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Gannett: Splitting Into Two
02/10/2015 7:00 am EST
Spinoffs tend to outperform, mainly because companies will only take on the costs of a spinoff when they have reason to believe it will boost the value of both the new and remaining businesses, notes Pat McKeough, editor of TSI Network.
In August 2014, Gannett (GCI) announced it would split into two companies. One will focus on newspapers and their associated Web sites and the other will hold its TV stations and stand-alone Web sites.
Gannet is the largest newspaper publisher in the US, with 82 dailies, including USAToday, its flagship paper. It also owns 46 TV stations that reach a third of the US population.
To cut its reliance on newspapers, Gannett paid $1.5 billion for Belo Corp. in 2013. In 2014, it bought six more TV stations in Texas for $215.0 million. Together, these purchases doubled the size of the broadcasting division.
Gannett is also investing heavily in its Web sites. In October 2014, it paid $1.8 billion for 73% of cars.com, a site for selling new and used vehicles that it didn’t already own.
Gannett now aims to unlock value by spinning off its publishing operations as a separate firm that will keep the Gannett name.
The remaining company will own the broadcast and Internet businesses. The plan needs shareholder and other approvals, but Gannett expects to complete it in mid-2015.
Gannett had to borrow most of the funds it needed for its recent acquisitions. As a result, its long-term debt rose 10.8% to $4.1 billion as of September 28, 2014, from $3.7 billion at the end of 2013.
That’s a high 60% of its market cap. However, under the breakup, the faster-growing broadcasting and Internet business will retain nearly all of Gannett’s existing debt.
Combined, the two companies will pay a quarterly dividend of $0.20 a share, which is equal to Gannett’s current payout. The annual rate of $0.80 a share yields 2.7%.
The stock has tripled since November 2011 but trades at just 11.0 times the $2.72 a share that Gannett will likely earn in 2014. That’s because of concern about weaker ad revenues at the company’s newspaper business.
However, the spinoff will strengthen the publishing division’s balance sheet as it integrates its print and online operations. Meanwhile, the broadcasting and Internet company should generate higher profit margins without the print division. Gannett is a buy.
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