August 12, 2019

Breakingviews: Newspaper deal stretches limits of revival

by Breakingviews.

Bloodletting is largely discredited as a way of curing the sick. Yet some regional newspaper operators are still giving it a shot. New Media Investment wants to pay $1.4 billion in cash and shares for Gannett, making the biggest publisher of local papers in the United States. As treatments go, it looks expensive and probably ineffective.

New Media, which is run by SoftBank-owned Fortress Investment, is offering a stated premium of more than 50% to Gannett’s closing price on May 30 when news of the merger first appeared. To justify that, it has touted up to $300 million in annual cost savings. Taxed and capitalized, those could tot up to $2.6 billion.

The market isn’t pricing in anything like that. Since the end of May, the two companies’ combined market capitalizations have only increased by roughly $300 million. True, the targeted costs seem within reason, at about 10% of Gannett’s operating expenses last year.

But the USA Today publisher is already the Freddy Krueger of newsroom slashing. Gannett’s U.S. work force has fallen by a fifth over two years, yet subscription revenue for the whole group, which also owns some titles outside of the United States, has fallen 6% during the same period. Larding on nearly $2 billion in debt to finance the deal – with an onerous 11.5% interest rate – would be risky even in better times.

At least both Gannett and New Media shareholders get a say. Investors in the buyers behind other ambitious tie-ups, like AbbVie’s purchase of Botox-maker Allergan, or shale producer Occidental Petroleum’s bid for Anadarko Petroleum, weren’t given a vote. Their only recourse was to sit tight, or dump the shares.

This deal might be different. Rival newspaper chain MNG Enterprises, which earlier took a failed lurch at Gannett, revealed nearly a 10% stake in New Media on Friday; Reuters reported it may vote against the plan to buy Gannett. That won’t make the patient any less sick, but it will spare the expense of an ineffective cure.

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