Do you think $ 300 million in cost cuts is a big number? Try $ 400 million. Or more than $ 400 million.
These are the internal numbers in the air as the US's two largest newspaper chains, Gannett and GateHouse, try to land their megamerger, first announced in August.
Follow Money: When I first wrote about this potential union in July, the estimated annual cost savings – "synergy" – that would come from a merger, "something like $ 200 million." In August, it was "$ 200 to 300 million." Then it was "$ 275-300 million." Now the conversation has gone to $ 400 million and beyond, in the order of nearly half a billion dollars .
What does it mean? Almost certainly, even more reduction in the number of employees than expected. (Leaders refused to comment on the amount of synergies they are seeing now.)
How much? In any room with eight people in a current GateHouse or Gannett operation, one would probably see her job gone by 2020. One in eight will add up to 3,450 of the combined companies' 27,600 jobs. Some observers expect the final total to be higher than that. And the company won't wait until the first of the year to begin layoffs: With immediate savings a priority, expect the anxiety-provoking conversations to begin right after Thanksgiving.
These layoffs may well be on top of those already ahead in the current Gannett newsroom. When Gannett finishes its regular budgeting for 2020, newsrooms can expect 3 to 5 percent cuts in budgets, sources said.
This morning marked the second last time in what has been a years-long process. Shareholders in both Gannett and GateHouse voted this morning to merge, which will create a giant (for newspapers) company that will retain the Gannett name. (The shareholders voting for GateHouse are owners of New Media Investment Group, including NEWM, GateHouse's holding company.)
Both said yes. NEWM's board of directors went first: "Exact voting results were not immediately available, but New Media CEO Mike Reed said about 99% of the 75% of shareholders who voted approved the deal." Then the results of Gannett's vote were announced at. 19659002] They approved the agreement despite the value of the agreement that fell since it was announced. On that day in August, NEWM shares stood at $ 10.70. When near the market yesterday, they fell to $ 6.68, including a six percent decline on Wednesday alone. The deal, which was originally valued at $ 1.38 billion, is now worth $ 1.13 billion.
Why the fall? Some investors who looked at the deal had hoped it would fail and thought they could get a NEWM rejection; maybe someone left the stock when the merger became a near certainty. Maybe you can blame McClatchy, the next largest newspaper chain, to sour the market; The share fell 12 percent yesterday after announcing that the tax authorities had rejected the request for relief from pension funds. (It's down 22 percent since Friday.)
Or maybe it was just the total amount of poor revenue reports from both GateHouse and Gannett. Or did the big NEWM investor persuade Leon Cooperman's pooh-poohing of New Gannett's estimate – "nobody thinks any of the numbers are coming out" – to convince others to get out? (Cooperman has been in the news lately for other reasons.) Gannett's USA Today reported that some "major investors in New Media appear to have sold shares earlier this week."
Figure that a combination of all these explanations is at stake.
In any case, life continues, as it is in the everyday industry. After today's votes, you can expect the deal to be formally terminated – and New Gannett to become a business reality – on November 19.
Industry watchers will then have their eyes open for the next announcement, expected on or around the next day, November 20. That's when CEO Mike Reed and Gannett CEO Paul Bascobert will designate their new management team. Today, I can offer a likely preview of who will step up in the new Gannett order. But before that, let's break down this megamer merger as it concludes – and take a look at what's likely for the company that will run 18 percent of US daily newspapers.
Let's start with some news: the next major newspaper M&A deal, which I can now report, is (yet again) underway. McClatchy and Tribune executives talk about merging the two companies, I have confirmed with several sources. Although I do not expect any forthcoming announcements, both company executives agree that in this rapidly deteriorating operating environment, a merger that buys time by massively cutting costs is a first order in the 2020 business.
While the companies are rejecting comment on what will be the next largest – and most logical – remaining combination, it is clear what obstacles need to be removed to pull it off. Let's call the two F's.
The First F: Funding . McClatchy and Tribune would argue that merging the two companies, likely to create $ 200 million-plus series synergies, will create a less exploited, financially healthier company. But can they get funding to get the deal done, given the limited interest that most banks show in the industry? And if they do, they can get it at a rate lower than the 11.5 percent that New Gannett pays Apollo Global Capital for its $ 1.8 billion in funding. (Remember that the need to pay back the loan quickly is a big driver for New Gannett's ever-increasing cuts.)
