

Let’s just say for now that it wouldn’t be surprising if the idea has been broached.

Desert photo by David Rosen used under a Creative Commons license. Newsboy photo (1915) by Lewis Wickes Hines.

POSTED     April 18, 2019, 10:38 a.m.
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