Last week, the Wall Street Journal reported that New Media Investment Corp (NEWM) was in talks to purchase Gannett in a cash-and-stock deal. New Media is similar to Gannett, just without the USA Today, they own a bunch of small town newspapers and a couple midsized ones. New Media is externally managed by Fortress Investment Group (now owned by Softbank), NEWM is one of the few operating businesses (non-REIT/BDCs) I know of that is externally managed, it was a spinoff of Newcastle (now Drive Shack) originating as the result of Fortress buying the debt of local newspaper publisher GateHouse Media (the entity WSJ references as the buyer) within Newcastle and later taking control of the post-reorg GateHouse. Fortress has since used New Media as a vehicle to roll-up the distressed local newspaper industry at low single digit EBITDA multiples and then pay an out sized dividend to attract retail investors (standard externally managed playbook type stuff).
This deal has a hint of HPT buying SMTA's master trust to it, Fortress gets paid a management fee of 1.5% off of New Media's equity, Gannett is a low-quality asset but represents a way for Fortress to roughly double their management fee with one of the last large willing sellers (the other publishers are mostly controlled/family owned) at a price that both could claim victory with given the synergies at stake. As an asset gatherer, New Media will be aggressive in pursuing Gannett and will likely get a deal done.
As a little recent background on Gannett, earlier this year they fended off a hostile takeover and later a proxy fight from PE owned MNG Enterprises (dba "Digital First Media"), the owner of the Denver Post and the San Jose Mercury News among other publications. MNG Enterprises offered $12 per share for GCI (currently trades at ~$9.60) but the hostile bid and lack of committed financing led Gannett management to dig in their heels and resist the effort. While this was happening, Gannett's CEO stepped down in May and the company has been without a named successor since.
How could this be a win for all three parties (Fortress, New Media, Gannett)? The Wall Street Journal references $200MM of potential synergies being discussed in the deal, which sounds like a lot compared to Gannett's $290MM EBITDA guidance for 2019, and it is, but there is a lot of overlap between the two's footprint and $200MM is roughly 25% of Gannett's run rate G&A expenses, I think there is some reasonableness to the synergy number that a PE manager could extract from the operations. New Media's stated acquisition criteria is to buy publishing assets at 3.5x-4.5x EBITDA, GCI trades for 5.6x standalone EBITDA of $290MM (mid-point of 2019 management guidance).
New Media can buy Gannett for "4x EBITDA" using a post-synergy number of $490MM and all three parties can claim victory:
- Fortress gets to roughly double their management fee;
- New Media gets a large acquisition within their stated price target to bleed for continued dividend yield, and given NEWM trades at a premium to the industry (due to the high dividend yield) it would be accretive to shareholders;
- Gannett gets a higher price with credible financing than what they turned down earlier this year justifying their actions
So how might a cash-and-stock deal look like? New Media has conventional debt of $450MM against a $180MM LTM EBITDA, or 2.5x levered, if they added the $490MM (let's save EBITDA addback math for another time) and kept leverage roughly the same they could raise enough financing to pay $6-7/share in cash and then issue the rest in NEWM stock. I'm also including Gannett's pension shortfall in EV, NEWM likes to exclude their capital leases and pension liability from their leverage numbers so maybe they could justify paying on the higher side of my back-of-the-envelope estimates. Anyway, I think this deal crosses the finish line as Gannett is floundering and doesn't have a controlling shareholder, New Media wants to gather additional assets for its external manager, it's a win-win for a dying industry.
Disclosure: I own shares GCI (and a few calls as well)
only tricky part is ev of gci is march larger than ev of newm. that presents problems with financing usually. only way around it is if the combined company can take on more leverage.ReplyDelete
seems like you have been playing around with this
That's partially true, it does make it a bit trickier, but I think the size of the synergies will make getting financing possible, plus NEWM is able to issue their shares as part of the transaction. I've seen people ask why doesn't GCI buy NEWM, or confused that the smaller NEWM is the buyer, its simple, because Fortress wouldn't give up their fee stream and wants an even larger one. The new company might get renamed Gannett, but NEWM will be the buyer.Delete
agreed. would have to pay $12.ReplyDelete
also GCI management doesnt like to lose their jobsReplyDelete
Thanks for making every journalist reach for the barf bag.ReplyDelete
I don't mean to be flippant about people losing their jobs, it is a shame what's happened to industry.Delete
How does the $290 EBITDA "midpoint guidance" compare to the operating budget they had been trying to achieve, and over the last four quarters, how have they been performing vs. budget? THAT info will help you understand whether the "midpoint guidance" is valid. With inserts declining rapidly, for example, in our induatry - which have signifant bottomline impact on EBITDA - I'd like to see that info, as well.ReplyDelete
Also, has Gannett jacked up subscription rates? Enjoyed your analysis.
