In 2016, Gannett (GCI +0.00%) attempted to acquire rival Tribune (NYSE: TRCO) in a hostile bid that lasted months but ultimately failed. Fast-forward to 2019, and Gannett is on the receiving end of a hostile takeover from MNG Enterprises, a private print media company.
MNG's reason for buying Gannett is the same reason Gannett pursued Tribune: The print media industry has been massively disrupted by the internet and needs to cut costs and adapt. Merging presents an opportunity to operate more efficiently through greater scale, but there are good reasons Gannett may want to avoid ownership under MNG Enterprises.
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MNG Enterprises' proposition for Gannett shareholders
MNG Enterprises dropped a bombshell on January 14, 2019. The privately owned newspaper group backed by hedge fund Alden Global Capital disclosed that it had amassed a 7.5% ownership stake in Gannett and was interested in a sale of Gannett either to MNG or another buyer. This unsolicited hostile takeover offer was disclosed in a 13D letter filed with the SEC.
In the letter, MNG offered to acquire Gannett for $12.00 per share in cash, which was more than 23% higher than GCI's trading price the day prior and more than 35% higher than GCI's current stock price. The letter also stated that as a major Gannett shareholder, MNG would also be happy if another acquirer bought the company for an even higher price.
However, MNG Enterprises' offer letter was no flowery overture. Rather, it was an indictment of what it described as a failed strategy by Gannett to transform itself into a digital media company. MNG called out that Gannett's stock price has declined by over 40% since its IPO in 2015 and blamed management's inability to cut costs or stem the decline in print media subscriptions.
Finally, MNG stated that if it took control of Gannett it could operate the company more profitably. As the owner of its own empire consisting of 200 publications, MNG touts a successful track record of acquiring newspaper businesses and running them more profitably by cutting costs. Towards the end of the letter, MNG provided the data in the table below, which contrasts Gannett's declining profit margins with its own rising margins.
| Metrics | 2015 | 2016 | 2017 | 2018E |
|---|---|---|---|---|
| Gannett EBITDA Margin | 13.4% | 11.8% | 11.4% | 11.2% |
| MNG Enterprises EBITDA Margin | 11.6% | 13.9% | 14.4% | 16.2% |
Data Source: MNG Enterprises January 2019 letter to Gannett.
Gannett's response
Three weeks after receiving MNG Enterprises' hostile letter, Gannett issued a press release stating its outright rejection of the offer. Gannett's response was a scathing takedown of MNG's offer, which Gannett described as "not credible".
First, Gannett defended its strategy to invest in its digital transformation, despite the fact that these investments have hurt its profit margins. Second, Gannett questioned MNG's ability to finance an acquisition and noted that MNG provided no details on financing. Finally, and perhaps most importantly, Gannett noted MNG's reputation of cutting costs to the bone to squeeze profitability at newspapers while reducing editorial quality. Gannett doesn't want to sell itself to a buyer that would foreseeably fire much of its staff and tarnish the reputation of its media properties.
Gannett's strategy of investing for the future of digital media is at odds with MNG's approach to run businesses for cash flow. While Gannett is legally obligated to review buyout offers, it also has the discretion to reject them. In this case, Gannett's response made several strong points regarding why MNG's offer may not be in the best interest of the company or its stakeholders.
Proxy fight
After Gannett's rejection, MNG decided to launch a proxy fight to gain control of Gannett's board of directors. MNG nominated a slate of six directors but later reduced its slate to three nominees. If successful in gaining board seats, MNG could push Gannett into selling itself from the inside.
MNG's proxy fight isn't expected to gain traction. Both proxy advisors ISS and Glass Lewis have largely recommended against MNG's nominees and there doesn't appear to be any support from Gannett's other large shareholders. Hostile proxy contests typically don't stand much of a chance if they cannot gain the recommendation of ISS or Glass Lewis because the proxy advisors have significant influence over the way large shareholders vote.
The shareholder vote is set to take place on May 16. If MNG loses, it may drop its takeover bid, as the vote would indicate a lack of shareholder interest.
Does the hostile proposal have merit?
Both Gannett and MNG Enterprises make several good arguments.
MNG has the data to support its claims that Gannett has failed to create shareholder value since its IPO in 2015. GCI's stock price is significantly lower, the company has a negative revenue growth rate despite several acquisitions, and operating profits and margins are at depressed levels.
Furthermore, MNG Enterprises pointed out that Gannett lacks leadership -- literally. Gannett's former CEO Robert Dickey stepped down on May 7, 2019, without naming a successor. It is hard for Gannett to argue it is well managed if it doesn't have a stellar financial track record and lacks a CEO.
Finally, MNG was later able to secure committed financing from Oaktree Capital, supporting the claim that it is serious about the buyout offer.
From Gannett's point of view, it is reasonable to resist selling to a company that threatens to destroy company culture. MNG Enterprises is notorious for its scorched earth approach to cost-cutting. Perhaps Gannett shareholders could get a short term premium for their stock, but risk destroying the newspapers and magazines they cherish.
Finally, MNG's buyout offer is subject to due diligence and is far from guaranteed. At worst, MNG would get an insider look at Gannett's books and lead the company down a distracting and drawn out process that could end up nowhere.
The side you take depends on your perspective. If you are a shareholder primarily interested in a short gain, MNG's offer is probably worth exploring and could end up in a competitive auction with a better strategic partner.
If you believe in Gannett's strategy of investing in digital, then perhaps you may not want to sell out at MNG's price so that you can patiently wait for Gannett's strategy to bear fruit. Also, if you are concerned about Gannett's legacy and other stakeholders, MNG's offer is a non-starter.
