Note 2 - Acquisitions

12 Months Ended

Sep. 27, 2020

Notes to Financial Statements

Business Combination Disclosure [Text Block]

2     ACQUISITIONS

On March 16, 2020, the Company completed the Asset and Stock Purchase Agreement dated as of January 29, 2020 with Berkshire Hathaway Inc., a Delaware corporation (“Berkshire”) and BH Media Group, Inc., a Delaware corporation (“BH Media”) (“Purchase Agreement”). As part of the Purchase Agreement, the Company agreed to purchase certain assets and assume certain liabilities of BH Media's newspapers and related publications business ("BH Media Newspaper Business"), excluding real estate and fixtures such as production equipment, and all of the issued and outstanding capital stock of The Buffalo News, Inc., a Delaware corporation ("Buffalo News") for a combined purchase price of $140,000,000 (collectively, the "Transactions"). BH Media includes 30 daily newspapers and digital operations, in addition to 49 paid weekly newspapers with websites and 32 other print products. Buffalo News is a provider of local print and digital news to the Buffalo, NY area. The rationale for the acquisition was primarily the attractive nature of the various publications, businesses, and digital platforms as well as the revenue growth and operating expense synergy opportunities.

The Transactions were funded pursuant to a Credit Agreement dated as of January 29, 2020 between the Company and BH Finance LLC, a Delaware limited liability company affiliated with Berkshire (the "Credit Agreement"), as described further in Note 6.

Between July 2, 2018 and March 16, 2020, the Company managed the BH Media Newspaper Business pursuant to a Management Agreement between BH Media and the Company dated June 26, 2018 ("the Management Agreement"). In connection with the Transactions, the Management Agreement terminated on March 16, 2020. As part of the settlement of the preexisting relationship, the Company received $5,425,000 at closing. This amount represents $1,245,000 in fixed fees pro-rated under the contract and $4,180,000 in variable fees based upon the pro-rated annual target. The amount we received settled our existing contract asset balance, which totaled $3,589,000 as of December 29, 2019, and the remaining amount was reflected in Other Revenue for the 13 weeks ended March 29, 2020. The amount of variable fees was estimated based on BH Media financial performance through March 16, 2020. Actual financial performance through March 16, 2020 did not vary materially from the estimated amount. As such, the Company did not recognize a gain or loss as a result of the settlement of this preexisting relationship.

In connection with the Transactions, the Company entered into a lease agreement between BH Media, as Landlord, and the Company, as Tenant, providing for  the leasing of 68 properties and related fixtures (including production equipment) used in the BH Media Newspaper Business (the "BH Lease"). The Lease was signed and commenced on March 16, 2020. The BH Lease requires the Company to pay annual rent of $8,000,000, payable in equal payments, as well as all operating costs relating to the properties (including maintenance, repairs, property taxes and insurance). Rent payments will be subject to a Rent Credit (as defined in the Lease) equal to 8.00% of the net consideration for any leased real estate sold by BH Media during the term of the Lease. In connection with the BH Lease, the Company recognized $56,226,000 and $56,226,000 in ROU assets and lease liabilities, respectively, as of March 16, 2020. 

The allocation of the purchase price is preliminary. The valuation of property and equipment, intangibles, deferred income taxes, and residual goodwill is not complete, pending the completion of the final valuation reports. These amounts are subject to adjustment as additional information is obtained within the measurement period (not to exceed 12 months from the acquisition date). As part of the Transactions, the Company also entered into the Credit Agreement and the BH Lease, as described above. The Company concluded that these agreements were not separate from the Transactions and evaluated these agreements for off-market terms and no such terms were identified. As such, the consideration for the acquisitions was limited to cash consideration, as shown below. 

The following table summarizes the preliminary determination of fair values of the assets and liabilities for the Transactions.

(in Thousands)	Estimated fair value as previously reported (a)			Measurement period adjustments			Fair value as adjusted
Cash and cash equivalents		22,293			—			22,293
Current assets		52,559			(886	)		51,673
Other assets		12,167			3,543			15,710
Property and equipment		42,952			33			42,985
Operating lease assets		7,445			101			7,546
Advertiser relationships		38,780			(10,820	)		27,960
Subscriber relationships		36,060			(7,860	)		28,200
Commercial print relationships		17,130			2,450			19,580
Mastheads		21,680			(1,290	)		20,390
Goodwill		63,559			14,577			78,136
Total assets		314,625			(152	)		314,473
Current liabilities assumed		(73,451	)		1,074			(72,377	)
Operating lease liabilities		(6.625	)		(921	)		(7,546	)
Other liabilities assumed		(2,246	)		—			(2,246	)
Pension obligations		(43,503	)		—			(43,503	)
Postemployment benefit obligations		(36,800	)		—			(36,800	)
Total liabilities		(162,625	)		152			(162,473	)
Net assets		152,000			—			152,000
Less: acquired cash		(22,293	)		—			(22,293	)
Total consideration less acquired cash		129,707			—			129,707

^(a) As previously reported in the Company's Quarterly Report on Form 10-Q for the period ended March 29, 2020.

For the 52 weeks ended September 27, 2020, the revenue and net income included in the Consolidated Income Statement related to the acquirees were $200,751,000 and $13,166,000, respectively. Acquired net income includes interest expense, net of taxes, of $4,744,000 for the 52 weeks ended September 27, 2020, respectively, which is associated with the cost of financing the acquisitions.

The Company had various measurement period adjustments due to additional knowledge gained since March 29, 2020. The significant adjustments included $10,820,000 decrease to Advertiser relationships and $7,860,000 decrease to Subscriber relationships due to updates in assumptions related to the forecast and attrition rates, both were offset by increases to Goodwill. The change in other assets related to a $1,800,000 reclassification from current assets that was identified during management's review.

Pro Forma Information (Unaudited)

The following table sets forth unaudited pro forma results of operations assuming the Transactions, along with the credit arrangements necessary to finance the Transactions, occurred on October 1, 2018, the first day of fiscal year 2019.

	Unaudited
	September 27,		September 29,
(Thousands of Dollars, Except Per Share Data)	2020		2019
Total revenues		821,793		973,143
Income attributable to Lee Enterprises, Incorporated		17,632		20,715
Earnings per share - diluted		0.31		0.36

This pro forma financial information is based on historical results of operations, adjusted for the allocation of the purchase price and other acquisition accounting adjustments. This pro forma information is not necessarily indicative of what our results would have been had we operated the businesses since the beginning of the periods presented. The pro forma adjustments reflect the income statement effects of depreciation expense and amortization of intangibles related to the fair value adjustments of the assets acquired, acquisition-related costs, incremental interest expense related to the financing of the Transactions and 2020 Refinancing, the BH Lease entered into as part of the Transactions, the elimination of certain intercompany activity and the related tax effects of the adjustments.

The only material, nonrecurring adjustments made relate to the write-off of previously unamortized debt-issuance costs as of October 1, 2018 which resulted in a $7,693,000 decrease to net income for the 52 weeks ended September 29, 2019 and a $8,973,000 increase to net income for the 52 weeks ended September 27, 2020.  No other periods were affected by the adjustments.