GateHouse-Gannett deal envisions print and digital media giant across 47 states
The newspaper industry mega deal in which GateHouse Media’s parent company plans to buy USA Today parent Gannett Co., combining the two largest newspaper chains in the country, faces its final hurdle Thursday when shareholders vote on the $1.2 billion pact.
GateHouse Media last year paid Cox Enterprises $49 million for The Palm Beach Post and Palm Beach Daily News.
New Media Investment Group’s acquisition with Gannett would create a nation-blanketing print and digital giant, with more than 260 daily newspapers and hundreds more websites and community and weekly newspapers across 47 states. The new company, to be called Gannett even though New Media is the acquirer, would have a daily print circulation of 8.7 million, dwarfing the next largest chain, McClatchy, with daily circulation of 1.7 million.
The companies say the advantages of size and reach will attract more digital advertisers and save expenses by eliminating operations deemed redundant or expendable, helping to offset a two-decade slide in revenue from print advertising and subscriptions, which has threatened the newspaper industry overall.
The deal has been approved by the boards of both companies and by regulators. If shareholders vote in favor, it is expected to close before the end of the month. New Media shareholders would own 50.5 percent of the merged company, Gannett shareholders 49.5 percent.
“Scale matters in the digital space,” New Media’s chairman and CEO, Michael Reed, told analysts on a recent conference call. The two chains “are much stronger together, with a viable path for growth for our shareholders, our employees and for sustaining journalism.”
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New Media executives have said they intend to cut $275 million to $300 million in annual expenses during the next 18 to 24 months if the deal goes through — or about 7.5 percent of the combined company’s total expenses — partly to free up resources “to accelerate our digital transformation.”
The cuts are likely to hit hardest in such back-office functions as accounting and production, rather than in newsrooms.
Still, the nation’s largest union of journalists, NewsGuild-CWA, has called the deal a “threat to journalism.”
“This merger will hurt the communities these media organizations serve,” NewsGuild president Bernie Lunzer said in a statement. “To fund the merger, local papers will likely disappear, jobs will be slashed, and journalism will suffer.”
Advocates for the deal have characterized it as the opposite, saying it’s a step toward crafting a viable business model for an industry that has struggled in the digital age amid competition from tech giants such as Google and Facebook, which dominate the market for online ads.
“The reason that we are fighting so hard to transform our business model (is) so that we can ensure our local communities have trusted, high-quality journalism for the next 100 years,” Reed said on the conference call. Through a spokeswoman, he declined a request for an interview before the shareholder votes.
New York-based New Media owns 154 daily newspapers, including The Austin American-Statesman in Texas and The Columbus Dispatch in Ohio. Gannett, based in McLean, Virginia, owns USA Today and 109 dailies, including the Detroit Free Press and the Arizona Republic.
The cost of the acquisition has fueled skepticism among some media analysts that the combined company would have sufficient resources to invest in its business and transform itself for a digital future, after making debt payments and funding what it has vowed will be substantial shareholder dividends.
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New Media is taking out a $1.8 billion, five-year loan from private equity firm Apollo Global Management at an annual interest rate of 11.5 percent to finance the deal.
It has said it expects the combined company to pay an initial annual dividend of 76 cents a share, and to increase the sum over time “as synergies are realized and (debt) is reduced.” The initial amount is half New Media’s current annual dividend of $1.52 a share, but it still would equate to a dividend yield of about 11 percent, based on New Media’s recent stock price — well above the S&P 500 Index’s sub-2 percent dividend yield.
The merger “buys time by knocking out lots of expenses,” said Ken Doctor, media analyst at Newsonomics. But “what is the strategy (for the combined companies) once they have bought time? That is the question that is looming for them and for readers.”
He said he doesn’t think the architects of the combination have one.
Lunzer, of the NewsGuild, agreed, calling the deal “a callous piece of financialization” that will create short-term profits at the expense of journalism.
But Reed has said the combination, and the ensuing cost cuts and digital push, will reduce the new company’s reliance on print revenue, which has been declining industrywide, and put it on firmer financial footing over the next few years. He has characterized the high-interest debt being used to fund the acquisition as bridge financing because it can be paid off early without penalty. He expects the combined company to refinance “at a much more attractive rate” in 2021.
The cash-and-stock deal initially was worth about $1.4 billion to Gannett shareholders, but the value has fallen since it was announced in August, along with New Media’s share price.
Under the deal, Gannett shareholders will receive $6.25 in cash and 0.5427 shares of New Media for every Gannett share they own. Based on New Media’s close Tuesday at $7.13 a share, the deal is valued at about $1.16 billion.
Reed will retain his positions atop the umbrella company after the merger. Kirk Davis, CEO of the GateHouse operating subsidiary, is stepping down. Gannett’s current CEO, Paul Bascobert, who was named to his post in August, will be CEO of the new operating subsidiary once the deal closes. Both the umbrella company and the new operating subsidiary would be named Gannett after the deal is completed.
Bob Sechler is a business and government reporter for the Austin American-Statesman, a GateHouse Media newspaper.