INVESTMENT THESIS
On November 19, 2019, New Media Investment Group completed its acquisition of Gannett for $12.06 per GCI share ($6.25 in cash and 0.5427 shares of New Media common stock). The combined company adopted the name Gannett Co. Inc. Management expects an annual $275-$300 million in run-rate cost synergies within the first two years based on the company’s expanded scale and accelerated digital transformation.
Gannett faces pressure from persistently weak print advertising and circulation revenue, as well as from weak margins, and operates in an industry facing secular decline. The combined company’s new management team is aggressively cutting costs and working to integrate the businesses, focusing on synergies in newspaper operations, procurement, and other operations and systems. It plans to drive revenue growth through investments in digital marketing services, and the expansion of digital subscriptions and the events businesses. It will also experiment with new revenue models. It expects improvements in customer service and retention, enhanced content, and digital-only circulation revenue to help drive growth in circulation revenue. It is also working to reduce leverage through refinancing debt and the sale of non-strategic real estate.
At the end of September 2020, Gannett had 1.029 million paid digital-only subscribers. Digital-only circulation grew strongly in 2019, and had been expected to grow further in 2020 prior to the pandemic.
RECENT DEVELOPMENTS
On November 3, Gannett reported a 3Q20 GAAP loss of $31.3 million or $0.24 per share. GAAP operating revenue was $814.5 million (an increase of 116% due to the acquisition). On a pro forma basis, same-store revenues fell 19.6% due to the adverse impact of COVID-19, though this was an improvement from the 28% decline in 2Q. With lower revenues partially offset by cost savings and merger synergies. The pro forma results represent full-quarter contributions for both legacy companies. The company said that third-quarter USA TODAY digital display sales improved with national advertisers, and that digital marketing campaigns from small business customers also picked up, with fewer pandemic-related delays.
Management said that synergies reduced expenses by $54.5 million in 3Q and $115 million year-to-date. It has cut executive pay by 25% and asked most of its 24,000 employees to take one-week furloughs. It noted that many of the temporary cost cuts would become permanent due to the challenging economic environment. It also cut about $10 million in capex and will save $50 million this year by deferring FICA and ERISA payments. Management has not provided guidance for 2020, though it expects about $300 million in synergies by year-end. It expects a maximum of $45 million in capital spending this year.
EARNINGS & GROWTH ANALYSIS
Gannett has two main reporting segments: (1) Publishing, consisting of print advertising, digital advertising and circulation; and (2) Marketing Solutions, which consists of Legacy New Media’s UpCurve and GateHouse business and Legacy Gannett’s digital marketing subsidiaries ReachLocal, SweetIQ, and WordStream.
In the Publishing segment, 3Q revenue came to $732.2 million (up 100% from the prior year due to the acquisition). Print advertising revenues (28% of total revenue) were down 31% on a same-store basis. Same-store digital advertising & marketing services revenue declined 13.5%, reflecting lower demand for digital media and digital classified ads due to the pandemic. Third-quarter circulation revenues were $336.2 million, down 13.2% from the prior year on a same-store pro forma basis, driven by declining single-copy and home delivery sales. Paid digital-only subscriber volume grew 31% to 1.029 million, with digital-only subscriber revenue up 48.7%. Segment adjusted EBITDA totaled $108.8 million and the segment margin was 14.9%.
In the Marketing Solutions business, Gannett posted third-quarter GAAP revenue of $105.4 million, down 17.4% on a same-store pro forma basis. Gannett also hosted 63 virtual events in the third quarter. Third-quarter adjusted EBITDA came to $4.2 million, and the margin was 4.0%. Management is targeting over 40% in annual growth in the events business through the expansion of community events as the pandemic recedes.
On a GAAP basis, we are adjusting our 2020 loss estimate to $4.47 per share from $4.61.
Legacy Gannett pursued acquisitions to enhance its digital content and marketing capabilities. Its acquisitions include WordStream, Journal Media Group, North Jersey Media Group, marketing services firm ReachLocal, and digital marketing firm SweetIQ Analytics. The company has been divesting the international operations of ReachLocal, narrowing its presence to the U.S., Canada, Australia and New Zealand.
FINANCIAL STRENGTH & DIVIDEND
In November 2019, the company took a $1.8 billion, five-year term loan with an interest rate of 11.5% and an origination fee of 6.5% to finance the acquisition of legacy Gannett. After paying down $8.6 million and $2.9 billion in total liabilities. The proceeds will be used to further reduce debt to $1.633 billion. Despite challenging conditions, management still plans to accelerate debt repayment using excess cash and proceeds from real estate sales. Its leverage ratio is currently 4.25; it is targeting a reduction to 2.75 by the end of 2020 and to 2.0 by the end of 2021, at which time it intends to refinance the term loan. The term loan requires the company to maintain $20 million in cash on the balance sheet and restricts capex to $60 million annually. In order to pay dividends or buy back stock, GCI must also maintain a maximum debt/EBITDA ratio of 4.0. The company is currently in compliance with the terms of its credit agreement.
The combined company has not repurchased any stock, and dividends have been suspended until financial conditions improve.
MANAGEMENT & RISKS
Michael Reed is the chairman and CEO of Gannett Co. Inc., and Paul Bascobert is the CEO of Gannett Media Corp. Mr. Bascobert succeeds Robert J. Dickey, the company’s CEO since 2015, who retired in May 2019. In April 2020, Douglas E. Horne was appointed CFO.
VALUATION
GCI shares are trading near their all-time lows. The 52-week range is $0.63-$7.06. While there may be some upside for the shares given the current price range, the company’s high debt burden and deteriorating top- and bottom-line results, along with the weak outlook for advertising revenue, warrant caution. Our rating remains HOLD.
On November 5, HOLD-rated GCI closed at $1.41, up $0.13.
Source: Argus
