|Shares Out. (in M):||37||P/E||0||0|
|Market Cap (in $M):||443||P/FCF||0||0|
|Net Debt (in $M):||303||EBIT||0||0|
|Borrow Cost:||General Collateral|
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Tribune Publishing (“TPUB”)
Summary: This write-up was originally a long piece at much lower levels before Gannett (“GCI”) bid 12.25 and then unilaterally upped its bid to $15. TPUB is a short right here and now. In order to fend off GCI, TPUB Chairman, Michael Ferro (“Ferro") sold almost 15% of the Company at an effective price of $14 a share (the headline number is $15 a share but when you add in free stock that was given as part of a shady licensing deal, it averages to $14). Management has sold a blocking stake to a friend of the Chairman in order to stop a deal with GCI. To add insult to injury, ISS appears to be going along with this farce of not only turning down a 100% premium bid to from GCI but also TPUB’s refusal to share confidential information needed for GCI to bid higher, unless GCI agrees not to launch a proxy fight in a year which is the earliest time they can nominate a slate. The bottom line is that Ferro controls the TPUB board (though there were recent signs of a small crack in solidarity) and between Ferro and Patrick Soon-Shiong (“SS”) - his white knight investor, GCI and Oaktree will need to wage total war to get control of GCI and at that point the asset may be so badly damaged that it is not worth the price. TPUB stock should trade down to its pre deal levels of the mid to high single digits, barring successful legal action on the part of Oaktree and other holders and assuming that GCI remains an active bidder. We believe this last transaction will give them cold feet.
The Company: TPUB’ s main remaining assets are the Chicago Tribune and the LA Times., along with some private equity media assets valued around $60mm. There have been rumors of LA based billionaires, such as Eli Broad, paying a trophy price for the Times, but no deal has emerged to date.
The Bidder: Gannett, owner of USA Today and other papers, has made a hostile bid of $12.25 (since raised to $15.00) for TPUB and been rebuffed by the board. That bid was made after private overtures were rebuffed. Owning these trophy assets is critical to the GCI’s long term plan to roll up the major metropolitan papers and achieve cost and sales synergies.
Synergies: GCI estimates that they can get $50mm savings on newsprint alone and another $50mm of other S,G, and A. We have assumed that GCI will only pay holders for $50mm of synergies and keep the rest for themselves, though the extra savings gives them some wiggle room to raise the purchase price. GCI has no debt and about $400 million of EBITDA and should be able to easily fund a purchase with cash and some stock if needed.
Michael Ferro and TPUB Governance: The Tribune board is stacked with 5 of 8 members directly aligned with Chairman, Michael Ferro, who owns about 14.2% of the company through Merrick Ventures, which was sold to him recently in a sweetheart secondary transaction at $8.50. No good reason was given for the use of proceeds, but it looks like the CEO was trying to protect himself. Ferro fired that CEO once he got effective control of the board. The board is light on media experience. Ferro is a Chicago based entrepreneur who made around $200 million selling a company to IBM. The three independent directors are seen as aligned with Ferro as well, which was borne out by their unanimous rejection of the initial Gannett bid. The $15 bid was not rejected unanimously by the board, but there is no way of knowing what that means without access to board minutes. I suspect that one or more of the remaining three independents voted no. The independents are about to get lonelier when Patrick Soon-Shiong joins the board. Ferro has openly said that there is no price he would sell TPUB and that he plans to close the gap between the $50 per CPM that Facebook gets and the $1 that TPUB gets, which makes any veteran media investor break out in uncontrolled laughter. SS talks about the news business going through a typical cycle that all industries go through. SS is worth $12 billion, the $70 million investment in TPUB is a rounding error for him. He made a similar investment with virtual reality licensing to JAKK toys in LA and the results have not panned out and he has been selling shares there. I would not hold your breath for these dreams of TPUB becoming a new media company like Facebook. GCI is the only real buyer with both the resources to pay for TPUB and the synergies to extract. One odd turn is that Ferro has threatened a Pac-Man defense of TPUB by bidding for GCI. This ploy looked like a joke until SS showed up with $12 billion in the bank. It is conceivable that Ferro and SS with TPUB as the vehicle make a Moe Green bid for GCI (“You buy me out, how about I buy you out!”). As absurd as this sounds, SS has the resources to do it and GCI has no debt, but I digress mostly to demonstrate the mindset of Ferro.
