Merger Arbitrage — 23% Upside (at $15)
This idea was shared by Mike.
This is a merger arbitrage play and quite a bit of corporate drama in the newspaper industry with two offers from strategic acquirers in place and the stock trading at the lower bid.
DALN owns The Dallas Morning News, one of Texas’s most prominent daily newspapers, and also runs a tiny marketing agency. Just two months ago the company looked like a relic in a declining industry: stuck in a sluggish digital transition, burning cash, and trading at all-time lows with a negative enterprise value.
Then on July 9, the company announced merger with Hearst Communications at $14/share in cash, a 219% premium to the $4 pre-announcement price. Hearst is a big media conglomerate, which also publishes 28 dailies and 50 weeklies across the US. Robert W. Decherd, the great-grandson of DALN’s founder, owns 96% of Series B (super-voting shares) and about 1.6% of Series A (common shares), giving him roughly 55% of the total voting power. Decherd has pledged his support to merger with Hearst. Any merger would need to be approved by both Series A and Series B shareholder (two thirds of each class), so Decherd has a veto power, but cannot consummate the transaction without support of common shareholders.
Two weeks later, Alden Global Capital, a hedge fund which owns MediaNews Group (MNG), quickly acquired a 10% stake in DALN and launched a competing $16.50/share bid. MNG is one of the country’s biggest newspaper owners and its parent Alden is known for slashing jobs and squeezing profitability in the acquired newspaper businesses.
Management rejected Alden’s offer and adopted a poison pill, but in turn negotiated with Hearst to increase the offer from $14 to $15/share. Even though the competing bid was materially higher, the board concluded that it was not superior because the controlling shareholder wouldn’t support it.
“Mr. Decherd and his affiliates agreed to vote (i) in favor of, among other things, the approval of the Hearst Merger Agreement and (ii) against, among other things, proposals for alternative transactions, such as the Alden Proposal, for so long as the Voting Agreement is in effect. […] Without Mr. Decherd’s voting support, the transaction contemplated in the Alden Proposal cannot be consummated.“
Alden, in turn, responded by questioning how all of this squared with the board’s fiduciary duty and threatened “to take our case directly to your shareholders”. On August 11, Alden raised its offer to $17.50/share and, allegedly “unlike Hearst,” pledged to maintain the print edition of The Dallas Morning News.
The board ignored the improved bid. The latest proxy struck an even harder tone when referring to Decherd’s intentions. It is not clear if Decherd’s opposition stems from his aim to preserve the newspaper legacy (even though Alden promised to keep print circulation in place) or whether there is a personal grudge angle.
“To be clear, Mr. Decherd has stated that there is no scenario involving Alden or its affiliates as a buyer for DallasNews which he would support. Mr. Decherd’s message was clear: as long as he is the controlling shareholder, Alden will never own DallasNews.“
Last week, Alden raised the offer again to $18.50/share, to which DALN hasn’t responded yet. The letter included another threat of taking action if the board continues to ignore its fiduciary duty:
You are obligated to exercise your fiduciary duties for all shareholders, not to shield an inferior buyer favored by just a single shareholder. We reserve all rights to pursue any available avenue to hold you accountable for failing to act in the best interests of almost 90% of DallasNews shareholders.
So today we have a stalemate: two offers (at $15 and $18.50) and a controlling shareholder who wants to sell at the lower bid, but cannot do so without the support of two-thirds of common shareholders — who, naturally, want more bang for their buck. I can only guess how will this play out, but with the stock sitting at $15/share, the downside seems to be well protected to wait and see what happens next. I do not think there is any risk of the sale falling through completely. With two parties interested in DALN, a solution will be found one way or another. Decherd is 74 years old and stands to make $10m+ from this transaction, I do not think he will want to leave DALN (his family’s legacy) as a struggling/declining independent entity. Even DALN’s management, despite minimal ownership, will split a $7m change-in-control payout among three executives. So nobody wants to see DALN trading back to $4/share and it will most likely not happen.
