Chicago Tribune publisher Tronc plans to buy Chicago Sun-Times parent in a deal that could ‘set the tone’ for further newspaper consolidation.

Lisa Allen 5/16/17
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Newspaper publisher tronc Inc. took a step in its plan to grow through acquisitions with a nonbinding letter of intent to buy the parent of the Chicago Sun-Times, following through on management’s comments on the Q1 earnings call with analysts who saw the company’s $160.9m in cash as a potential stockpile for purchases.

Kevin Kamen, president and CEO of media industry brokerage and appraisal firm Kamen & Co., believes the acquisition would not put too deep a dent in tronc’s cash pile. “Based on my research, [the Chicago Sun-Times’ parent is] not profitable, and they’ve been searching for a new home for quite some time,” Mr. Kamen told CapitalStructure. “When one within the media trade analyzes their operation from afar and looks at the titles, the distribution, the staffing, the digital components, and considers the quality of that editorial content and the brand from an advertiser’s perspective, I come up with a figure of no more than eleven million dollars. Any investor group offering more than this figure would be out of their mind.”

Financial terms are still being finalized, according to a May 15 statement from tronc, which publishes newspapers including the Chicago Tribune and the Los Angeles Times.

The newsrooms will remain separate if the deal closes, tronc said – it is still subject to approval by the Justice Department’s antitrust division.

Mr. Kamen expects the deal will go through unless a wealthy investor from Chicago steps in with an attractive offer. However, he is skeptical of the claim that the newsrooms will remain independent.

“I personally don’t see them staying separated and independent from each other for more than 24 months maximum, primarily because that is where the profits lie: Economies of scale would lead any logical person to come to the same conclusion,” Mr. Kamen said.
He noted regulators have the power to demand that operations stay separate over a specified timeframe, but said they usually avoid that measure.

One comparable deal between nearby competing newspapers was the Tampa Bay Times’ 2016 purchase of the Tampa Tribune. The two papers were combined into one, leading to massive job losses. Executives argued at the time that competition between the two publications was threatening both of them.

Mr. Kamen is watching the outcome in Chicago closely for regulatory cues. “With the new Trump administration, this particular deal will set the tone for future deals between other neighboring papers throughout the country,” he said.

It remains to be seen whether tronc makes further M&A forays. On the Q1 call, tronc CEO Justin Dearborn said the search for acquisitions would focus on digital properties that would allow tronc to “take advantage of the data we collect” and create businesses around that, though he noted an opportunistic approach to traditional media was possible as well.

Liquidity at tronc is not limited to the cash position. As of March 26, tronc had nothing drawn on its $140m variable-rate senior ABL facility due August 2019, though $34.7m of that availability supported undrawn letters of credit.

The corporate entity that owns the Chicago Sun-Times, Wrapports Holdings LLC, also owns other properties including an alternative weekly paper, the Chicago Reader; a syndicated column, “The Straight Dope”; and a minority stake in digital content network business Aggrego LLC.

Michael J. Ferro Jr., tronc’s nonexecutive chairman and largest shareholder, was formerly chairman of Wrapports, but gave up that role when he joined tronc last year amid takeover overtures from rival Gannett Co.

Q1 revenue declined 8.1% year-over-year at tronc, largely due to a 13.1% reduction in ad revenue, even as the publisher grows its digital audience.

The two publishers already have a close business relationship. The Chicago Sun-Times has been distributed by tronc’s predecessor company since 2007, and the acquirer became the printer for that paper as well in 2011. The Chicago Sun-Times sold its suburban papers to tronc’s predecessor in 2014.

If the deal does close, “tronc will benefit from increased unique visitors, better engagement with Sun-Times consumers and more data for future troncX initiatives,” Mr. Dearborn said in a statement.

Wrapport approached tronc about combining earlier this year, and the parties have been in talks with the Justice Department about the deal since then, according to the statement.

The Justice Department announced an investigation of the proposed deal on May 15, and its statement provided further details about the timing and process. If no other viable buyer comes forward to express substantial interest in acquiring the Chicago Sun-Times parent and begins due diligence within 15 calendar days, then the target may be sold to tronc.

The deal could be completed as soon as June 1.

Kevin B. Kamen, President/CEO
Kamen & Co. Group Services
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