It’s Time for Take Two on Gannett and Tribune

(Bloomberg Opinion) -- The time is right for a Gannett Co. and Tribune Publishing Co. do-over.

Gannett on Monday rejected a $12-a-share takeover offer from MNG Enterprises Inc., which is backed by hedge fund Alden Global Capital and better known as Digital First Media. Gannett said the bid undervalued the company and that Digital First failed to answer basic questions about its ability to secure financing and antitrust approval. Responding to Gannett’s rejection, Digital First accused the company of lacking a plan to reach a $12 stock price on its own and indicated it might start a proxy fight but refrained from making any specific funding or regulatory commitments. The challenges in the high-yield debt and leveraged-loan markets of late have been well documented, and Alden Global’s other investments are faring poorly, as my colleague Joe Nocera has reported, so it doesn’t seem off base for Gannett to accuse Digital First of lacking a realistic plan to acquire it. But because Gannett is a public company, its board vowed to engage with “any party that makes a bona fide, credible proposal.” There’s one option that makes more sense than all the rest, and that’s a rapprochement with Tribune.

It’s Time for Take Two on Gannett and Tribune

Gannett doggedly pursued the publisher of the Chicago Tribune and other dailies for seven months in 2016 until the valuation reached such heady levels that its bankers balked. There was bad blood: Tribune’s chairman at the time, Michael Ferro, used every trick in the book to try to thwart Gannett’s advances, including bringing in biotechnology billionaire Patrick Soon-Shiong as a white-knight investor. But Tribune’s circumstances have changed drastically ever since. Ferro stepped down as chairman last year amid allegations of sexual harassment and is seemingly looking for an exit after brokering a deal for his 25 percent stake in Tribune that later fell apart. His cohort Justin Dearborn announced last month that he would pass the CEO reins to one of his top deputies, Timothy Knight. Soon-Shiong and Ferro had a falling out but patched things up enough for the former to buy the Los Angeles Times and San Diego Union-Tribune last year for $500 million plus the assumption of pension liabilities.

Against that backdrop, Tribune, the company that fought so hard to resist a takeover, came hat in hand to Gannett seeking to rekindle merger negotiations in the weeks before Digital First came knocking, according to the Wall Street Journal. Tribune was reportedly willing to structure a deal as a stock swap, which would allow the combined company to protect its balance sheet and retain more cash for turnaround efforts. That’s a marked difference from Ferro’s previous push for higher and higher all-cash offers. The opportunity for an all-stock deal would seem to be a selling point for Gannett shareholders who also grew queasy at the swelling valuation in the previous merger talks. The Wall Street Journal reported that Gannett rebuffed Tribune’s overtures at the time but may revisit the discussion in light of Digital First’s offer. It should.

It’s Time for Take Two on Gannett and Tribune

For Gannett shareholders, the prospect of getting bought out at a premium is always going to be more alluring. But given the lack of substance in Digital First’s offer, it seems worthwhile to consider other criteria, and a combination with Tribune would be a much better option for Gannett as a journalistic institution. I’m generally not a fan of the idea that two struggling companies can suddenly be a successful one once combined. Gannett and Tribune would have to work hard to make the merger pay off, and they may yet wind up back at square one with declining sales and profit margins and no idea what to do about it. But at least there would be a shot that something resembling a thriving newspaper publisher could emerge. There’s zero chance of that happening if Alden Global is in charge. The hedge fund is known for cutting costs to the bone at Digital First’s newspapers and not caring too much about the damage it does to the quality of its product.

Gannett has been an avid cost cutter in its own right, but the company has also invested in digital marketing to better insulate its newspapers from secular decline, and it places some value on well-written articles and talented reporters. As part of its takeover bid for Gannett, Digital First called for a moratorium on all digital investments, a step that seems likely to accelerate its newspapers’ trip to the grave. The one sticking point in the rekindling of a Tribune and Gannett deal is the question of who will lead the combined company. Gannett CEO Bob Dickey is stepping down in May, and no successor has been named yet. It’s unclear whether new Tribune CEO Knight would have an interest in running a merged entity.

“We believe Tribune shares the new Gannett’s unwavering commitment to journalistic excellence and delivering superior content on all platforms,” Dickey said in April 2016 when he made his first public offer for the company. He may be on his way out the door, but here’s his shot to capitalize on that vision.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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