The main question is what happens if Hearst $15/share offer is put to shareholder vote. My guess is that common shareholders would reject it (2/3rds approval required). But I do not think it will come to that, either Hearst will up its bid again before the vote or some kind of arrangement will be reached with Alden. At the end of July, after Alden’s first offer was rejected, Gamco disclosed a 5.3% stake in a 13D, buying shares at up to $16. So I suspect that some activism is already ongoing behind the scenes. Together, Gamco and Alden control roughly 15% of Series A shares.
DALN’s financials
DALN is a classic case of a failed transition from print to digital. Print circulation is shrinking faster than digital is growing, driving sustained losses and painful declines in advertising revenues. The company recently sold its printing facility, laid off staff, and moved into a smaller space, promising substantial cost savings. That shift briefly fueled a bull thesis around an imminent inflection to modest profitability, but it hasn’t materialized yet.
For the buyers, the appeal lies not in DALN’s financials, but in its established brand and the potential to unlock faster digital transition as well as synergies under the ownership of a large-scale player.
Why would >1/3 of Series A shareholders reject the Hearst offer?
Most of them will be making gains of >200% or >$10/share (from average trading levels in recent years), and why would they take any risk just for a relatively low probability of extra gain of $2.5/share?
And I don’t think Alden can do anything about the board.
The board has not violated its fiduciary duty. It’s a fact that the Alden offer is not viable without the support from Decherd, and the board would actually violate its fiduciary duty if they recommend the unviable Alden offer and reject the Hearst offer.
Unfortunately stock options are not available for DALN, or selling both puts and calls can be what I would do.
The stock has been trading at around current price since early July. Liquidity is decent, so the shareholder base has changed meaningfully since the initial announcement. There is probably a decent amount of arb players involved and for them the difference between $15 and $18.5 is big.
While Decherd’s recommendation is an obstacle, it doesn’t legally insulate the board. Once the company is for sale, the board’s overriding duty is to maximize value for all shareholders. Accepting a lower bid solely because a single, conflicted shareholder demands it seems like a potential litigation risk for the directors. Alden’s threat to “hold you accountable” is a direct reference to that.
No, the Alden offer is not actionable/viable, and I don’t think the board will get into (legal) trouble for not recommending it.
Alden has not mentioned litigation (but just empty threats like “take directly to shareholders”) , because they probably know that there’s no merit to a litigation.
The board will reject the Alden offer not because Decherd demands it, but because under the current shareholding/voting structure the Alden offer is not viable without Decherd support.
Last time this happened though Hearst bumped their offer 1$.
Given the pressure isn’t a revised bid possible?
I guess Hearst bumped the offer to win support from Decherd. Now that Decherd is already on board and is happy with $15/share, there is no need to bump again.
Yes, Hearst may bump to ensure support from Series A shareholders. However, voting down the merger is very risky for Series A’s (downside can be significant), while Hearst can certainly take the risk of losing the deal. So I think Series A’s will chicken out eventually, and Hearst probably thinks so too.
I mean they did say “We reserve all rights to pursue any available avenue to hold you accountable”. Even if the higher offer doesn’t go through, it might pressure Hearst to bump again (though this is a bit speculative IMHO).
Right the upside is speculative. The question is 15$ your floor and you’re free rolling the upside or does it break lower.
So the $18.50/share offer has been rejected. The board is refusing to acknowledge that Alden’s proposal is superior because Decherd doesn’t want to support it (thus, it has no chance of going through). The market expected this and the share price hasn’t reacted. I still think there’s a chance shareholders will be able to force Hearst to raise before the meeting on the 23rd of September.
Glass Lewis has recommended shareholders vote FOR the merger with Hearst at $15/share. The advisory firm calls the offer “reasonably likely to approximate the maximum value available under current market and ownership conditions” – a direct acknowledgment of Decherd’s veto power over any competing deal from Alden.
Both Glass Lewis and now ISS have recommended in favor of the $15.00 Hearst deal. This increases the probability that the offer will be approved.
Meanwhile, GAMCO has increased its stake in DALN from 5.3% to 6.1% and has stated that it remains undecided on how to vote at the upcoming shareholder meeting.
