Should You Buy Into This Publisher's Leveraged Bet?
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Consumers are increasingly getting their news and information from online channels, often at no cost, which has presented big problems for leading newpaper publishers like Gannett (NYSE: GCI) and New York Times Company (NYSE: NYT). While paywalls and all-access plans have stemmed circulation revenue declines for the companies, advertisers continue to move their advertising dollars into alternative online channels. For its part, Gannett has offset this irreversible trend by diversifying its revenue mix, including investments in the digital and broadcasting arenas. In June 2013, the company made a big bet on broadcasting with an offer to acquire broadcaster Belo (NYSE: BLC) for roughly $1.5 billion in cash. So, should investors bet on this horse?
What’s the value?
Belo is one of the largest independent owners of local broadcasting affiliates, with 20 stations in select markets around the country, including Dallas, Houston, and Seattle. Like the rest of its industry, Belo has enjoyed improved financial results recently, as cable and satellite operators continue to pay higher rates to retransmit network programming from local affiliates. In addition, the company has benefited from a surge in the fortunes of the auto industry, a sector that accounts for almost one quarter of Belo’s advertising revenues.
In FY2013, though, Belo’s results have flat-lined, due to a difficult comparison to the prior year’s windfall of political advertising sales. For the six-month period, the company reported flat revenue growth and a 2.5% decline in adjusted operating income versus the prior-year period. While the absence of political advertising was a drag on Belo’s top-line, it offset most of the difference with increases in auto, retail, and online advertising categories.
The deal rationale
Gannett is still a publishing house, accounting for roughly 70% of its overall revenues, with its USA Today national publication and 100 dailies in the U.S. and U.K. However, since traditional publishing profits remain hard to come by in the digital age, the company has been moving into higher-margin areas like broadcasting, e-commerce, and digital marketing services. With the purchase of Belo, the broadcasting segment will account for roughly one quarter of Gannett’s overall revenues and should lead to a more profitable enterprise.
In FY2013, Gannett has generated lackluster consolidated results, with a slight gain in revenues and a slight decrease in adjusted operating income versus the prior-year period. Revenue increases in its broadcasting and digital segments, especially in its CareerBuilder online recruitment business, were offset by weakness in its much larger publishing segment. On the upside, the Gannett has transitioned roughly 1.3 million customers to its all-access subscription plan and has built strong a strong online following to its properties, with almost 55 million monthly unique visitors as of June 2013.
Despite taking on a significant amount of debt in the purchase of Belo, Gannett is wisely diversifying its revenue stream further and enhancing its growth prospects. In contrast, New York Times Company has chosen to go the other way, by selling off most of its non-publishing properties in recent years, including About Group and its interest in Fenway Sports Group. It took its very concentrated focus a step further recently, agreeing to sell its New England Media Group to private investors for roughly $70 million.
In FY2013, New York Times Company has reported mixed financial results, with a 1.4% decline in overall revenues, but an 8.9% increase in adjusted operating income. While advertising revenues were weak, the company’s circulation revenues gained 6% and it ended the period with almost 740,000 digital subscribers, up 40% over the prior year. More importantly, New York Times Company’s profitability improved noticeably, due to production efficiencies and its reduced use of newsprint. While the company’s singular focus is risky, including the rebranding of its U.K.-based International Herald Tribune paper as the International New York Times, the founding Sulzberger family’s controlling stake gives them the ability to pursue a long term value creation strategy.
The bottom line
Gannett went big into broadcasting with its $1.5 billion purchase of Belo, a sharp contrast from the publishing-focused strategy being employed at competitor New York Times Company. Only time will tell which company is making the better decision, although diversification almost always trumps concentration, in my humble opinion. As such, investors should avoid New York Times Company, but should put Gannett on their buy list for investment at lower levels.
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