Gannett is spinning off its newspapers to focus on broadcast. TV could shine, while publishing may flounder.
By Alexander Eule | Barron's | June 27, 2015
When Gannett CEO Gracia Martore gave her last major presentation as a newspaper executive last week, it seemed like a weight had been lifted from her shoulders. The chief executive strode across the dais at the Park Hyatt, midtown Manhattan’s swanky new hotel, as she unveiled Tegna, her new company carved out of Gannett’s prosperous broadcasting and digital segments.
After lunch, the signage in the room was changed, and it was time for “new Gannett” to share its plan for reviving publishing. The Tegna excitement was replaced by a depressing discussion about newspaper ads.
Such is the reality facing Gannett shareholders when the company officially splits in two on Monday, June 29. Technically, the newspapers are being spun out. Existing shareholders will get one share of new Gannett (ticker: GCI) for every two shares they already own in the parent company, henceforth called Tegna (TGNA). Tegna shareholders will own a company with 46 broadcast stations to go with fast-growing Cars.com and CareerBuilder Websites. The sites were created in the 1990s to snatch back classified ads that were being lost to the Web.
Gannett will continue to own USA Today, along with 92 local newspapers across the U.S., and a collection of British papers.
Tegna shares could easily rise 20% in the coming year. But Gannett will be lucky to tread water, as the company seeks a whole new shareholder base.
“Obviously, most investors’ appetite for publishing assets is not great right now,” says Joe Cornell, publisher of Spin-Off Research, who has carefully tracked other publishing spinoffs in the past two years, including Tribune Publishing (TPUB), Time (TIME), and News Corp (NWSA), the publisher of Barron’s.
“You’re giving people a hot potato,” Cornell says of the newspaper stock. “I think you’re going to see a lot of guys blow it out.”
TEGNA, BY CONTRAST, could quickly increase its investor base, particularly without the newspaper baggage. The company’s revenue is estimated to jump 20%, to $3.1 billion, this year, boosted in part by the success of Cars.com and CareerBuilder.
Next year, TV will return to a starring role, thanks to the presidential election and the Olympics on NBC. Tegna is the largest independent owner of NBC affiliates. Its local stations, meanwhile, are concentrated in swing states like Colorado, Ohio, Florida, and North Carolina, where candidates and political action committees will vie for every possible vote by buying pricey local TV ads. For 2016, broadcast revenue alone is slated to jump 18%, to $1.96 billion.
But Olympics don’t happen every year and neither do elections. For Tegna bulls, the most significant opportunity lies in boosting licensing fees paid to the company’s local stations. So-called retransmission fees have doubled in the past two years based on a projected $448 million in 2015. Yet, Tegna believes it’s still vastly underpaid for its content, particularly in comparison with ESPN, which makes roughly $6 for every cable subscriber.
“In most of the markets I’m aware of, if you added up all the retrans going to the local TV stations, it wouldn’t get you, at this point, to what ESPN is getting,” Martore told Barron’s last week. “But that is going to be rectified.”
Tegna will have ample opportunity to close the gap. Some 90% of its retransmission deals expire in the next 18 months. “We’ve kept our deals at two to three years because frankly the market continues to reset,” she adds.
The higher fees will fall to the bottom line. Spin-Off Research estimates that Tegna could garner earnings before interest, taxes, depreciation, and amortization from broadcasting of $861 million this year, on top of $386 million from Cars.com and CareerBuilder. If Tegna were to fetch an Ebitda multiple of 11—similar to peer Nexstar Broadcasting Group (NXST)—the stock would be worth $37. Tegna’s shares will probably open on Monday at about $30.
RECENT HISTORY PORTENDS a less hospitable debut for the Gannett spinoff. Tribune Publishing is down 36% since it was spun off last July. Gannett’s “when issued” shares were trading last week at $14.90, for a market value of $1.7 billion. Spin-Off estimates that new Gannett will generate $388 million of Ebtida this year, down 18% from last year.
If they traded at a Tribune-like multiple— 4.5 times Ebitda—Gannett shares would be worth $15.70. But that’s a best-case scenario. The entire industry could get rerated downward if recent trends continue.
At last week’s investor meeting, Gannett said its first-quarter publishing revenue was down 9%. The culprit? “Core print advertising.” Results for the current quarter were trending in the same direction, Gannett disclosed. Don’t expect it to get much better anytime soon.
“At this time, we’re not planning to give specific guidance about revenue or earnings, Alison Engel, chief financial officer for new Gannett, told investors. “Volatility in our markets, particularly advertising, makes it difficult to accurately forecast revenues.” Not the kind of words investors like to hear.
Gannett’s new management team bristles at comparisons with Tribune. CEO Robert Dickey points out that Tribune was laden with debt when it began as an independent company, and lacks the national-to-local synergies that Gannett has with USA Today, providing content to a network of 92 local papers.
IF THERE’S GOOD NEWS for new Gannett, it’s that the spinoff amounts to a fresh start. The company has cut half of its workforce in the past decade, and it emerges from the parent company debt free. Shares will pay a generous annual dividend of 64 cents a share, a 4.3% yield, which could support the stock after the spin. “We now have the ability to manage our capital in a way that best fits our needs,” Dickey told Barron’s last week.
Much of the capital could be used to quickly diversify away from print newspapers. “All of our attention is to be a digital company,” Dickey says. “The print platform will be there for some time to come, but that is not the future.”
Dickey tells Barron’s that his new company aims to make acquisitions totaling $200 million to $250 million a year. That’s a substantial sum in the publishing world. In 2013, Amazon founder Jeff Bezos bought the Washington Post for $250 million. Gannett’s purchases could drive revenue, and eventually earnings, assuming that the company’s scale allows it to produce synergies and reduce costs at the acquired properties.
Dickey also says that Gannett’s nascent event-sponsorship business could be worth “tens of millions” in revenue. Gannett will need more opportunities like that to offset its fading newspapers. This year, publishing revenue is likely to fall 6%, to $2.99 billion.
Over the past two years, shares of the old Gannett gained 52%—well above the Standard & Poor’s 500’s 31% gain—driven by broadcast and anticipation of the spinoff. For investors, TV remains the main event.
To view the article on barrons.com click here: Gannett Split Could Lift Broadcast Shares 20%