Deal Multiples and Gannett Synergy Scenarios: At the May 23rd closing price of $12.09 and profroma for the 5mm new shares issued at an average price of $14, TPUB trades for approximately 4.37x the midpoint of 2016 EBITDA. However, GCI only trades for about 4x (the newspaper industry is deeply out of favor due to legitimate concerns of secular decline). Comparable assets have traded for 6x or more of EBITDA. At 6x 2016 EBITDA, TPUB would be worth between $18.90 and $19.88 a share. From GCI’s perspective, 4x Pro Forma EBITDA with $50 of synergies, yields a price between $15.30 and $15.95. 4x Pro Forma EBITDA with $100 million in synergies, yields a $20.75 to $21.41 range of value. Based on the numbers above, a win win deal could be reached between $15 and $21 a share, yielding a 24-73% return from current levels. These numbers have all come down a bit from the dilution from the $14 deal. This range of value is both accretive for Gannett shareholders and a fair premium to current standalone trading multiples for Tribune shareholders.
What the SS Transaction Really Means: My initial take, before Soon-Shiong came in, was that the risk vs. reward was attractive as Tribune is still trading in line with the industry, so you are not paying an excessive multiple while you wait for GCI to force a transaction. That said, the TPUB guidance is aggressive (showing growth and is above street numbers of $148 of 2016 EBITDA). There is a decent chance they miss these numbers, especially with a new management team trying to implement Ferro’s digital dreams and SS’s virtual reality deal. The secular newspaper advertising decline has slowed but not abated as well. As an aside, newspapers are already digital with these quaint devices called smart phones and TVs. It is not clear what value the licensing deals with SS will bring other than to conveniently bring his purchase price down to a round number of $14 instead of the $15 headline number, which appears designed to persuade the courts and ISS that this is a good deal for all shareholder and not just Ferro.
Pre the SS deal, you also had Oaktree and Primecap with 27% of the stock. Other hedge funds also appeared to own between 12-15% so it looked like 39-42% of all holders would be sympathetic to a deal, or a sure win in a proxy. Now SS and Ferro control 28% of the Company. Oaktree and Primecap only have 23% of the proforma shares. If I am generous and say that sympathetic funds control about 12% of the proforma stock and none of them votes for Ferro then the fight looks like Ferro at 28% and shares sympathetic to a sale are approximately 35%. This assumes that none of the hedge funds break ranks and sell or vote with management and that Ferro or SS won’t buy or issue any more shares. Also, if ISS continues to recommend management, which they have despite a stunning 100% premium bid, all the index funds will vote with management. Realistically, I think you have a pretty even share count going into any proxy vote with Ferro rock solid at 28% and the others very soft at 35%. With ISS on Ferro’s side, I think it is fair to say that he may even have the lead. Primecap is a pretty vanilla fund. How often do they go against the mighty ISS? Would they get fatigue and sell? Ferro and SS aren’t selling – that is clear.
Timeframe, delay and macroeconomic: The annual meeting is on June 16th. Stockholders may not call a special meeting. It also takes a 2/3rd vote to amend the bylaws. GCI will likely need to wait a year to change the board though they are trying to shame the board into action by filing a separate proxy urging shareholders to withhold their votes for current directors. This shaming tactic has already failed as Ferro has no shame. This $14 blocking trade to SS is one of the biggest FUs that I have ever seen to a strategic bidder offering a 100% premium and offering to go higher.
