Call it megaclustering.
If a GateHouse (NYSE:NEWM)/Gannett (NYSE:GCI) merger - rumored for weeks, today reported as a deal in some stage of progress by The Wall Street Journal - becomes reality, about 1 of every 6 daily newspapers in the United States would be owned by a single company. Totaled up, 267 dailies would fall under a single ownership and management. That's an unprecedented concentration of control in the history of the American press.
(Back in 1977, The New York Times wrote with concern about the growing concentration of newspaper ownership, pointing to Gannett's 60 dailies as the most of any chain in the country. The United States had 1,756 daily newspapers back then, and Gannett owned about 1 of every 29. Times change.)
Megaclustering is a notion I first wrote about two years ago as I looked at the possibility of a GateHouse + Gannett + Digital First Media combination. And that's still a combination that could tumble out of today's consolidation talks.
Of course, a Gannett/GateHouse merger isn't a done deal, and talks aren't even all that advanced. Today's Journal story drew new attention to the potential hookup, which I'd pointed to a couple of columns here at Nieman Lab within the last month. Such a merger would win the championship ring in the 2019 Consolidation Games, the prime driver of newspaper strategy in 2019. Merge, buy, or sell - they're all routes to cutting costs in this abysmal advertising climate, one way or another.
There's no small irony that this sort of merger might well be counted as a success by Alden Global Capital, the cut-to-the-bone newspaper company that poured gas on this round of negotiations by saying it wanted to buy Gannett in January. But Alden never supplied certain financing for the deal, and many believed it just wanted to put Gannett into M&A play, so it could profit off the 7.5 percent stake it already owns in the company.
First published at Harvard's Nieman Journalism Lab on May 30, 2019
Gannett won the battle to stave off Alden. But in play it plainly is.
Industry observers like the shape of this potential deal. The financial coming attractions:
- The matchup between the Gannett and GateHouse maps. Both companies have looked keenly at where their newspapers mesh or overlap, and some enterprising data-viz creator could help all of us play along at home. With 267 dailies - plus lots of weeklies and niche publications - we could all see how closely the GateHouse and Gannett dots match up. The more match, the greater the synergies. Speaking of which:
- Synergy savings. "$40-50 million in back office duplication," one financial observer told me. Distribution, printing, and ad sales would all get regionalized. Not to mention more "regionalized" reporting. Last week, I detailed the combination of GateHouse's own layoffs of 200 or so and launching of regional investigative teams. That's part of a continuing trend - and one that could be supercharged by this merger. "Local" newspapers get increasingly regionalized in their journalism as well as in all their business functions. In this big a deal, such financial synergies would be probably be touted in the $125-$175 million range. Of course, the costs - massive severance and related "closing" costs - are usually soft-peddled in the synergy-selling business. Still, the savings are real, and they are the big driver of this deal.
In effect, these two companies - and their peers, including Tribune (NASDAQ:TPCO), McClatchy (NYSEMKT:MNI), Lee (NYSE:LEE), and Alden Global Capital's MNG Enterprises - have all run into the same wall in mid-2019. They're trying to make their companies more digital, and less reliant on print, but they have little available cash to invest in those changes. The never-ending depression in print advertising - it'll be down another 10-15 percent this year, similar to the past couple of years - has made their transformation math next to impossible. While they're laying off staff, they know they can't do that forever without seeing even deeper losses in print circulation.
So M&A is the only route that offers big short-run savings. Do any of these publishers have a grand plan to really turn it all around, to make daily publishing once again - after a decline of now more than a decade - a growing business? No. But they hope consolidation can buy them time - maybe two years or so - to survive and keep pushing "transformation."
So what are the odds on this deal happening?
We can now say Gannett + GateHouse should be a better bet than Gannett + Tribune, another combination that's been the subject of off-and-on talks.
Gannett + GateHouse would be a bigger company, which makes it more attractive, and the synergies between the two chains' markets - both concentrated on mid-metro-sized properties and smaller - makes more sense than combining with Tribune's larger markets.
But as I've noted throughout all the various consolidation moves and dekes this year, logic is one thing - valuation is another.
How much value does each company really bring to the deal? That will be the argument. In recent years, GateHouse has generally gotten more credit from the market, a valuation based on a higher earnings multiple. Gannett currently trades at 4.5× its EBITDA enterprise value, while GateHouse/New Media still fetches 7×. That could be a sticking point in finding a mutually suitable formula.
Both companies, like most of their peers, have seen steady declines in share price. Value investors (and everybody else) are increasingly souring on the staying power of newspaper earnings.
The markets didn't have much of a reaction at all to today's Journal story. Gannett's share price popped up when the market thought Alden's interest in buying it was real. But now it's back down under $8 a share, and it barely moved today: closing up 1.5 percent after a brief 5 percent spike on the Journal report. GateHouse, traded under its owner New Media Investment Group, has also had a terrible time of it of late, down more than 50 percent since last July to around $9. It was up 4 percent today.
So we get to the banker questions: What's the price of GateHouse "buying" Gannett? How much of that is in stock, how much in cash? As the Gannett board undoubtedly burns up its conference lines, the numbers guys - Goldman Sachs represents Gannett - run the spreadsheet formulas over and over.
Gannett, remember, doesn't even have a CEO right now. Bob Dickey retired earlier this month, as he'd announced last December, and Gannett's board still hasn't named a replacement - a task it had high on its list as soon as the board fight with Alden ended two weeks ago. Is its hesitance announcing a new top boss - one who would presumably get a golden parachute in the neighborhood of $10 million if the company were sold - part and parcel of GateHouse talks?
That could well be.
GateHouse's Mike Reed - described in the trade with phrases like "disciplined operator" and "great dealmaker" - could emerge as CEO of the merged company. He's a 30-year veteran of the news business. In our long interview at the Lab last year, Reed laid out in detail his strategy for GateHouse. If Gannett is merged into it, expect Reed to double down and combine the digital marketing businesses of both companies and emphasize events business expansion.
If - a big if - this chip falls into place, then the Consolidation Games will move into a next round. Might then McClatchy and Tribune - having found little other companionship on the mating market and the bar closing soon - restart talks that failed in December? And what about Alden? Might it pick up any papers a Gannett + GateHouse might have to dispose of for antitrust concerns? What other plays might it consider?
Finally, the important question: Is this good for journalism, or for the communities that daily journalism serves? That's what we should care about most in all of this, and it can get lost.
This move - like the other consolidations batted around so far this year - is financially strategic. It is not journalistically strategic. Both these companies have been executing various editorial strategies - some patchwork, some earnest, some with real community-serving potential - and both are severely hobbled by declining editorial budgets. This kind of consolidation would buy some time. How that time, and the money saved, gets reinvested into a longer-term solution to local journalism's woes remains a hanging question. Still required: More capital and a better vision.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.