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Will Tribune Publishing (TPUB) Accept Gannett's Latest Offer?

Tribune Publishing TPUB is making headlines today.  We aren’t talking about what’s on the front page of the LA Times or Chicago Tribune though.

Under a month ago, Gannett Co. GCI made an offer to buy Tribune Publishing’s shares for $12.25 each.  In response, Tribune’s board members unanimously rejected Gannett’s offer, stating that the price didn’t reflect the true value of the company, and that it was not in the best interest of shareholders.  After the initial offer, TPUB shares shot up over 50%.  Before Gannett made its offer, Tribune’s shares were trading for about $7.30 per share.

Tribune’s stock is surging once again, gaining 22% so far today.  Each share is now trading for $14 dollars after Gannett significantly increased its offer.  GCI is now offering to buy up TPUB at $15 per share, for a total value of $864 million including debt.  This represents a 22% premium on its previous offer of $12.25 per share.  Will Tribune accept the latest offer?  Here are some metrics which show why the deal looks pretty sweet for TPUB shareholders right now.

Outlook

Tribune recently reported a weak first quarter, with revenues ending up flat compared to the same quarter a year ago.  Advertising revenues, the company’s largest sales segment, saw a decrease of 4.3% compared to the same quarter last year.  If that wasn’t bad enough, quarterly operating expenses grew by 3.8% compared to the same quarter last year.  This as well as higher interest expense payments set back TPUB, resulting in a net loss of $6.463 million for the quarter.

Tribune’s trailing twelve month net margin is -0.39%, and sales are projected to decrease by 2.17% this year.  The company’s EPS is also projected to shrink, with an expected decline of 114.74% this year.  If Gannett’s offer was off the table, TPUB shares would not look very attractive at all.  The company does offer a nice dividend, but its cash flows may not be adequate enough to sustain the current yield.

The Price is Right

Tribune Publishing’s market capitalization has climbed immensely since Gannett made its acquisition proposal.  The current share price of $14 is pretty close to Gannett’s $15 offer, so current valuations are useful for comprehending how sweet this deal looks right now. 

TPUB has an immense amount of leverage on its balance sheet, with total debt-to-capital at 94.25%.  Companies with high debt levels are more risky to invest in, and this tends to drive down the price investors are willing to pay for an equity investment.  In spite of this, Tribune’s shares are trading at a price-to-book of 16.64, which is way higher than the newspaper publishing industry’s average price-to-book of 1.66. 

The industry’s average EV/EBITDA is 5.57, and Tribune’s EV/EBITDA of 11.14 is significantly higher.  This ratio is especially important to consider when evaluating M&A transactions.  Keep in mind that Gannett’s current offer is even more valuable than TPUB’s current EV/EBITDA of 11.14.

Bottom Line

It is common practice for companies to refuse an initial acquisition bid, even if it seems like a great offer.  This is because companies know that there is often more room to negotiate after an initial offer.  Gannett’s latest offer is significantly higher the second time around, and Tribune’s board should carefully consider accepting the offer.  While they do this, they should accept that it isn’t very easy for newspaper publishers to make a profitable turnaround by embracing the trend of going digital. 

I think that Tribune should accept this offer.  The company is highly leveraged and its outlook does not look stellar in the near term.  The long term outlook may be even more uncertain for this company, and this gives shareholders even more incentive to accept the attractive offer now.

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