Newspaper company MNG Enterprises made a hostile bid to acquire Turnaround Letter-recommended Gannett Company for $12/share in a letter dated January 14, 2019. Gannett shares closed 21% higher at $11.82/share.
The letter also urged Gannett to commence negotiations with MNG about an acquisition, commence a strategic review and cease making any additional digital investments.
Backing its offer, MNG states that it has a 7.5% position in Gannett, making it the largest active (non-index) holder of the company’s stock. While our review shows two other active investors with equal or larger stakes (Dimensional Fund Advisors and Capital Research), a 7.5% position is a meaningful stake for an activist investor.
MNG’s previous discussions with Gannett apparently were rebuffed.
As one of the nation’s largest newspaper owner/operators, with over 200 publications, MNG’s offer appears credible. The company is an active consolidator in the industry, with major acquisitions including the Boston Herald, Denver Post, San Jose Mercury News and others. MNG-provided data shows an ability to operate at high profit margins. While MNG is privately owned (we have essentially no information about its financial capabilities), it is backed by Alden Global Capital, a New York-based hedge fund with an estimated $1 billion in assets under management. While a common hedge fund tactic is to “put a company in play” while having no intention of actually acquiring the target, we believe that MNG would be able to acquire all of Gannett.
Partly offsetting this credibility is MNG’s reputation for aggressively cutting costs, including large layoffs of newsroom and other staff, at its acquired companies. While these may be critical to keeping newspaper companies alive, it will not be easily accepted by Gannett’s leadership when contemplating any negotiations with MNG.
Gannett is vulnerable. Its shares have not performed well in recent years. Its leadership is in flux, as CEO Robert Dickey and the head of subsidiary ReachLocal Sharon Rowlands have announced their departures. MNG’s critique of Gannett’s capital allocation strategy of investing heavily in digital assets while not boosting the profits of its core newspaper business is not without merit. Gannett’s shares are meaningfully undervalued at 4.1x EV/EBITDA. The value of Gannett to MNG could be high: if MNG sold off Gannett’s digital businesses and proceeded to aggressively cut costs, it could likely find $20/share or more of value in Gannett.
Gannett responded by acknowledging the receipt of the letter, saying it will carefully review the proposal and that no action is currently needed by Gannett shareholders.
We see a few possible outcomes. Most likely would be a full takeover by MNG, probably at a higher price of perhaps $15 or more. Another bidder may get involved, but this is unlikely outside of a major personal investor (like Amazon chief Jeff Bezos’ acquisition of the Washington Post) as few if any companies would appear interested and capable of acquiring Gannett. Another reasonable possibility is that Gannett prevents any takeover.
There is little near-term risk in GCI shareholders’ waiting and watching. MNG is credible while GCI is vulnerable. We don’t think MNG will be easily deterred, nor will GCI’s board give up without a serious fight. Investors should hold onto their Gannett shares.
We continue to rate Gannett (GCI) shares a Buy up to 14.
Disclosure: An employee of the Publisher owns GCI shares.