The second F: Ferro . Michael Ferro, the former chairman of the Tronc / Tribune board, mixed the latest attempt at a McClatchy / Tribune combo in December last year. His group still owns 25 percent of the Tribune, and they could once again stand in the way of a deal.
On the ground – the gyrating retail market in all of the 38 McClatchy and Tribune markets – revenues are declining and concerns about 2020 deepening. Tribune, in last week's quarterly revenue report, said ad revenue was down 15 percent – both print and digital – with total revenue down 7.7 percent. McClatchy said in the earnings report Wednesday that advertising revenue was down 19.3 percent, with total revenue down 12 percent.
It is worse that McClatchy has to deal with his ongoing pension plan problems, and is now negotiating "a distressed end" with the federal Pension Benefit Guarantee Corporation. Although it was able to report the first gain in quarterly EBITDA of eight years, the stress for the company clearly increases. It reported that the money owed to the pension "greatly exceeds the company's expected cash balance and cash flow given the size of its operations in relation to its liabilities, creating a significant liquidity challenge in 2020."
Meanwhile, the Tribune announced this morning that it would start issuing a quarterly cash dividend for its shareholders. And not cheap: $ 0.25 per share per quarter. With 36.02 million shares outstanding, that equates to about $ 36 million a year going to shareholders – despite the company being in the red with $ 9.1 million for the first three quarters of 2019. As MarketWatch notes, " a dividend yield of 10.47%, compared to the implied return for the S&P 500 of 1.92%. "It may attract cash-hungry investors, but it also removes $ 36 million a year that could go toward investing in the future.
" The ability to hire and retain top talent remains one of our top priorities. ”
My colleagues have to choose between keeping the job and having health care because they literally cannot afford the increases.
But yes, please tell me about how our work benefits shareholders. pic.twitter.com/zrOCwEq0Tp
– Danielle Ohl (@DTOhl) November 14, 2019
Put it all together and the consolidation games for 2019, first previewed here in January, is set to expand into the new decade.
The megamerker wins headlines with the poll today and then the end of next week, but the focus is likely to shift to the significant main roll. This is understandable, as these employees unfortunately find themselves joining tens of thousands of others who have left the newspaper industry for the past decade.
The biggest question, however, is what the deal will mean for American local journalism, and that is the big picture we are looking for.
We already know that the deal with Mike Reed's career will first focus on both the rapid reduction of his huge debt and the maintenance / improvement of the dividend that has sustained NEWM investments over the years. Many of the New Gannett cash flows come out through one of these two doors. How much remains to be paid to journalists and key product people in 2020, 2021 and into 2022 – to invest in the product – is unknown.
How did we get here?
In December last year, Gannett CEO Bob Dickey surprised colleagues by announcing the retirement. The company was caught unprepared, with no presumably internal successor in sight.
Smelling opportunity, Alden Global Capital President Heath Freeman – proprietor of the shape-shifting chain MNG, in various ways following the MediaNews Group, Digital First Media, Journal Register, and 21st Century Media – made his move. He offered to buy Gannett. Although both his intentions and access to funding remained suspect, the Gannett board and management panicked. Could Gannett's big house – founded in 1923, the largest US newspaper publisher, following News Corp globally – be swallowed by a hedge fund that had become the poster child for milking the American press on its way to oblivion?
When Gannett pondered the alternatives of fighting Alden – which resulted in a later battle and more – Mike Reed smelled both opportunities and the whiff of panic. He called Gannett, offering GateHouse as a friendlier merger partner. Reed looked good compared to Heath Freeman, Gannett executives said to one another.
Much appreciation, negotiation and solace followed throughout the year. In the end, however, this is how private equity Fortress Investment Group has come to control and manage the largest daily newspaper chain in US history.
Let us now consider the numbers, the people and the decisions ahead.
The large number is the synergy number, which now sits at $ 400 million or more.
Although Reed has said that editorial cuts would be minimal, "there is no way they can get that number without significant cuts in the newsroom," a person very close to the deal told me. Other sources have reiterated that belief. With an employment rate of about 50 percent of the total cost, most people place the total number of FTE cuts at more than 3,000. Some believe the number next year will come in somewhere between 3,500 and 4,000. It is unlikely that we will know the actual number for a while, and then only through extrapolation.
