(Bloomberg Opinion) -- Better the devil with money than the devil without it.
USA Today publisher Gannett Co. announced late Monday that it would sell itself to New Media Investment Group Inc. in a cash-and-stock deal valued at $1.9 billion including debt, or about $12.06 a share based on last week’s closing prices. The agreement combines the two largest newspaper publishers in America and comes just three months after Gannett successfully rebuffed a proxy fight launched by an Alden Global-backed newspaper group in a bid to force the board to consider its $12 a share takeover offer.
In that fight, Gannett lambasted Alden’s penchant for aggressive cost cutting and seemingly endless journalist firings, saying these practices undercut “papers’ ability to produce quality journalism and retain subscribers.” But New Media is hardly a neophyte when it comes to cost cutting. At the end of the day, it appears it was really just about the money. New Media has clinched a term loan from Apollo Global Management to fund the takeover, whereas Alden’s bid lacked any firm financing commitments. Put another way, New Media was able to afford a Gannett takeover; Alden wasn’t.
The $300 million in annual savings New Media is targeting from the merger of its GateHouse Media operations with Gannett is a huge number and implies a dizzying level of cost cuts. That’s nearly 7% of the companies’ combined sales over the past year. By comparison, when Gannett pursued Tribune Publishing Co. in 2016, the only public synergy number the company gave was $50 million. Gannett indicated at various points that the ultimate savings could be higher, but there’s no reason to think that in that contentious battle, the company was withholding the fact that synergies could in fact be six times as high.
For the sake of argument, let’s say Gannett was really eyeing something more like $100 million in cost savings from a Tribune deal. That would have been a little over 2% of Tribune and Gannett’s combined sales in 2016. Another key difference is that at that point in time, Tribune was a relatively fatty newspaper company and needed some operational improvement. Gannett and GateHouse’s cost cuts will come on top of years’ worth of trimming.
The companies say the savings will come from the increased scale of the organization, the sharing of best practices, leveraging existing infrastructure, facility rationalization and other “judicious” cost reductions, which I’m going to assume is a euphemism for job cuts. Against this backdrop of heavy cost cutting and the need for consolidation to survive, New Media does appear to be cutting its dividend, but the company expects to raise the payout over time as it repays debt.
Speaking of debt, you know who doesn’t have very much of it anymore? Gannett’s former would-be partner, Tribune. The company had a net cash balance at the end of 2018 and just $48 million of net debt as of March, according to data compiled by Bloomberg. Recall that Tribune had reportedly attempted to rekindle merger talks with Gannett in the weeks before Alden-backed MNG Enterprises Inc. launched its pursuit of the company. Gannett staunchly defended its digital initiatives amid criticism from Alden about a lack of return. While it claims the New Media deal will help it accelerate its investments on that front, it remains unclear to me why it wouldn’t be preferable to tap Tribune’s relatively pristine balance sheet. A deal with Tribune is hardly without its own share of risks, though, in a time of declining circulation and advertising dollars.
At the end of the day, I’m not sure there are any great options left for newspaper companies. New Media shares fell 7.6% on the news of the Gannett merger Monday and were down as much as an additional 17% on Tuesday. It's a sign that investors have their doubts about the companies’ ability to achieve the deal’s purported benefits. The decline also puts the offer price well below the $12 Alden Global had offered (albeit without ever giving a firm indication of the financing to back that up). This deal may be all about the money, but it says a lot that Gannett, the largest newspaper publisher by circulation, now views itself as a seller in this environment.
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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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