What happened

Shares of New Media Investment Group (GCI 7.54%) declined 18.6% on Tuesday after the newspaper titan announced a merger with Gannett (GCI).

So what

New Media Investment Group said in a press release that the merger would create the leading print and digital news organization in the U.S. with "deep local roots and nationwide scale." 

The deal will see Gannett shareholders receive $6.25 in cash and 0.5427 of a New Media share for each Gannett share they own. Together, this represents a total of $12.06 per Gannett share based on New Media's closing stock price on Aug. 2, or a premium of approximately 18% to its average price of over the preceding five days.

"The Gannett Board unanimously determined that this combination with New Media is in the best interests of Gannett shareholders, customers, audiences, and employees, providing significant and immediate value, as well as the ability to benefit from the upside potential of the combined company," Gannett Chairman J. Jeffry Louis said.

A downward-sloping line chart.

New Media Investment Group's stock price declined sharply after it said it would acquire its rival Gannett. Image source: Getty Images.

Now what

New Media says that the scale of the combined company will allow it to reduce costs by $275 million to $300 million annually.

"We believe this transaction will create value for our shareholders, greater opportunities for our employees, and a stronger future for journalism," New Media Chairman and CEO Michael Reed said. "Gannett is an innovative, digitally focused media and marketing solutions company with well-known brands worldwide."

However, investors appear to be concerned that New Media is paying too great a price. The company intends to finance the deal with high-interest debt. New Media is borrowing $1.8 billion from private equity firm Apollo Global Management at an interest rate of 11.5%.

Moreover, New Media is cutting its annual dividend in half to $0.76 to help pay for its acquisition of Gannett.