For a sense of scale, when this deal is terminated, McClatchy will be the second largest US newspaper company after circulation, behind New Gannett. It has fewer than 2,800 employees in total. So New Gannett wants to cut more jobs – maybe substantially more – than the biggest competitor even has.
Why has the number grown from $ 275 million to $ 300 million that Reed first quoted?
undoubtedly: Operating revenues are getting worse, quarter by quarter. And even Reed may not want to bet on the highly optimistic revenue forecasts he has offered investors in the merger prospectus.
It was on GateHost's notice last week that Leon Cooperman made meat dough by Reed's numbers. In colorful language rarely seen in conference calls for quarterly financial results, Cooperman posted these forecasts:
When I listen to you, Mike, on the call, I am reminded of the late comedian, Rodney Dangerfield, who used to complain, he gets no respect. And then I see on page 88 in S4, the power of attorney that came out and linked with the merger. If I take the numbers there, the stock is currently trading at 2.7 × EBITDA. And this assumption, so no one believes the numbers, no, on the changed size yield gives the stock 9%, you are 2.7 × EBITDA. By 2021, you need to arrange the financing.
No one believes it. And I think part of the problem is that Gannett's total revenue has gone down by over 9% over the past few quarters. New Media's revenue has fallen by around 7%. I actually think Q3 was at 7.9%. After merger, you project down 3.5% in 2020, 1.5% in 2021 and down 0.4% in 2022. When it comes to margins, they are currently running 11% to 12%. After merger, you expect 15.6%, 18.6%, 21.3%, & # 39; 20, & # 39; 21, & # 39; 22.
Now I can understand the margin expansion that is due to the synergies, but I do not understand how we go from revenue decline that is 7% or 8% to 3% or 4%. What lies behind it and how confident are they that this will be the case?
(Ouch. Elizabeth Warren is not the only one to become Coopermens toughest these days.)
In response, Reed emphasized minimizing the fastest-moving part of the business – print advertising – and the increased focus on growth areas. . He also highlighted the production business GateHouse Live, a fast-growing, high-margin unit that is being brought to the Gannett markets as quickly as possible. ("So 85% of our revenue will be driven by categories that we feel we can have either stable or growing," he said. "So we feel very confident over the three-year period that the biggest driver for refusals, print advertising will be a very small part of our overall business. ")
But a simple truism applies here. If you have a number to dial, it's much easier to get there by cutting expenses than really relying on Improved earnings, cutting big and cutting deep in the beginning offers Reed some insurance, so he knows he will be able to pay off the Apollo debt and maintain investors' profits.
Despite Coopermens strong skepticism, he maintained his support for the merger.
Why? The same reason I repeated throughout the year: Nobody loves this deal, but it's probably the best thing that can be done now to possibly save investors' efforts. That's what I hear. from those in For listed newspaper companies in one class – a species that does not survive the 2020s – it is about the art of being imminent.
We will learn more about this merger as the numbers move through 2020, in quarterly reports and SEC filings. How much will the company pay out early in the year to any of the transferred Gannett and GateHouse executives who will distribute their golden parachute? How many tens of millions will be paid in remuneration to generate the huge cost savings?
And how does the combined company really manage? It will take as long as 15 months to get a real apple-to-apple comparison of revenue and profits. In the meantime, there is a lot of extrapolation.
For the number of junkies out there, NewsGuild's research economist Tony Daley has written an exhaustive account of the GateHouse / Fortress timeline, with a lot of data. The guild, recently energized by the wave of unions spreading across digital media, issued its own resignation of the megamerker last week, saying "journalism will suffer."
There are the numbers and facts, and then there are people – and the more beautiful question of culture. GateHousers is proud to go fast, break things and get things done. Gannetteers point to greater sophistication of systems and processes and their deeper benches of talent. Expect these benches to thin quickly, given the cuts.
Already within Gannett, sources say, business executives have been notified and are picking up the pace. Soon they will see how many of them survive to work with the always tough process of merging two companies.
Top executives will try to do what they can to reduce the time it takes, but everyone expects it to take something like 18 to 24 months to relax, rewind and combine how things work. All of this is an opportunity cost – potentially productive time and resources devoted more to internal change than external business management.
This brings us to the new top management. Sources tell me that the new lineup is pretty clear, but it may still change before the announcement.