We have done a governance review and believe that Gannett/Oaktree should be able to run a proxy contest in a year. TPUB is a Delaware corporation, which is a shareholder friendly jurisdiction. The longer a fight drags on the greater the chance for a macroeconomic slowdown or other secular industry pressures to weigh on Tribune or Gannett’s results.
The Bottom Line: We believe that unless Oaktree sues to block or rescind the SS transactions and leads a fight to replace the board in a year that TPUB stock should trade down to where it was pre GCI bid. That was in the $5-9 range – around mid 3x EBITDA. One could argue that it should trade at an even bigger discount because if Ferro wins, he will surely stagger his board and entrench further. My target price is the $7-8 range. For a 42-34% rate of return from $12.09. You could also go long GCI to hedge a sector recovery or a Pac-Man bid. There are many other papers GCI can buy without dealing with an entrenched egomaniac with a $12 billion man backing him. I think GCI will walk unless Oaktree wins quickly and unwinds the SS and other recent deals – including Ferro’s own $8.50 purchase. As a risk arb deal, do you really want to be at trading at such a large premium to the pre deal price and exposed to Ferro and the newspaper business for at least a year, while management damages the asset? Every day GCI doesn’t own TPUB is a bad day for TPUB value.
Risk Factors: Oaktree has their reputation on the line and refused to take green mail when Ferro offered to buy their stake at $15. I believe that they will file a flurry of lawsuits and hope to get Leo Strine in Delaware and unscramble this egg. That said, Ferro’s transactions, with ISS’s blessing, appear designed to satisfy the business judgement rule (bringing in $12 billion digital player with AI patents! Even though $0 AI sales to date. Right in line with new TPUB digital strategy and done at a price that optically looks to match the GCI bid) and will be hard to rule against – even though it’s blatant entrenchment. The stock doesn’t get interesting until GCI walks, the arbs sell, and the stock is back to where it was and a group of activists form to rid TPUB of Ferro, and that day may never come. Meanwhile SS/Ferro control their hometown papers (SS also owns part of the Lakers and has courtside seats) and couldn’t care what GCI bids as they will just say no. I would short now and short on any pop from the Oaktree suits if they ever come. Only if GCI buys/tenders for material stock or another activist with a large stake shows up would I be concerned and even then Ferro has more cards to play – he and SS can take their stakes to 25% each (assuming the recently activated pill at 20% is lifted). Even if they go to just 20%, it will be awfully hard to beat a 40% combined stake. In the words of Jim Cramer,”Sell,Sell,Sell!”
|($US in millions, except per share values)|
|Current Metrics||Key Holders|
|Share Price (as of 5/04/16)||$12.09||Capital Required @||Shares||% O/S|
|New Shares @||5%||10%||15%||20%||Ferro||5.22||14.20%|
|Exitsting Shares Outstanding||31.6||19.12||38.25||57.37||76.50||SS||5.03||13.70%|
|Total Share Outstanding Pro Froma||31.6||10.26||28.00%|
|Equity Market Cap [A]||$382||Revenue 2016E||$1,600||$1,613||$1,625|
|Unfunded Pension||127||Other Sympathetic||4.5||12.30%|
|Net Debt and Investments [B]||$374|
|Enterprise Value [A] + [B]||$756|
|Base Case||Synergy Case||Synergy Case 2|
|EBITDA 2016E||$166||$169||$172||EBITDA 2016E||$166||$169||$172||EBITDA 2016E||$166||$169||$172|
|PF EBITDA||$216||$219||$222||PF EBITDA||$266||$269||$272|
|Enterprise Value||Enterprise Value||Enterprise Value|
|Net Debt & Inv.||($374)||($374)||($374)||Net Debt & Inv.||($374)||($374)||($374)||Net Debt & Inv.||($374)||($374)||($374)|
|Equity Value||Equity Value||Equity Value|
|Equity Value Per Share||Equity Value Per Share||Equity Value Per Share|
The hostile bid fails and Gannett gets cold feet/tired of waiting.
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