Tribune Publishing (TPCO) – Merger Arbitrage – 20% Upside

Current Price – $16.05

Merger Consideration – $19 – $20

Upside – 15% – 20%

Expiration Date – TBD

This situation was shared by Ilja.

 

This is an interesting situation involving two rumored buyers and two largest shareholders, which together own more than 50% of the target company. The spread to the rumored price is currently 15%-20%, whereas the downside to pre-rumor price is in the range of 10%.

Tronc (TRNC) (later updated to Tribune Publishing TPCO) is an American newspaper and online media publishing company that owns a number of print newspapers (the most prominent being The Chicago Tribune) and digital publishing properties. In early August it has been reported that Tronc is in talks to be acquired by the private investment company Donerail Group and that 25% Tronc shareholder Patrick Soon Shiong is supporting the buyout. Recently, McClatchy (MNI), troubled Californian newspaper company, appeared as competitor to Donerail’s bid. Also it seems that MNI took over the support of Soon Shiong, becoming a more favorable winner. Rumored acquisition price is in $19-$20/share range. Two years ago Gannett tried to acquire Tronc for $18.5/share and the bid was rejected – so the currently rumored acquisition price seems rather in line with what strategic buyer was willing to pay.

 

Two rumored buyers

Donerail group is a newly founded investment vehicle led by Will Wyatt, who has built his name working in Starboard Value, which is known for buying companies and selling them apart. There are opinions that Donerail would do the same with Tronc – dispose its publishing properties piecemeal. It’s likely Tronc is the first target of the newly established group – at least there does not seem to be any news about it from before.

Another rumored bidder is McClatchy – a troubled and overlevered newspaper publishing firm. The company has not fared well in the digitization age and has observed revenue/earnings declines over the last decade in line with the rest of the print publishing industry. Performance of digital assets started gaining traction lately – digital only subscribers have grown by 34% and digital advertising revenue increased by c. 10% in H1 2018 (vs 10% drop overall). Revenue from digital advertising now comprises c. 40% of the total. Nevertheless, company is burdened by debt and all of its EBIT is consumed by interest expense. Therefore, debt free balance sheet and strong cash flows of Tronc are an enticing target, but it’s questionable whether McClatchy has capacity to raise additional financing for the acquisition.

Interestingly, McClatchy has issued about $300m+ of debt notes expiring in 2026 to cover the ones expiring in 2022 (refinancing approximately half of its debt load). So a considerable amount of debt and pressures have been postponed potentially providing space for the acquisition. Additionally, company is also taking a number of cost-cutting measures.

 

Major shareholders and Gannett’s failed acquisition

Two major shareholders are billionaire investor Patrick Soon Shiong and former CEO of the company Michael Ferro. Both own 25% and 26% of the company respectively. Their histories were interlinked in the 2016, when Gannet (largest daily newspaper publisher in U.S.) tried to acquire Tronc. The whole storyline can be found here. In the end Gannet has decided to walk away after Ferro continued to beat back all the bids, the latest of which went up as high as mid $18 and presented about 140% premium to the pre-announcement levels. Shareholders were mad and Ferro was called crazy. In one of the meetings, Ferro stated that he is open for the deal as long as he remains in control.

Earlier this year Ferro resigned from a chairman position due to #meetoo related accusations and a month later tried to sell his stake to McCormick Media for $23/share, but the deal failed due to the buyer breaching their obligations. Details of the breach were not specified. So it is still not entirely clear if Ferro wants out or it was just some kind of a play again.

Soon Shiong helped Ferro to fend-off the Gannet by investing $70m in Tronc, at $15/share (same price as Gannet’s bid at the time) and becoming a second largest shareholder with 13%. This move has allowed Ferro to penetrate the board with a like-minded investor and together control about 30% of the company. This has received a lot of criticism and even a lawsuit from a shareholder.

Besides cooperation to fend-off Gannett, earlier this year Soon Shiong has acquired Tronc’s largest newspaper L.A. Times together with some other properties for $500m and commented that he is ‘a news junkie’ and that this was a very personal acquisition. The adviser to this sale was Will Wyatt from the above mentioned Donerail Group.

 

Soon Shiong switch

It was reported that this time Ferro wants $19-$20/share deal, however there are no further sources to confirm that. It was also rumored that the Donerail group has no problems with financing, however for a smaller and highly levered McClatchy this is a way more challenging burden.

Soon Shiong initially backed Donerail’s bid but then has switched to supporting McClatchy. Having Soon Shiong makes the acquisition more than $170m cheaper (crucial for McClatchy) assuming he is interested to remaining a shareholder. It is puzzling why Chinese billionaire would change the sides like that, especially given that he has already worked with Will Wyatt from Donerail to get the L.A. Times. It might be that the rumored decision was influenced by his intentions to stay as a player in the field for a longer time. Given that Donerail will most likely get rid of Tronc piece by piece after acquisition, a deal with McClatchy would provide an option to play the long game in the publishing industry.

 

Reasons for the spread

– So far there is nothing more substantial than rumors regarding intentions of potential acquirers and major shareholders as well as the expected acquisition price;

– Investors are skeptical given the history of the failed sale negotiations with Gannett couple years ago and subsequent share price decline;

– Ferro’s willingness to sell his stake is questionable – he was unwilling to sell to Gannet at $18+/share and reportedly wanted $23/share from McCormick.

– Soon Shiong seems to be backing the offer of McClatchy which is over-levered and might have troubles raising financing for the deal.

– Unaffected price is c. 10% lower. After the initial acquisition rumors surfaced, Tronc reported Q2 earnings in which 2018 outlook for revenues and EBITDA was slightly increased – thus the actual downside might appear lower than 10%.