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Boletín Semanal diciembre 12, 2019

What was once expected to be $200 million in annual cost savings has now grown to $400 million or more. But how much blood is left to be drawn from this stone?

By KEN DOCTOR @kdoctor Nov. 14, 2019, 12:15 p.m. 

You think $300 million in costs cut is a big number? Try $400 million. Or more than $400 million.

Those are the internal numbers in the air as America’s two largest newspaper chains, Gannett and GateHouse, try to land their megamerger, first announced in August.

Follow the money: When I first wrote about this potential union back in July, the estimated annual cost savings — “synergy” — to be derived from a merger was “something like $200 million.” By August, it was “$200 to 300 million.” Then it was “$275–300 million.” Now, talk has gone to $400 million and beyond, into the range of nearly half a billion dollars.

What does that mean? Almost certainly, even more reduction in headcount than had been anticipated. (Executives declined to comment on the amount the synergies they’re now eyeing.)

How much? In any room of eight people at a current GateHouse or Gannett operation, one is likely to see her job gone in 2020. One in eight would add up to 3,450 of the combined companies’ 27,600 jobs. Some observers expect that the final total to be higher than that. And the company won’t wait for the first of the year to begin layoffs: With immediate savings a priority, expect those anxiety-inducing conversations to begin right after Thanksgiving.

Those layoffs may well be on top of those already going forward in current Gannett newsrooms. As Gannett finishes its regular budgeting for 2020, its newsrooms can expect 3 to 5 percent cuts in their budgets, sources tell me.

This morning marked the penultimate go-ahead in what has been a yearlong process. Shareholders of both Gannett and GateHouse voted this morning on the merger, which will create a giant (for newspapers) company that will retain the Gannett name. (The shareholders voting for GateHouse are owners of New Media Investment Group, a.k.a. NEWM, GateHouse’s holding company.)

Both said yes. NEWM’s board went first: “Precise vote totals were not immediately available, but New Media CEO Mike Reed said that about 99% of the 75% of shareholders who voted approved the deal.” Then the results of Gannett’s vote was announced at 10 a.m.

They approved the deal despite the value of the deal plummeting since it was first announced. On that day in August, NEWM shares stood at $10.70. At market close yesterday, they’d dropped to $6.68, including a six percent decline on Wednesday alone. The deal originally valued at $1.38 billion is now worth $1.13 billion.

Why the drop? Some investors looking at the deal had hoped it would fail and thought they could catch a NEWM bounce; perhaps some abandoned the stock as the merger became a near-certainty. Perhaps you can blame McClatchy, the next largest newspaper chain, for souring the market; its stock dropped 12 percent yesterday after it announced that the IRS had denied its request for pension fund funding relief. (It’s down 22 percent since Friday.)

Or maybe it was just the accumulated toll of poor earnings reports from both GateHouse and Gannett. Or did major NEWM investor Leon Cooperman’s pooh-poohing of New Gannett’s projections — “nobody believes any of the numbers coming out” — convince others to get out? (Cooperman’s been in the news lately for other reasons.) Gannett’s USA Today reported that some “large investors in New Media appear to have sold off shares earlier this week.”

Figure that some combination of all those explanations is at play.

Anyway, life, such as it is in the daily industry, goes on. Following today’s votes, expect the deal to formally close — and New Gannett to become a corporate reality — on November 19.

Industry watchers, then, will have their eyes on the next announcement, expected on or around the next day, November 20. That’s when CEO Mike Reed and Gannett operating head Paul Bascobert will name their new executive team. Today I can offer a likely preview of who’ll ascend in the new Gannett order. Before that, though, let’s break down this megamerger as it concludes — and then take a look at what’s likely for the company that will operate 18 percent of America’s daily newspapers.

Actually, let’s start with some news: the next big newspaper M&A deal, which I can now report is (once again) in progress. McClatchy and Tribune executives are talking about merging their two companies, I’ve confirmed with several sources. While I don’t expect any imminent announcements, both companies’ executives agree that, in this rapidly deteriorating operating environment, a merger that buys time by massively cutting costs is a first order of 2020 business.

While the companies decline comment on what would be the next largest — and most logical — remaining combination, it’s clear what obstacles will need to be cleared to pull it off. Let’s call them the two Fs.

The first F: Financing. McClatchy and Tribune will argue that adding the two companies together, likely creating synergies in the $200 million-plus range, will create a less leveraged, financially healthier company. But can they get the financing to get the deal done, given the limited interest most banks are showing in the industry? And if they do, can get they get it at an interest rate of lower than the 11.5 percent that New Gannett is paying Apollo Global Capital for its $1.8 billion in financing. (Remember, the need to pay back that loan quickly is a big driver of New Gannett’s ever-increasing cuts.)

The second F: Ferro. Michael Ferro, the former Tronc/Tribune board chair, nixed the last attempt at a McClatchy/Tribune combo last December. His group still holds 25 percent of Tribune, and they could once again stand in the way of a deal.

On the ground — that gyrating retail ground in all the 38 McClatchy and Tribune markets, — revenue declines worsen, and the worries about 2020 deepen. Tribune, in last week’s quarterly earnings report, said ad revenues were down 15 percent — in both print and digital — with total revenues down 7.7 percent. McClatchy, in its earnings report Wednesday, said ad revenues were down 19.3 percent, with total revenues down 12 percent.

Worse, McClatchy has to deal with its ongoing pension plan problems, now negotiating “a distressed termination” with the federal Pension Benefit Guaranty Corporation. Though it was able to report in first gain in quarterly EBITDA in eight years, the stress on the company is clearly intensifying. It reported that the money it owes the pension “greatly exceeds the company’s anticipated cash balances and cash flow given the size of its operations relative to the obligations due, and creates a significant liquidity challenge in 2020.”

Meanwhile, Tribune announced this morning that it would begin issuing a quarterly cash dividend for shareholders. And not a cheap one: $0.25 per share, per quarter. With 36.02 million shares of stock outstanding, that adds up to about $36 million per year going to shareholders — despite the company being in the red by $9.1 million for the first three quarters of 2019. As MarketWatch notes, that’s “a dividend yield of 10.47%, compared with the implied yield for the S&P 500 of 1.92%.” That might attract cashflow-hungry investors but it also removes $36 million a year that could go toward investing in the future.