Photograph by Hachephotography/Getty Images/Flickr RF
By Mathew Ingram
May 20, 2016

As newspaper chains Gannett Co. and Tribune Publishing trade threatening emails and legal notices over a hostile acquisition bid that Gannett launched last month, it’s hard not to picture a couple of massive dinosaurs circling each other in some Mesozoic Era desert battleground. The winner gets to eat the loser, but that’s probably not going to stop the meteor that is hurtling towards the earth.

Gannett, which owns papers like USA Today and the Detroit Free Press, threw the first punch in April with an $815-million takeover offer for Tribune, whose major assets are the Los Angeles Times and the Chicago Tribune. It quickly became obvious that it wasn’t going to be a friendly deal when Gannett accused Tribune management of ignoring its offer and started sending out passive-aggressive press releases.

Tribune management, meanwhile, eventually responded to the offer by saying Gannett was trying to “steal the company” from shareholders, despite the fact that the original price was a 63% premium to Tribune’s market value before the deal was announced.

The pressure on Tribune’s controlling shareholder, Chicago-based entrepreneur Michael Ferro, increased after the company’s second-largest shareholder—investment fund Oaktree Capital Management—sent a letter to the company’s board advising it to “engage Gannett immediately” about the takeover bid, calling it “the only possible conclusion consistent with your fiduciary duty.”

In the latest development, Ferro responded to a new, more valuable offer from Gannett by saying he had no intention of being acquired by the larger company. In fact, Ferro apparently told Los Angeles Times staffers that he was planning to mount his own acquisition bid for Gannett, according to a report from Politico’s Ken Doctor.

Just how Tribune (TPUB) would mount a hostile takeover bid for Gannett (GCI), a company that is more than four times its size in terms of stock-market value, is unclear. To say this news was received with great skepticism would be an understatement. In order to buy more time, meanwhile, Tribune also implemented a so-called “poison pill” designed to hold Gannett’s offer at bay.

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Ferro has tried to make the argument that Gannett’s offer for Tribune is too cheap because he has a plan in place that will dramatically increase the chain’s value—in part by expanding the global reach of papers like the Los Angeles Times with new bureaus in other countries. But not everyone is convinced that these grand plans will bear fruit, and those skeptics appear to include the company’s second-largest shareholder.

In a statement about the deal, Oaktree said it met with Ferro and listened to his plans for the “digital transformation” of Tribune Publishing, but believed his ideas were too risky and unlikely to succeed. “Companies with much greater resources and a substantial head start are struggling in a rapidly changing environment to effect digital change that is profound enough and quick enough to overcome the outgoing tide of print revenues,” the firm said.

In summary, we have not seen anything to give us any confidence that Tribune on its own, with the resources and competitive position it has today, can achieve over any reasonable period of time the value for shareholders that we believe can likely be achieved through a transaction with Gannett

For Ferro, who made most of his money in e-commerce and private equity before getting involved with the ownership group behind the Chicago Sun-Times, rejecting Gannett’s bid appears to be at least in part about ego.

But for Gannett, there is only one real driving force behind its offer, and that is the need to consolidate as many print newspaper assets as possible, as cheaply as possible. Why would it want to do this? Because it’s about the only survival strategy left in a rapidly declining industry.

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The print-advertising revenue that used to prop up the business models of newspaper chains like Gannett and Tribune’s former parent, Tribune Co., has disintegrated over the past decade as advertisers and readers have moved to digital platforms like Facebook and Google. Between 2000 and 2014, the U.S. newspaper industry lost more than $50 billion in advertising revenue, and if anything, that trend has probably accelerated since.

The only real option left for largely print-based companies like Gannett and Tribune in that kind of environment is consolidation and cost-cutting. So Gannett wants to bring the smaller company under its wing because that would allow it to combine editorial and business units and remove costs. Some analysts say those synergies could generate as much as $100 million in savings, and thereby boost Gannett’s cash flow.

As investor and CNBC financial commentator Kevin O’Leary said when he discussed the deal, the print newspaper business is heading towards the zero mark, and so the only real approach is to milk those assets as efficiently as possible. “By putting all the zero candidates together on life support,” O’Leary said, “you suck out every dollar before you turn out the lights.” It’s not a very happy metaphor, but it’s pretty close to the truth.

Michael Ferro may want his shareholders to have faith in his vision of returning Tribune Publishing to some kind of halcyon time when newspapers ruled the media world and spun off millions in cash flow with virtually no effort. But his investors would probably rather just have some money and a stake in something larger that has a better chance of survival.

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