Gannett (GCI) - Get Report  received a blow to its $864 million hostile efforts to acquire Tribune Publishing (TPUB) after an influential proxy advisory firm recommended that institutional investors don't support the USA Today publisher's "just vote no" campaign against the Chicago-based media company's directors.

The recommendation, which was made by Institutional Shareholder Services in a report obtained by The Deal Monday, comes after Gannett on May 2nd launched a "just vote no" campaign urging shareholders to oppose Tribune Publishing's eight incumbent director candidates in an uncontested election as part of an effort to bolster its unsolicited bid.

The vote on the directors, which is scheduled to take place at Tribune Publishing's June 2 annual meeting, will have no binding impact on its management or board. However, a large negative vote against Tribune Publishing's directors would send a strong message that shareholders want the two sides to engage in discussions about a combination. The effort could also backfire - a weak vote of opposition would show the opposite is true.

In addition, on Monday Tribune Publishing's board said it was rejecting Gannett's $864 million hostile bid but it also said it was inviting Gannett to agree to a mutual non-disclosure agreement to conduct a due diligence and examine whether a transaction is in the best interest of Tribune and Gannett shareholders. 

The offer of a review of the books comes as ISS backed up its recommendation against supporting Gannett's campaign by noting that the publisher didn't make a tender offer to acquire Tribune Publishing nor did it offer up any dissident director candidates. The deadline to nominate a dissident slate of directors had already passed by the time Gannett made its unsolicited bid.

Gannett's bid was increased earlier this month from $815 million to $864 million and represents a 99% premium to unaffected closing price the day before the media giant made its first bid. However, ISS suggested that based on its analysis that the revised bid still "materially underrepresented the intrinsic value of the company." In addition, ISS said that "given these considerations" it appears that Tribune Publishing's response "appears to have been appropriate." and leaves little reason to believe opposing director candidates "is warranted."

The Rockville, Md.-based proxy adviser's recommendations carry a lot of weight with institutional investors, many of which have their own internal vote review committees that also take into account the firm's outside analysis.

However, the recommendation is likely not going to appease Tribune Publishing's second largest shareholder, asset manager Oaktree Capital Group, which on May 6 reported in an activist securities filing that it was urging the media company to "pursue discussions" with Gannett, which owns over 100 newspapers, to see if an acceptable agreement can be reached between the two media companies.

Oaktree owns a 15% Tribune Publishing stake and on Monday it submitted a securities filing including a letter it sent to the company Friday saying it should establish an independent committee with advisers to consider Gannett's proposal.

Nevertheless, the ISS recommendation could have more sway with other Tribune Publishing institutional investors, such as BlackRock, Vanguard or State Street, which all own significant stakes in the company. A vote for Tribune Publishing directors by these investors could weaken Gannett's campaign and unravel its acquisition efforts down the road. 

In addition, Michael Ferro, Tribune Publishing's executive chairman, could pose a significant complication to a possible deal. Ferro acquired a 16% stake in Tribune Publishing about three months ago for roughly $8.50 a share at a slight discount to the media company's share closing price a day prior to the announcement of the deal, according to Gannett.

In addition, Tribune Publishing said Monday that it received a $70.5 million capital investment from Nant Capital in exchange for a 12.9% stake in Tribune Publishing. Gannett on Monday argued that the share issuance, coupled with Ferro's stake represents an ownership position of roughly 30%. The sale suggests that Tribune Publishing is building a blocking stake in advance of the June 2 meeting.

Oaktree in its letter said Gannett filed proxy material on Friday noting that Ferro stated at a May 12 meeting with Gannett that "a business combination between Gannett and Tribune could make sense as long as Mr. Ferro would have a 'significant role' and was its 'largest shareholder.'"

In addition, Oaktree suggested that Ferro wants to turn the table by making his own bid to take over Gannett, a possibility that was widely reported last week.

As a result, Oaktree is urging Tribune Publishing to not include Ferro and four other directors on the independent committee it wants the media company to set up. "The developments since our Wednesday letter to you have only caused us to believe more strongly that a negotiated transaction with Gannett is in the best interests of all Tribune shareholders," Oaktree said in its letter.