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A hostile bid on Gannett raises questions in the newspaper sector



The hostile takeover on the parent of USA Today

Gannett
Co.

GCI 21.23%

MNG Enterprises Inc., a group of newspapers backed by a hedge fund, feared that an industry already shattered by years of budget cuts would face even greater cost-cutting, with financial owners becoming more active players. important.

MNG Enterprises, better known in the industry as Digital First Media, on Monday sent a letter to Gannett, the largest media group in the country, saying it had taken a 7.5% stake in the company and offering to buy it for 12 USD. a cash portion of approximately $ 1.4 billion, representing a premium of 23% over the closing price of the stock on Friday.

In that letter, Digital First stated that Gannett's management had not managed the company well, which has a hundred publications in addition to USA Today. Gannett confirmed that she had received the unsolicited offer and that she would carefully review the proposal.

A new wave of owners

Four of the top ten American newspaper chains in terms of number of daily titles belong to investment groups.

Daily circulation,

in millions

Industry critics, including consultants and journalists who worked at Digital First, say the firm has a tradition of cutting costs significantly, without investing enough to improve the long-term health of newspapers. Granted, Gannett has already adopted his own substantial layoffs in his newspapers, but the concern is that what will happen could be even worse.

"When the most aggressive newspaper in newspaper cost reduction is getting into the largest newspaper chain in the country, it's not good news," said Jim Friedlich, executive director of the Lenfest Institute for Journalism. a non-profit organization dedicated to finding sustainable business models for local journalism. "It's the trial timber company trying to buy the national park."

A spokesperson for Digital First defended the company's strategy, saying that it was not just about siphoning profits in the short term.

"We believe that these publications must survive and continue to serve their communities, but they must also have costs commensurate with their incomes," he said, noting that the company still employs more than 4,500 people.

The sharp decline of the newspaper industry in recent years, while consumers have turned to online media, has created many opportunities for consolidation. Financial companies, private equity funds and hedge funds have aggressively engaged in the action. Today, these companies own or manage four of the ten largest chains.

Digital First Media, which is majority-owned by the Alden Global Capital LLC hedge fund since 2012, owns approximately 50 dailies, including the Denver Post and San Jose Mercury News, as well as 150 other publications.

Group of investment in new media
,

Founded in 2014 by the private equity firm Fortress Investment Group following the bankruptcy of GateHouse Media, it has actively consolidated small newspapers and now has 145 daily newspapers in 37 states.

Digital First has been as aggressive as any player to reduce expenses and staff. Of its 12 newspapers represented by unions, including major subways like the Denver Post, the company halved the number of newsrooms to the size of what they were in 2012. The 12 trade union newspapers had 1,552 employees in 2012, up from 487 last November, according to Darren Carroll, International NewsGuild Representative CWA.

"It's almost possible to destroy them as information-gathering operations without actually shutting them down," said Julie Reynolds, a former Monterey Herald journalist owned by Digital Media, who currently tracks the company. for DFMworkers.org. "Thinking it could happen to a hundred other newspapers is scary and disturbing."

The Alden Global Capital hedge fund, based in New York, is renowned for its secrecy. The founder of the company, Randall Smith, has not spoken to the media for decades. Company executives did not respond to requests for comment.

Digital First is famous for having some of the highest profit margins in the newspaper industry, a feat almost entirely realized by cost reduction.

According to Digital First, the company recorded an EBITDA-adjusted margin of 16.2% in 2018, while Gannett had dropped to an estimated 11.2%, compared to 14.9% before

Tegna
Inc.

in 2015.

According to Neil Chase, former editor of San Jose Mercury News, a company owned by Digital First, the company has cut its editorial staff from 25% to 30% in its three major newspaper groups last year. . This resulted in a reduction of 225 to 160 editors of Digital First Bay Area newspapers, about 75 layoffs in the Southern California group and over 30 in the Denver Post.

But at the same time, newspapers in the San Francisco Bay Area made a profit of $ 40 million with revenues of about $ 170 million, he said.

"They are good at what they do: buy troubled assets, reduce costs and sell properties. It's good for their investors, but it's not necessarily good for the communities that these newspapers serve, nor for democracy, from somewhere else, "Chase said.

Digital First's spokesman said Gannett paid too much for digital acquisitions that did not pay off and made other management mistakes. A spokesman for Gannett declined to comment.

Most newspapers, including Gannett-owned media, have already experienced significant layoffs to cope with declining revenue from print advertising and distribution. Since 2004, the number of journalists employed by newspaper companies has been halved, from 71,640 to 39,210, according to the Bureau of Labor Statistics. According to a study from the University of North Carolina, the total circulation of weekday and weekly newspapers decreased by 40% from 122 million to 73 million, while 1,800 newspapers were closed, leaving 200 counties without paper .

Jay Young, whose position as an investigative editor at Evansville Courier & Press in Evansville, Indiana, was eliminated after Gannett took over the paper in 2015, said Gannett had a reputation "and that the writing was hooked." Since then, Gannett has cut nearly 20% of the newsroom, eliminated the copydesk, sold the newspaper's headquarters, dismantled his printing press, and turned over his print to Louisville, about two hours away, he said. . Gannett declined to comment on his paper in Evansville.

Wall Street praised the idea of ​​the Digital First offer, pushing Gannett's stocks to more than 20% on Monday.

Since its creation two and a half years ago, Gannett has struggled with the owner of the television channel now known as Tegna Inc.

After the split, the company purchased Journal Media Group Inc., owner of 11 daily newspapers, including the Milwaukee Journal Sentinel, for $ 280 million. He later sought in vain to acquire

Tribune Publishing
Co.

, then owner of the Los Angeles Times and the Chicago Tribune. After that, Gannett focused on buying digital marketing services properties, such as Reach Local and WordStream.

"Gannett has been trying to diversify his business from the digital press to digital advertising in recent years, but the results have been poor," JPMorgan analyst Alexia Quadrani wrote Monday. "We view MNG Enterprises' interest as a potentially favorable exit strategy."

Write to Keach Hagey at keach.hagey@wsj.com and Lukas I. Alpert at lukas.alpert@wsj.com

Corrections & Amplifications
In an earlier version of this article, a Digital First Media spokesperson said the company needed to align its costs with profitability. He went on to say that the costs should be aligned with revenues. (January 13, 2019)


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