Tuesday, May 19, 2015

Gannett: Familiar Publishing Spin Playbook

Continuing on a familiar trend in the legacy broadcast/publishing media space, Gannett announced in August 2014 the spinoff of their publishing business to separate the headwinds facing business from the growth broadcast and digital businesses.  The transaction structure isn't as interesting and doesn't appear to create the same inefficiencies as the SSP/JRN merger spinoff, but I think the upside opportunity is roughly the same.  Plus with Gannett, Carl Icahn owns a 6.57% stake and he will likely generate some media headlines as the spinoff nears in the next couple of months.

The publishing business will be the spinoff and retain the Gannett (and GCI ticker) name with the parent being awkwardly renamed TEGNA and trading under the TGNA ticker.  TEGNA will be the #1 NBC, #1 CBS, and #4 ABC independent affiliate with a total of 46 broadcast stations across 36 markets, including a big slug of Texas exposure thanks to the 2014 acquisition of 6 London Broadcasting Company stations.  The company will cover roughly 30% of U.S. households, comfortably below the 39% FCC limit allowing continued station acquisitions.

Broadcast television stations are a fairly straight forward business to analyze with many near pure play public comparables thanks to the previous deals done in the space.  The current plan is to make the publishing spinoff virtually debt free, so for the sake of a simple SOTP analysis all of the debt is going on the broadcast TV business.  Similar to the Scripps thesis, I'm going to take an average of the expected EBITDA of 2015 and 2016 to capture the election cycle revenue which can really skew off-year results.
Interestingly Scripps still looks pretty cheap and under-levered compared to peers (I sold the day or two after the transaction, continue to hold JMG).  TEGNA's broadcast business should be worth at least 9x a blended EBITDA given the attractive market profile and size which should get them leverage in upcoming retransmission and affiliate negotiations.

Along with the broadcast business, TEGNA will also include the two main Gannett digital assets in Cars.com and CareerBuilder.  Both were formed as joint ventures in the late 1990s by a consortium of newspaper publishers in an attempt to combat the rise of the internet in classified advertising, so it's odd that they'd be included with the parent over the spinoff.  Gannett purchased the 73% of Cars.com it didn't own last year for $1.7B implying a $2.5B valuation for the entire asset (or less if you want to subtract the control premium).  CareerBuilder is a little trickier to value, in the 2014 10-K, Gannett had $68MM in net income attributable to non-controlling interests, presumably the vast majority of this is the 47.1% of CareerBuilder that Gannett doesn't own.  Putting a 15x multiple on CareerBuilder net income values the company at $2.1B ($144MM NI), making Gannett's 52.9% ownership worth $1.1B.  As a double check, McClatchy owns 15% of CareerBuilder and using the equity method values the company at $1.5B.  Splitting the difference and Gannett's position in CareerBuilder is worth about $950MM.

Adding the broadcast and digital groups together I get an enterprise value of $11.77B or an equity value of $7.4B after backing out the debt (assuming virtually all of it stays with the parent).

Gannett Co (Spinoff)
The publishing company's main asset is the USA Today which is the top newspaper in the U.S. by circulation, possibly because its a staple of Holiday Inn breakfast bars all around the country.  Additionally, Gannett has over 100 local dailies in both the U.S. and U.K. which include a mix of larger papers like the Arizona Republic, Indianapolis Star, Detroit Free Press, along with other smaller community papers which are generally stickier.  Their circulation number declines have slowed, however they're still feeling declining advertising revenues as social media gains are typically at the expense of legacy media companies.  

Their current strategy is to leverage the USA Today brand/content by selling it into local newspapers and beefing up their sports coverage.  USA Today has a strong brand - everyone recognizes their red/sports, green/money, and purple/life sections - with over 70MM unique monthly readers to either their print or digital content.  I'm not sure how I missed it late last year, but Horizon Kinetics has an interesting discussion on spinoffs and specifically the recent publishing spinoffs that's worth reading.  Gannett isn't specifically touched on, but many the same parallels apply, the spinoff's challenge will be turning the low-to-negative margin business of print publishing into a higher margin digital content company that has a broader geographic reach than print.  Gannett seems to have a good mix of small community papers that can turn into local databases and the USA Today which could increase its readership through continued digital build out.

Below is the same basic list of comparables used for Journal Media Group (which could be a natural acquisition target for the new Gannett), and again all the debt is on the broadcast company for the purpose of the SOTP:
The publishing companies are valued more widely than the broadcasters, but Gannett will be clearly the largest in the space and should garner at least a 6x EBITDA multiple, or a $2.7B valuation.

Total pre-spin valuation: $7.4B (net of debt) for TEGNA and $2.7B for the new Gannett, for a total of $10.1B or roughly $44.50 per share, it's currently trading at ~$36 for a potential 23% upside.  Thanks to Carl Icahn's influence the corporate governance at both companies should be shareholder friendly, there's no controlling family like other media companies, but I see both more as acquirers in their space.  I purchased some in the money calls a few weeks ago and will be interested to see where both end up trading after the mid-2015 transaction date.

Disclosure: I'm long GCI calls