What's behind Axa Financial Inc.'s sale of 30 million shares of Gannett Co.? Does the big Paris-based insurer envision a credit event for America's largest newspaper publisher?
The losses Axa was willing to absorb, as indicated by a regulatory filing last week, certainly suggest as much. The quick jettisoning of so many shares seems a message, too. Axa ended 2008 as Gannett's largest stockholder, its 30.8 million shares representing 13.4% of the total. Equally telling, Axa had added 18.5 million shares throughout 2008.
Never mind that from Dec. 31, 2007, to Dec. 31, 2008, the price of Gannett stock declined from $34.75 to $7.86. Continued buying by Axa through an increasingly bleak 2008 allowed it to topple Brandes Investment Partners LP as Gannett's largest shareholder.
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The declines continued into 2009, with Gannett stock reaching a
52-week low of $1.85 per share on March 10 but rising to trade between
$4 and $5 last week. It was during this period that Axa unloaded all
but a million of its shares, leaving it with a mere 0.4% of the total.
Call it coincidence, but it was also during this period that Gannett
commenced and concluded a private exchange offer. The offer allowed
eligible holders to exchange two tranches of "old notes" (one paying
5.75% and due June 2011; the other paying 6.375% and due April 2012)
for two tranches of "new notes" (the first paying 10%, including a $30
early participation payment, and due 2015; the second also paying 10%,
including a $30 early participation payment, and due 2016).
Despite the rich upgrade, only 26% of both tranches tendered. And,
of the nearly $500 million in 5.75% notes due June 2011, only 13%
tendered. This means $432 million of outstanding 5.75% notes will
mature in June 2011.
Gannett tried putting a good face on the offer's outcome, its CFO
claiming to be "very pleased with the results." Looking deeper,
however, leaves one wondering why.
In the first quarter, preparatory to paying down $563 million in
floating-rate notes due May 26, Gannett borrowed $547 million under its
revolving credit agreements. This allows it to boast, as it does in its
most recent Form 10-Q, "The company has no debt maturities until June
2011."
That's true, technically, but so is the notion that the two
maturities Gannett does confront in 2011 could prove fatal. In addition
to the leftover $432 million in unexchanged 5.75% notes due June 2011,
there's a $280 million term loan due July 2011. That's a lot of coin --
$712 million. The challenge for Gannett is compounded by having already
borrowed $2.5 billion on revolving credit facilities whose aggregate
size will be cut from $3.1 billion to $2.75 billion on Dec. 31, 2009.
Moreover, as part of other credit amendments last year, Gannett
agreed to replace an equity requirement of at least $3.5 billion with a
senior leverage ratio -- senior unsecured debt (which in Gannett's case
is all debt) to Ebitda on a trailing four-quarters basis -- of less than
3.5 times.
Gannett puts the ratio at 2.92 times in its most recent Form 10-Q
and states its belief that the ratio "will remain below 3.5x during
2009." But that could be wishful thinking. Its consensus Ebitda,
forecast at $922 million for 2009, would allow debt of about $3.2
billion at year's end. That's $500 million less than the $3.7 billion
reported at the end of the first quarter, thus raising the specter of a
covenant trip.
Back-of-the-envelope estimates for 2009 put Gannett's interest
expenses at around $200 million and taxes at around $300 million, while
the company itself has budgeted capital expenditures of $148 million.
These outflows would reduce to $274 million the amount of consensus
Ebitda that could be applied to debt. This, in turn, would leave
Gannett $226 million shy of satisfying its year-end leverage test.
Small wonder that the company elected in February to cut its
quarterly dividend to 4 cents per share, from 40 cents. The
rabbit-out-of-the-hat maneuver allows for the sudden reallocation of
$325 million in annual free cash flow, theoretically keeping Gannett in
compliance by $99 million. However, rather than provide the thinnest of
covenant cushions, the dividend cut could easily be undone by a
rounding error elsewhere that more than justifies Axa's sudden selling.
Richard Morgan covers media for The Deal.
