How to evaluate Gannett's offer to buy Tribune Publishing

Gannett revealed today that it wants to buy the Tribune Publishing company for about $815 million. The offer is about 63% higher than the Tribune company's closing stock price last Friday, April 22.

Stock prices for Gannett (blue) and Tribune Publishing (orange) suggest advantage Gannett now
that its offer to buy the Tribune company is public. Prices April 2015-April 2016, from MSN Money.

Gannett says it's a cash deal, implying Gannett won't take on debt. That reduces Gannett's risk if the merger doesn’t generate substantial profits. Gannett and Tribune Publishing are old-line newspaper companies that have been transformed by digital competition. Gannett is probably well aware that other once-profitable newspaper companies failed after taking on enormous debt to finance mergers in the early years of this century.

Gannett, and some analysts, claim the merger will generate millions of dollars in “synergies,” which means reduced production costs. That is easy to say, but hard to do.

Focus instead on the value of the Tribune company assets. Are those assets undervalued at the Tribune’s current stock price? Is Gannett’s offer price still below the book value of the assets?

If undervalued assets are a factor that may explain why, according to Gannett, the Tribune has been reluctant to negotiate a sale. Changes in the Tribune's ownership and board of directors may be influencing the company's response to Gannett's offer. But we should also ask if Tribune executives have evidence that Gannett’s 63% premium is still less than the underlying value of their company.

Sixty-three percent surely sounds good to Tribune stockholders, which is why Gannett went public. But Gannett’s offer might not be the best available deal.

Focus also on the local markets where a merger might consolidate the ownership of local media that currently compete with each other. Consolidation would reduce the elasticity of audience demand. If local audiences have multiple media choices that are all owned by Gannett, that will make it easier for Gannett to sell advertising in those markets.

In a classic economic model, consolidation creates the possibility of increased power to raise prices for the owner that dominates the market. But Google, Facebook and other new media also sell local ads in local markets. One possibility is that Gannett only hopes to gain enough pricing power to become profitable in these markets.

In any case, a post-merger Gannett will have to manage audience demand. Audiences increasingly consume news only on social media sites like Facebook.  The fraction of the audience that leaves social media to visit news company sites doesn’t stay long or visit often.

It’s true, and often overlooked, that about half of newspaper readers still only read the print edition. But the trends are clear, more and more people are consuming news online or on social media.

Gannett will face the tricky problem of (a) trying to stop the migration of audiences away from its traditional or digital media platforms while (b) trying to persuade social media audiences to engage with those platforms.

So, the financials of the proposed deal may favor Gannett. But managing the merger to produce anticipated cost reductions, pricing power, or profits is likely to be challenging.

(A version of this post first appeared on my Twitter account @HughJMartinPhd)