- Lou Phelps, Managing Partner
Phelps, Cutler & Associates
Consultants to Media
Last year they missed their EBITDA guidance by about $10MM. Inserts and subscription rates are a good question, but I don't think they really impact the thesis here, I think NEWM is going to follow through and acquire GCI (fee play for Fortress) and the exercise is more on what price they would pay.Delete
Sorry about the typos!ReplyDelete
is 200m of synergies realistic? if they fail to materialize then NEWM is clearly overpaying and shareholders will face the brunt.ReplyDelete
It passes the smell test, but it might be too high, that's not the thesis here, I'm not suggesting that NEWM is a buy or a good long term investment. $200MM number was leaked to the WSJ, I'm assuming that's the number they're working with on the transaction, just a matter of how that gets divided up among NEWM and GCI shareholders. NEWM has a principal-agent problem, their external manager has an incentive to grow the company, which might be at odds with shareholders.Delete
Under the deal, Gannett shareholders will receive $6.25 in cash and 0.5427 of a New Media share for each Gannett share held.
As of Friday's closing prices, that comes to total consideration of $12.06 per share of Gannett
Completely spot on. Creepy :) . Well done.
Thanks! Interesting in that Fortress is giving up the management contract, well giving it up for 4.2 million shares, but still a path to looking like a normal company. Dividend normalizing (being roughly halved) as well and even more synergies than what the WSJ was reporting.Delete
I'm out now, NEWM shareholders realizing their dividend is being cut in half won't be pleased.Delete
Hey MDC, what's your opinion on NOL shells? I found one called Elah Holdings:ReplyDelete
Market cap: $44.3M
Net cash (cash less all liabilities): $7.0M
Tax receivables: $4.3M
Federal NOLs: $877.9M
State NOLs: $318.2M
I've read your reflection on GBRK and how NOLs are most effectively utilized when management teams purchase a single company as opposed to being like a mini-Berkshire. Would be interested in your view on this one though.
This is the old RELY/SGGH? Interesting, I didn't realize it was still publicly traded, I looked at SGGH many years back but didn't feel comfortable with Craig Bouchard running the company like a mini-Berkshire. I'll take a fresh look at it soon, but in general as just a shell its not that different from a SPAC, financial buyer with no synergies outside of the tax asset. The presence of the NOL might lead the shell to overpay for a business, can justify it saying their cost of capital is lower based on the NOL, etc. I think it might be better to buy after a deal is announced, usually the market gives you another opportunity and you don't have to sit and wait potentially years for a deal.Delete
All good points. Yes, this is the old RELY. And true, the NOLs could definitely influence the price management pays. Appreciate your insight!Delete
"We believe one fruitful pipeline for deal opportunities could be foreign exchange listed companies with significant operations in the United States where Elah’s ability to return to NASDAQ or NYSE listing on an expedited and lower cost basis will be an important factor in the counter parties’ evaluation of a transaction with us."Delete
I found that line interesting, sort of targeting a reverse tax inversion? Makes sense and sounds less like the mini-Berkshire strategy and more like a one transaction which makes more sense to me. I'll add it to my watch-list, thanks.
Thanks for this idea. Just a quick question. How did you find this kind of rumored deals? Did you just happen to see the news? Or do you set up Google alerts or regularly check any website of merger opportunities?
Rumored might be the wrong word since it was reported in the WSJ, I had previously owned or written posts on both GCI and NEWM, so I was familiar with both and the headline caught my attention more than other deals. I do have some Google alerts setup for "strategic alternatives" and a bunch of other event type alerts, I follow quite a few M&A journalists and other event driven investors on Twitter, etc.Delete
What are some of the other event type alerts you monitor via Google Alerts? I tried this for a while, but I got so many irrelevant results, it didn't make sense to keep up with it.ReplyDelete
They can be hit or miss, I try to be specific to individual companies or people. For instance when I bought SMTA, I setup a lot of Shopko related Google alerts, or I have a few on various executives that have sold companies that I've owned waiting to see where they pop back up again.Delete