Apollo withdraws from D.F.M. deal, Paton leaves
As of today Apollo Global Management won’t meet Digital First Media’s price. That price tag of $400 million (“What are they thinking? Apollo’s acquisition of Digital First Media”) had been wavering as Apollo did its continuing due diligence over the last two months.
“We have concluded we are not going to sell the company to a single buyer,” C.E.O. John Paton told me this morning, as his memo to D.F.M.’s 5,500 employees, reproduced below, went out. That memo also included the not-unexpected news that C.O.O. Steve Rossi is replacing Paton as C.E.O. on June 30. Officially, the company is pursuing other strategic options, as it says it has done throughout a more-than-year-long sale–review process.
What will that continuing strategic review produce?
“There’ll be a horse-trading of assets,” Paton told me, saying markets, readers and employees should expect both selling and buying. That means that D.F.M.’s Plan B – the selling of regional clusters of newspapers and perhaps individual ones – looks like it is reemerging, in some form. That news, already spreading across the web and in emails, now newly re-stokes regional interest in individual papers and groups. Recall that D.F.M., and its broker UBS, requested and worked through bids from would-be cluster buyers, as part of the “strategic review” process. We should soon hear whether UBS renews those discussions.
Principal owner Alden Global Capital could be making the financial calculation that it can maximize value better by selling its clusters to several buyers than at too low a price to a single buyer like Apollo. Plan A – selling all the assets – has long been Paton’s goal, but Plan B looks like it is being set in motion. The basic theory: In an age when cost consolidation is a primary weapon for newspaper company management, regional clusters become a necessity. It’s an old Dean Singleton theory, from the days when he put together MediaNews, but now financial exigencies drive it to the forefront. We can see it in recent New Media Investment (Gatehouse) acquisitions as well as in Tribune’s San Diego, Chicago and Baltimore buys.
Here, watch whether Gannett takes ownership sooner than later of the 10 D.F.M. properties it would have gotten out of D.F.M./Apollo sale. That may be one of the first domino pieces to tumble, especially as Gannett publishing gets split from the broadcast mothership.
“We don’t want to own a standalone newspaper,” Rossi told me today. “We have a lot of cats and dogs,” referring to the motley collection, by geography and circulation size, of its current newspaper holdings.
Further, the company has made noises about recapitalization or I.P.O. in the past, though that seems less likely than sale.
Then, there’s the possibility of D.F.M. treading water. “One of our strategic options is to manage cash,” said Rossi.
And there’s one more possibility. Apollo, or some other single buyer, reemerges. After all, this sales odyssey at this point comes down, simply, to price. Are we seeing hard-headed, now public negotiation, as D.F.M. formally signals its willingness to walk away unless Apollo ups its offer? As I’ve written, this is a deal of the head, not the heart, essentially involving two private equity companies known for squeezing the last dollar out of a transaction. Simple dollars will change the news on this deal once again. Still, the odds have plainly changed, with a sale to Apollo less than more likely by some hard-to-determine margin.
While the company wants to paint the process as controlled and logical, it has taken place against the backdrop of worsening financial results for dailies (see: “Razor-thin profits are cutting into newspapers’ chances at innovation”). Paton and Rossi both say finances are rosy. “We have so much cash on our balance sheets that we are a debt-free,” Rossi told me this morning. “Our cash flow performance is really good, three years in a row of increasing cash flow.”
D.F.M., of course, is a private company that doesn’t release financials. This morning, Paton and Rossi highlighted the company’s ad agency-like Ad Taxi business, as the kind of digital investment that “D.F.M. would continue to plow money into,” according to Rossi.
On the other hand, word within D.F.M. is that a new July 1 budget calls for more cuts, both in the field, including in newsrooms, and in the corporate budget. Cuts, of course, are nothing new, and the question will be how deep any new ones will be.
Paton wouldn’t comment on the whispers about a new budget in the works, saying: "There is no newspaper Company that can make the successful transition to digital without investing in digital while cutting its overall cost structure.”
Steve Rossi, a long-time Knight Ridder executive, moved over to the MediaNews Group after Knight Ridder’s sale to McClatchy in 2006. He has risen steadily in responsibility, playing a yin to Paton’s yang. Paton has been the public face and an early advocate of “digital-first” strategy, which finally gave its name to the combined company of MediaNews and Journal Register (21st Century Media) at the end of 2013. Plainly right and early about the need to rapidly reduce legacy costs, his aggressive stance riled many in the industry, a riling that the engaging Paton clearly enjoyed.
Rossi has been the enforcer, matching down print ad results, seen universally in the industry, with cost-cutting to maintain EBITDA. Internally, the word has been that the board wanted to give Rossi more power to make financial decisions necessary to steady profit, making him C.O.O. in January, 2014. Some insiders say that Rossi has been effectively running the company since then. Further, it was clear that Paton planned on leaving D.F.M. as soon as a determination of its future was made. Consequently, the news of Rossi’s appointment as C.E.O. and Paton’s departure isn’t surprising.
Paton makes the point that he appointed Rossi, and that relationship is good and amicable. Paton moves to a position as CEO of IVA Ventures, which includes eight companies, some of which have had partnerships with DFM.
Below, the aforementioned memo from Paton and Rossi:
As you all know, it is earnings season and we are seeing others in our industry report on their financial performance. While our fiscal year does not end until June 30th, we can see how it will finish and we thought this was a good time to update you on news at our Company on this and other fronts.
To begin, for DFM, it has been a strong year in a difficult environment. In short, because of you this Company has real, demonstrable momentum. Year-to-date we have:
· Increased our operating profit versus last year, enabling us to deliver on our goal of providing profit sharing for all eligible employees;
· Delivered nearly $200 million of digital ad sales; and
· Expanded our AdTaxi digital platform, both internationally and with large newspaper, television station and ad agency partners in 166 cities and 6 countries.
These results demonstrate that our strategic game plan is working: we are building scale, carefully controlling expenses and investing in the digital future. At the same time, we continue to provide exceptional reporting, winning numerous awards for outstanding coverage including the first Pulitzer Prize for the Torrance Daily Breeze in our Los Angeles News Group. Our Denver Post was a finalist for a Pulitzer as well, and our San Jose Mercury News won the prestigious Scripps Howard Foundation Award for Environmental Reporting. And that’s just to name a few.
None of this success could happen without you.
You will recall that back in September, DFM announced a strategic review process – meaning we would look at all of our options for the future, including potentially the sale of DFM as a whole or in regional clusters, or the continued execution of our business plan. While the review process is not complete it has been determined that a sale of the Company as previously speculated is not in the best interest of shareholders at this time. However, we continue to have discussions concerning selected assets, and we are looking at potential acquisition opportunities. Our performance is driving our digital future and increased profitability, and our essentially debt-free structure has given us a lot of options, which we will continue to explore. We will keep you updated on our plans, including when the strategic review process has concluded.
In addition, we wanted to let you know that in light of the strong trajectory the Company is on, John has decided that the time is right for him to dedicate his efforts on a full-time basis to IVA Ventures. IVA Ventures is a company that actively seeks strategic investments in seed, early and growth stage digital media start-ups aimed at accelerating the digital transformation of legacy media companies. We expect to have an ongoing working relationship with IVA Ventures in identifying cutting-edge products to accelerate our digital growth. John will remain CEO until our fiscal year end which ends on June 30 before taking up his new position, at which time Steve will assume leadership of DFM.
We are both deeply grateful for all of your terrific work and want to express our sincerest thanks for your contributions to the momentum underway at DFM. Let’s keep doing what we are doing and keep our performance strong.
John and Steve