Now that DALN is trading at 5% discount to the $15 offer, the situation is getting more interesting.
If the deal can close within 6 months, 5% sounds attractive. I assume no anti-trust issues.
mike1 lets goooo!
Purchase price raised to 16.5!!
Mike1 do you have a view on how to play the rest of this?
Sorry for the late reply. I think this is a solid outcome. They’ve called the $16.50/share bid “best and final.” Alden could still edge its offer higher, which might give the stock a small lift, but unless that increase is substantial this looks like the end of the road. Shareholders are likely to back Hearst.
Do you think Hearst can close the deal before year end? Are we expecting any delaying factors?
At the time of the initial bid, the companies expected the transaction to close in Q3/Q4 ’25. Given the transaction’s small size and lack of horizontal overlap, I would not expect any regulatory pushback.
Do you have a sense of how GAMCO will proceed?
While GAMCO has not disclosed its intentions, the activist acquired its shares at up to $16/share, below the current offer levels. This, coupled with the “best and final” language, might suggest that GAMCO will accept the $16.50/share bid.
Thanks bud.
Sold out after 3 weeks and a quick profit. Thanks Mike1, much appreciated.
I happened to own a good chunk (~7% position) of DALN pre merger based on the plans to sell the print facility. I ended up selling it all yesterday because its not clear to me that getting 2/3 approval will be an easy task. The shareholder base seems pretty spread out with only ~59% held by shareholders with 0.13% or more according to TIKR. Seems like a pretty big risk with Alden at 9.9%. Does anyone have a strong view on the odds of getting the small retail owners to turn out and vote?
I think Alden will vote yes and walk away with a 20% profit. By now they should have known that they can’t win.
So Alden did come back with $20/share, but right after that Gamco announced they intend to vote for Hearst’s $16.50/share offer:
I agree with Mike – no one believes Alden has a shot anymore, and shareholders will almost certainly approve Hearst’s offer. Still, it is remarkable how much value is being left on the table. I guess it’s as Matt Levine wrote yesterday, “The shareholders know that shareholder value is not all that’s important here.”
Are you worried about the risk raised by @Philip, that it’s difficult to get those small/nano shareholders to vote? The approval requires affirmative votes from 2/3 of all shares outstanding.
Looking at the recent AGMs, the voting turnout has been solid. Assuming all Series B votes for the appointment of the independent registered public accounting firm were cast during the 2025 AGM, the Series A turnout came in at 74%, so above the two-thirds threshold.
you only need 2/3 or shareholders that actually vote (not 2/3 of all shares out)
For Texas-incorporated companies, I believe the 2/3 threshold is based on all outstanding shares eligible to vote.
“Affirmative Vote: Approval of a plan of merger by the shareholders of a Texas for-profit corporation typically requires the affirmative vote of the holders of at least two-thirds of the outstanding shares entitled to vote on the matter. “
Yes, that correct. In their solicitations for votes they have said that abstaining is the same as a no vote. Here’s what it says in the merger agreement:
(b) Company Shareholder Approval. The only votes of holders of Shares or other Equity Interests, or any class or series thereof, of the Company necessary to approve this Agreement (including the plan of merger set forth herein) and the Transactions (including the Merger) is the approval of this Agreement (including the plan of merger set forth herein) and the Transactions (including the Merger) by the affirmative vote of (i) the holders of at least two-thirds of the voting power of all of the Shares that are outstanding and entitled to vote thereon at the Company Meeting, (ii) the holders of at least two-thirds of the outstanding shares of Company Series A Common Stock entitled to vote thereon at the Company Meeting, voting separately as a class, and (iii) the holders of at least two-thirds of the outstanding shares of Company Series B Common Stock entitled to vote thereon at the Company Meeting, voting separately as a class (collectively, the “Company Shareholder Approval”). No other vote of the holders of Shares or any other Equity Interests, or any class or series thereof, of the Company is necessary to consummate the Transactions.
Hearst’s offer approved https://www.bamsec.com/filing/141389825000093?cik=1413898