Gannett Evolving To Higher Margin Enterprise With Belo Acquisition

Over the last year, the new female troika steering Gannett has carefully moved to recast GCI from one of the largest U.S. publishers of printed newspapers fighting to stay relevant to a digital and broadcasting entity.  Their efforts have been recognized and the stock has doubled over the last year. Even so, it is  amazing how few people have noticed what’s going on at GCI. Just before year end 2013, Gannett closed on its acquisition of Belo’s extensive broadcasting properties furthering bolstering and rebalancing the cash flow.

Broadcasting is a different beast with much higher margins than newspapers have ever dreamed of earning. Gannett has owned broadcast properties for years and its margins are industry leading for a “group broadcaster.”  With Belo’s stations added into its mix, Gannett doubles its national reach. That puts it into a stronger position in garnering fees from the networks for retransmission of its programs. The deals it struck with the various networks over the last year or two were structured to include any future acquisitions at the higher retransmission rates.  And, Belo’s stations had lower margins than those of Gannett in general. Management has stated for months that it expects to deliver $175 million in synergy costs with this merger.  Initially the boost to 2014 earnings was expected to be $0.50 but the recently revised estimates reflecting some required divestitures is no $0.43.  Both Belo and Gannett jumped about 25% after the deal is announced. That is highly unusual for both buyer and seller to enjoy such sharp gains..

In an unChristmasy article on 12/25 Miriam Gottfried at the Wall Street Journal wrote about Yahoo’s stock price doubling with little to show in the way of improvement in vital metrics to support the increased price except its stake in Alibaba.  She took a gratuitous slam at Gannett saying Yahoo could end up the same way.  Frankly, it should only happen. Gannett has been energized in a way it hasn’t been in years; much as Marissa Mayer is trying to do at Yahoo.

Transitions take years, and the older the company the harder it is to imbue a new culture and longer term viewpoint into the workforce. Gracia Martore is doing a great job. She’s  been at Gannett for decades so she knows every nook and cranny of the company. She knows every hidden skeleton.  And she has a vision for the future that seems to be energizing those around her.

The general view is that newspapers are a dying business. However, our democracy will fold without the Fifth Estate and people do need information on which to base their life decisions including how to vote in the next election, te mid-terms in 2014.  For local news, you must depend on the local media to keep you informed of what is going on in your own community.  You can’t get that from the Huffington Post. As Gannett is rapidly  transitioning to new methods of delivery, it is also exploring ways to combine the properties it already owns such as providing a local edition of USA Today inside the daily local paper, both print and digitally delivered. It test marketed in 4 communities with great consumer enthusiasm and is now expanding in 2014 to 35 such markets.

Over the last year, Gannett  has revved up its efforts to convert readers to digital delivery and says its efforts have exceeded expectations. Decades ago when I was a media analyst at The Dreyfus Corporation for years, management was always asked about the price of newsprint because it was such a huge cost for this industry. Nobody much asks about that anymore and its diminished importance is a big factor going forward in a new delivery model.

The real challenge is, of course, advertising which supports the news gathering and editorial activities of both newspapers and magazines.  The more you use your mobile device whether in the form of a smartphone or a tablet, the more you see how advertisers and publishers are testing how to deliver ads to you that you might actually see yet not annoy you so you avoid the site entirely. Twitter, for example has just begun  inserting ads as tweets in between real tweets to answer its critics about developing its revenue streams.

Several of Gannett’s businesses had strong October and November numbers but due to the Govt. shutdown and weakening consumer confidence at year end, December apparently was a bit soft. Even so, Victoria Harker, the sharp new CFO, stated at the UBS conference in mid-December that Gannett expected to deliver Q4 earnings toward the upper end of the $0.63- 0.67 range of estimates for the quarter.  Gannett will benefit greatly from both the Olympics and the election cycle in 2014.  Obviously both those categories declined in 2013. Also some of the sports acquisitions that were made two years ago have been slow to develop as expected. Nobody is talking about them much anymore.  Sports is a really lucrative business these days so there must be a formula for success for Gannett in this field.

The stock has expanded its P/E multiple  to 17 during 2013 with the stock doubling as it has. In contrast CBS sells at a P/E of 23 with margins that are only 3% higher. Two years ago, Gannett was an obvious candidate for a significant increase in the dividend, which did happen. Ed Atorino at Benchmark was the first to pound the table on Gannett two years ago.  When the dividend was advanced to $0.80 the stock rose quickly to $20 at which it offered a 4% yield.  Closer to $30, the yield is now 2.7%, still a good competitor to T Bills.   Now, with more debt to finance the Belo and some other small digital acquisitions, there is probably some reluctance in the Board meetings to raise the dividend soon.  They are also strategically buying back shares against a $300 million authorization.

Martore at a recent conference said she is expecting a “terrific” year in 2014.  While I wouldn’t expect the stock to double, it should continue to move higher as people at the Wall Street Journal and elsewhere begin to realize Gannett today is not the Gannett of yesteryear. It is bounding forward into the digital future. It is trying things on a small scale to see if they work and if they do, rolling them out across the country.  Gannett should continue to deliver in the coming year, in your portfolio if not on your doorstep.

Joan E. Lappin CFA         Gramercy Capital Mgt. Corp.

Mrs. Lappin, Gramercy Capital and its clients own shares in Gannett at this time.  For information about our firm or help with your investment portfolio:  [email protected]    To follow Joan at click on the button at the top of this article.  To follow her on Twitter: @JoanLappin

Good Health and Happiness in 2014.

Source: Forbes Business

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