Activist Funds Lose After Gannett Cancels Tronc Bid Effort

Gannett's (GCI) announcement Tuesday that it was cancelling its six-month-long hostile effort to acquire the publisher of the Chicago Tribune and L.A. Times also puts a spotlight on a number of activist funds and arbitrageurs who accumulated large stakes and failed in their efforts to drive a combination of the two media giants.

The McLean, Va.-based owner of USA Today -- and the country's largest newspaper publisher -- issued a short statement saying it was terminating its discussions to acquire the Chicago Tribune and L.A. Times publisher, which changed its name from Tribune Publishing to Tronc (TRNC) in June. Although the statement didn't provide any additional details, reports suggest that banks set to finance Gannett's takeover of Tronc had backed out of the potential deal rather than fund a higher bid of $18.75 a share, up from $15 a share in May and $12.25 a share in April.

In addition, Tronc issued a statement noting that it had "serious doubts about Gannett's ability to finance a transaction" that was in the best interest of shareholders.

The announcement drove Tronc's shares down significantly in premarket trading to $9.92 a share, down 18% from its Monday close of $12.03 a share. The share price drop was likely a major disappointment for a number of activist funds and arbitrageur investors that had accumulated stakes as part of a push to drive a deal, with an unsuccessful result.

Case in point: Activist investor HG Vora Capital Management in August launched a campaign pushing for Tronc to consider "strategic alternatives" such as a sale. The fund reported accumulating a 14.9% stake in shares and derivatives. 

In addition, asset manager Oaktree Capital, according to a June securities filing, reported owning a 13% stake. In a letter in May, it urged the media company to "pursue discussions" with Gannett. It also urged Tribune to set up an independent committee of directors, assisted by independent advisers, to evaluate Gannett's proposal at the time. Another occasional activist fund, TCS Capital Management, accumulated a 1.35% stake according to FactSet.

Towle, also a disgruntled fund, liquidated its 4% stake in the media company in June. Towle's director of research, Peter Lewis, told The Deal Tuesday that he sold his stake in the open market after Gannett had failed to convince a majority of shareholders to vote against the publishing company's directors in an uncontested election in early June. Lewis said he had lost confidence in the current management team at Tronc and was happy he had sold his stake then. "The leadership there is not someone we wanted to partner with and it was more hassle that it was worth and here we are with no deal," Lewis said.

The conclusion of the hostile bid effort also puts a spotlight on Tribune Publishing's non-executive chairman Michael Ferro and his successful strategy at thwarting the hostile bid. His investment vehicle accumulated a 16.5% stake in the media company in February, an investment that likely was being accumulated as Gannett considered a hostile bid.

In another strategic move to shore up shareholder opposition to Gannett's effort, Tronc, under Ferro's oversight, engineered a friendly investment by Nant Capital's Patrick Soon-Shiong, a surgeon and scientist. In May, Soon-Shiong made a $70.5 million investment in Tribune Publishing in exchange for a 12.9% stake and a board seat. The move was considered by some to be a blocking stake that could limit any future activist effort to replace directors on the company's board.

It became much more difficult to strike a Gannett-Tronc deal after Gannett in June failed to convince a majority of shareholders to back a so-called "just vote no" campaign against the publishing company's directors in a non-contested election. The vote had no binding impact but Gannett was hoping it would put public and shareholder pressure on Tronc to consider a deal. About 49% of shares not affiliated with Tribune Publishing voted against directors in the campaign but the result in many ways was a victory for the Chicago Tribune publisher as all directors were elected by a majority of votes.

Goldman Sachs and Lazard provided financial advice to Tronc. Kirkland & Ellis provided legal advice.

It is possible that Gannett could relaunch its hostile bid effort in the future. But Gannett likely read the writing on the wall and realized that another insurgency campaign at the 2017 annual meeting likely wouldn't have fared well. In addition to Ferro's large stake, Soon-Shiong, for example, would have been able to vote his 12.9% stake at next year's meeting, and expect that he would have voted for the incumbent board.

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