Gannett's Offer for Tribune Comes at Critical Juncture for Both Companies

Gannett (GCI) , owner of USA Today, is seeking to strengthen its national and local digital advertising sales networks by proposing to buy Tribune Publishing Co. (TPUB) in a deal valued at $815 million. 

The transaction, if accepted by Tribune shareholders, would create the country's largest newspaper company at a time when the asset values for print publications continue to decline.

The offer, announced Monday, would pay shareholders of Tribune, owner of the Los Angeles Times and Chicago Tribune, $12.25 per share in cash, a 63% premium to its Friday closing price of $7.52. Gannett also agrees to assume debt of about $390 million.

Shares of Chicago-based Tribune Publishing were surging 54% to $11.56, indicating that shareholders approve of any transaction that could bolster a stock that was trading at $18.50 a year ago. McLean, Virginia-based Gannett was adding 6.3% to $16.77.

Gannett, in a statement, sought to convince Tribune management that a combination of the two companies would create a robust print and digital platform capable of selling advertising on to national and local businesses.

Yet Tribune Publishing, in a response from CEO Justin Dearborn, said the company was "in the midst of significant transformation," a reference to the plans being hatched by a new management team headed by Michael Ferro, its largest shareholders. Dearborn told Gannett 
Chairman John Jeffrey Louis and CEO Robert Dickey that the company is reviewing the proposal and "will respond to you as promptly as feasible."

Gannett's hostile buyout offer comes at a crucial time for both companies. 

Ferro was hoping to put in place a plan to grow Tribune Publishing upon taking a larger role in its operations after his Merrick Media made a $44 million cash infusion in the company in exchange for a 16.6% stake. A technology entrepreneur, Ferro was already well known in Chicago having built a 40% stake in its chief rival the Chicago Sun-Times. To avoid a conflict of interest, Ferro donated his Sun-Times stake to a new charitable trust, the Chicago Tribune reported.

But pressure on Ferro is certain to intensify as the company prepares to hold its shareholder meeting on June 2.

"I cannot see a scenario in which they're not forced to sell," Ken Doctor, a longtime newspaper industry analyst currently a columnist for Politico Media, said in an interview from Santa Cruz, Calif. "I'm surprised by the scope of the deal but you have some very good consolidation possibilities for Gannett."

Tribune Publishing's Chicago Tribune as well as its Orlando Sun and Fort Lauderdale SunSentinel newspaper offer a compelling fit for Gannett's newspaper holdings in Milwaukee as well as the Florida cities of Tallahassee, Fort Meyers and Naples. Earlier this month, Gannett, which owns 107 daily newspapers nationwide, closed its $280 million acquisition of the Journal Media Group, owner of the Milwaukee Journal Sentinel and the Naples Daily News.

Additionally, Gannett is hoping to further enhance its national advertising sales by adding two other major metro dailies, the Tribune's Hartford Courant and the Baltimore Sun.

"The Florida papers are a big part of this deal," Doctor said. "On the fact of it, it seems, 'why buy so many metro papers.' But Gannett is very strong in Florida, they'll be the largest publisher in the state and with McClatchy struggling as well, they could be poised to acquire the Miami Herald."

Sacramento-based McClatchy (MNI) , which also owns The Sacramento Bee and The Charlotte Observer, rose 7.1% to $1.20.

Gannett, which has invested heavily in its digital operations, is hoping the Tribune acquisition can bolster the profile of its USA Today Network group, which manages it national and local brands. If it is successful in acquiring Tribune, Gannett may be better positioned to compete with Alphabet's (GOOGL) Google and Facebook (FB) for local digital advertising sales in selected markets such as Chicago-Milwaukee and Florida, Doctor said.

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The coming days are likely to be critical for the future of Tribune Publishing, the newspaper half of a media company that once held considerable sway both financial and political within both media and government. In 1999, an ambitious Tribune paid $8 billion in cash and stock to acquire Times Mirror, owner of the Los Angeles Times and Long Island's Newsday.

But those are distance memories for a publishing company that has struggled to grow since being split from its broadcast properties in August 2014 while suffering damage to staff morale and operations as a result of a torturous four-year bankruptcy process that ended in 2012. Tribune Media  (TRCO) , which holds the company's TV stations including Chicago's WGN, hasn't fared much better, falling 44% over the past year.

Ferro, as Tribune Publishing's non-executive chairman, must entertain a buyout offer for a company has recently installed a new chief executive and chief financial officer in the past two months. Dearborn was hired in February and Terry Jimenez was made CFO in March just as Tribune Publishing replaced its auditor PricewatershouseCoopers with Ernst & Young complaining of an "ineffective control environment" in an SEC filing.

"Recent management upheaval creates numerous risks with respect to strategy and execution going forward," CRT Capital equity analyst Lance Vitanza said in an investor note. "There's seemingly never a dull moment for Tribune Publishing shareholders."

Tribune Publishing fell 2% last year to $1.67 billion as legacy print publications continue to grapple with a decade-long transition of brand managers moving advertising money to a variety of online platforms.

Gannett, meanwhile, had seen its stock price rise 11% since it began trading separately from its broadcast properties, which became incorporated as Tegna (TGNA) . Nonetheless, the company's fourth-quarter sales of $739.3 million missed analyst forecasts just as CEO Robert J. Dickey said it expected revenue to decline 5% to 7% in 2016.

For Tribune, the split from its broadcast group was made harder because ownership of its underlying real estate went with its TV properties rather than helping to shore-up the value of its newspaper businesses. When News Corp was reformed in 2013 as a print and digital news company, it retained its real estate holdings.

Other companies to have split their print operations from broadcast holdings in recent years include Time Warner (TWX) , E.W. Scripps (SSP) , Belo (BLC) and Media General (MEG) . Gannett reports its first quarter earnings on Wednesday.

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