We already knew that Paul Bascobert would become the CEO of New Gannett, reports Reed. Accepting Bascobert, who was just hired by Gannett this summer, was part of the deal Reed signed. This meant that Reed's long-time business partner, Kirk Davis, would not enter the same No. 2 position in the new company. Davis, well-liked by his leadership team and respected as a leading revenue-generating operator in the industry, has decided to leave the company instead of taking a smaller position.
Surprisingly, perhaps in a merger run by GateHouse, it appears that a number of Gannett executives are in the process of playing major roles in the merged company. In fact, some at GateHouse find how much Gannett influence in the new company is disappointing.
Several top executives in Gannett are expected to take similar positions in the new company, multiple sources said. Current Gannett CFO Alison Engel is one. (New Media currently lists its CFO as "TBD.") In the all-important revenue management position, Gannett Chief of Revenue / USA Today Network Marketing Solutions Manager Kevin Gentzel will take on the bigger job with the new company. Similarly, Maribel Wadsworth, currently president of the USA Today Network and publisher of USA Today, "oversees [ing] the company's consumer business," assuming a similar role in New Gannett.
GateHouse, Denise Robbins, SVP of Consumer Marketing, is expected to take a similar job. Jason Taylor, manager of GateHouse's new venture unit, including GateHouse Live, will maintain a similar portfolio, sources said.
Given all the pressure on the companies and the industry, there is a lot on the table.
Early in 2020, the company will decide which of its newspaper properties to sell or trade. “Asset sales” are a key part of the Q1 agenda – although I do not expect major sales, only some one-off companies. Reed will also receive cash for some of the remaining properties that Gannett brings into the deal, many of which came with its own acquisitions in recent years.
We know something about what the parties valued when they put together an agreement. Gannett's national digital ad network is one of those, providing plus revenue for the company, sources said. Adding GateHouse's digital audience to that network will add scale, and the scale is good. Similarly, you can expect to see USA Today's branding extend across all sites.
Will USA Today newspaper continue to publish? At Poynter, Rick Edmonds has detailed the probable approach to the end of the print. How long it will take is likely to be the question. In the meantime, the brand, ironically, will be rising. And that leaves big questions about Gannett's national journalist staff. With a large Washington office and USA Today's staff, where do they fit journalists into the new company's strategy?
We also know, as mentioned above, that GateHouse Live is highly valued and will be extended to Gannett properties.
But how will the different digital marketing companies of both Gannett and GateHouse be combined? And can the company find ways to improve margins in this once highly touted growth business that has provided disappointing cash flow for many publishers?
Bascobert has outlined a "marketplace" strategy in his early visits to the company's cities. Bascobert, formerly of The Knot / XO Group, has told employees that he sees such marketplaces as a new key point to rebuild the local commercial advertising business. In the months ahead we will see what kind of marketplaces New Gannett will test.
Finally, it is the regional design centers. Gannett has operated several of them; GateHouse has largely centralized the site's make-up and production work in Austin. These centers have already eliminated many news production jobs on local newspapers. How much more can their work be rationalized, squeezed or made "more efficient"?
That's actually the all-encompassing question here. Neither of these two companies is known for excessive or excessive spending, in their journalism or elsewhere. They have both been well squeezed for many years.
How much juice is left to extract? And when the juicing is done, what remains for readers? Money for journalism: That is still the basic question here.
Tens of thousands of millions have gone to Fortress Investment over the years, and there are still tens of millions left to go, as Fortress is serving its final two-year management contract and then concludes with a new package of shares worth tens of millions more. It is money that, like GateHouse's dividend, has not paid and will not pay for journalism.
How questionable are these payments, even in the traditional private equity world?
Take it from Leon Cooperman – who hard-boiled a capitalist as they come – who had his own comment on the case about the GateHouse earnings call:
I know we're happy to get rid of Fortress, but I have to say that you, and I probably should not say this, but I will say it, because it is my nature to speak what I think.
Basically, I was in the hedge fund business for 26 years. I only got paid when I made money to investors.
The kind of money Fortress goes away with here, and I know it doesn't. They brought this public in 2014 to $ 16 per share. The stock is $ 8.50 and they will go away with hundreds of millions of dollars. It's just morally wrong, and they shouldn't even take the money, given what they've done here.