Analysts say Digital First’s $1.36B bid on Gannett too low
A hedge fund-backed chain aiming for a hostile takeover of Gannett, which owns USA TODAY and 109 local media properties including The Arizona Republic and azcentral.com, placed too low a value on the company and is betting on a level of cost-cutting that may be unrealistic, analysts said Monday.
Michael Kupinski, director of research at Noble Capital Markets in Boca Raton, Florida, said most newspapers, after years of staff reductions across the industry, “are running pretty lean.”
He predicted that Gannett’s board will decline the offer.
MNG Enterprises, which also operates as Digital First Media, is proposing to buy Gannett for $12 a share, or about $1.36 billion. That would be a 23 percent premium above Friday’s closing price of $9.75 a share. Gannett shares on Monday closed up 21percent, or $2.07, at $11.82.
MNG, majority owned by hedge fund Alden Global Capital, owns about 200 publications, including newspapers such as The Denver Post, The Mercury News of San Jose, California, the Los Angeles Daily News and the Boston Herald. The company has also gained a reputation for deep cost cuts and extensive layoffs in newsrooms.
A plan to prune Gannett for additional return on investment may be faulty, Kupinski said.
“I guess this particular firm is notorious for going in and slashing costs,”
he said. “I really don’t view Gannett as being one of the companies that has bloated staffing or anything like that. There might be an opportunity to consolidate maybe some facilities but they were moving along that direction anyway.”
Paul Caminiti, a spokesperson for MNG, said it “has extensive operational experience and a successful track record in the newspaper industry, enabling us to run newspapers profitability and sustainable so that they can continue to serve their local communities.”
Subsequent bidders could surpass the MNG/Digital First offer because “it would be below what I would expect the company to achieve,” Kupinski said. “We have a $15 price target” on Gannett stock.
Huber Research analysts Douglas Arthur and Craig Huber, in a note to clients Monday, said any offer for Gannett should be at least $14 a share.
The two analysts described the takeover attempt as “opportunistic given the stock was battered during the market’s December sell-off and the CEO as well as head of digital sales have both announced they are leaving (CEO is retiring). Our bottom line is that the proposed price is not high enough.”
Gannett CEO Robert Dickey announced his retirement in December. Sharon Rowlands, who led USA TODAY Network Marketing Solutions, is leaving the company to be CEO of web.com.
Gannett said MNG/Digital First did not approach the company prior to Monday. That is an unusual strategy and one that would not only be more costly, but would be less likely to be effective, said Morton Pierce, a mergers and acquisitions lawyer with the firm of White & Case in New York City.
“If I approach you and punch you in the mouth and then say, ‘Let’s be friends,’ it’s less likely to work than if I just come up and talk to you,” Pierce said.
This first bid may not be the last and shareholders could be wooed, he said.
“If someone’s paying you cash, whether they’re the nicest people in the world or the worst SOBs, their cash is the same,” Pierce said.
Since MNG/Digital First is privately held, financial details are hard to collect. But the chain achieved a 17 percent operating margin for fiscal 2017, the highest among publishing chains, said Ken Doctor, an analyst who writes about the media business at Newsonomics.com.
Other major publishers such as The New York Times Co. and Gannett posted margins of less than 10 percent, according to Doctor. He said company financials obtained confidentially found that much of Digital First’s profit was driven by its Colorado newspapers and its Bay Area News Group.
Two months ago, Gannett reduced its full-year 2018 revenue forecast after digital advertising and marketing services revenue growth slowed, resulting in a 4 percent dip in total operating revenue for the third quarter. The company revised its full-year revenue forecast to a range of $2.9 billion to $2.94 billion, compared to the previous range of $2.95 billion to $3 billion. Wall Street analysts now expect Gannett to post full year-revenue of $2.9 billion, down 6.5 percent from $3.1 billion a year ago, according to analysts polled by S&P Global Market Intelligence.
Declining print circulation and advertising revenue has led newspaper groups to seek protection through consolidation. Gannett itself has bolstered its size in 2016 by adding the Journal Media Group. Its 15 media properties included the Journal Sentinel in Milwaukee and The Commercial Appeal in Memphis, Tennessee. Gannett also acquired the North Jersey Media Group, including The Record in Bergen County.
“Alden has a controversial reputation in the newspaper business and is known for aggressively slashing staff (media sources refer to the strategy as strip-mining), selling off real estate and otherwise attempting to seemingly run papers until the very last iota of cash flow has been squeezed from it,” the Huber Research analysts wrote. “We believe, while Underweight, (Gannett) is on the right path with its digital growth push and legacy cost cuts.”