McLean, Virginia, United States Publishing October 27, 2015 Gannett Co., Inc. Exchange: NYSE Ticker: GCI Initiating Coverage BUY
Tyler Forte Angus Heaton Current Statistics Senior Analyst Junior Analyst [email protected] [email protected] Price at Date of Coverage $15.00 Price Target $22.91 52-week range $11.30-$15.42 Business Description Upside 35.1% Quarterly Dividend $0.64 Gannett Co., Inc. operates as a multi-platform news and information Annual Dividend Yield 4.28% company. Its operations comprise 100 daily publications and related Market Cap 1.67B digital platforms in the United States and the United Kingdom; and approximately 400 non-daily local publications in the United States and approximately 125 such titles in the United Kingdom. The company’s principal publications include Newsquest, a regional news publisher in the United Kingdom; and USA TODAY a flagship newspaper brand in Selected Financial Data the United States. It also provides commercial printing, newswire, marketing, and data services. The company was formerly known as Shares Outstanding 115M Gannett SpinCo, Inc. and changed its name to Gannett Co., Inc. in May Net Income $204M 2015. Gannett Co., Inc. was incorporated in 2014 and is headquartered EBITDA $420M in McLean, Virginia. EV $1.695B EV/EBITDA 3.7x Investment Positives Cash $62.3M Debt $0.0M Our Discounted Cash Flow model shows Gannett Co., Inc. Price / Tangible Book Ratio 4.6x trading at a discount to its intrinsic value.
Gannett Co., Inc. is a virtually debt free company.
Our Leveraged Buyout Model indicates that Gannett could be a very attractive acquisition target.
Consolidation within the publishing sector could benefit Equity Research Report Gannett as they are very well capitalized.
Investment Risks
A continuation of decreasing revenues throughout the publishing sector could negatively impact Gannett’s future earnings
Investment Recommendation
We recommend buying Gannett Co., Inc. at the current price due to its strong fundamentals and appeal as a likely acquisition target. In addition, based on our discounted cash flow analysis, GCI is trading at a 35 percent discount. We also believe that Gannett’s management is extremely competent and shareholder friendly as shown through their dividend program as well as their share repurchase program.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Capital IQ, Bloomberg and other vendors.
Orange Value Fund,, LLC.LLC. Gannett Co., Inc. NYSE: GCI
Table of Contents
Company Description 3
Spin-Off Breakdown 4
Timeline 5
Management/Board of Directors 7
Top Shareholders/Activists 12
Segment Analysis 13
Revenue Breakdown 16
Expense Breakdown 19
Revolving Credit Facility 20
Mergers & Acquisitions 21
Industry Overview 22
Catalysts & Drivers for Growth 23
Investment/Value Thesis 24
Investment Risks 24
Investment Recommendation 24
Financial Valuation 25
Comparable Analysis 27
Gannett Co., Inc. NYSE: GCI Orange Value Fund, LLC.
Company Description
Formerly, Gannett Co., Inc. was a consolidated company with three business segments; Broadcasting, Digital and Publishing. On August 5, 2014, the former Gannett Co., Inc. announced its plan to spin-off its Publishing segment from its Broadcasting and Digital business segments and completed its separation on June 29, 2015. The spun-off publishing business retains the name ‘Gannett Co., Inc.’ trading on the New York Stock Exchange under the symbol “GCI” while the Broadcasting and Digital business has adopted the name, “TEGNA Inc.” trading under the symbol “TGNA”, also on the New York Stock Exchange.
Today, Gannett Co., Inc. is a leading international, multi-platform news and information company that delivers high quality, trusted content where and when consumers want to engage with it on virtually any device. Its operations comprise 100 daily publications in the U.S. and the U.K., more than 400 non-daily local publications in the U.S. and more than 125 similarly, non-daily titles in the U.K.
Gannett Co., Inc.’s Publishing business has national to local reach. On the local scale, Gannett Co., Inc. owns U.S. Community publishing’s portfolio of 81 local media organizations and in the U.K., owns Newsquest media, a Publishing business with a collection of 18 daily local newspapers distributed throughout the U.K. To give an idea of the geographical revenue breakdown between the two countries, 91% of the Publishing business’ revenues come from the U.S. and 9% from the U.K.
On the national scale, Gannett Co., Inc.’s Publishing business operates the renowned national brand, USA Today, the nation’s number one newspaper, as of 2014. As part of its strategy to enhance local core news and marketing operations to make local franchises stronger and ties with communities deeper, USA Today announced partnership deals in February 2015 with several non-Gannett news organizations to include the USA Today Local Edition as part of their print and digital offering to readers.
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Spin-off Breakdown
The former Gannett Co., Inc. was a consolidated company consisting of three business segments: Broadcasting, Digital and Publishing. On August 5, 2014, the former Gannett Co., Inc. announced its plan to create two publicly traded companies with scale: one exclusively focused on its Broadcasting and Digital businesses, and the other on its Publishing business. The planned separation of the Publishing business was implemented through a tax- free distribution of Gannett Co., Inc.’s Publishing assets to shareholders.
Gannett Co., Inc. refers to the two new entities in its Form 10 filing as “Parent” and “SpinCo”, “Parent” being the Broadcasting and Digital business and “SpinCo” being the Publishing business. Shareholders of “Parent”, also known as the former shareholders of the consolidated Gannett Co., Inc., received one share of “SpinCo”, for every two shares of “Parent” they owned at 12:01 am, ET, on June 29, 2015. If shareholders held fractional shares, they would receive cash in lieu.
The separation will be effected by means of a pro rata distribution of 98.5% of the outstanding shares of SpinCo common stock to holders of Parent common stock. Following the distribution, Parent will own shares of SpinCo representing 1.5% of the outstanding shares of common stock, and SpinCo will be a separate public company. The Parent will continue to hold a 1.5% stake in SpinCo for a period of time following the distribution to allow SpinCo to enter into a modified affiliation agreement with CareerBuilder, LLC.
An important feature to note is that Gannett Co., Inc., the Publishing business would be ‘virtually debt-free’ after the separation with all of Gannett’s existing debt retained by the Broadcasting and Digital company, TEGNA. Gannett Co., Inc. anticipates the initial combined dividend of the two independent companies will not be less than former Gannett Co., Inc.’s $0.20 per share quarterly cash dividend. Contemporaneous with the separation, Gannett Co., Inc. will enter into a revolving credit facility, with borrowing capacity of up to $500 million, to provide SpinCo with additional flexibility and liquidity.
Former Gannett Co., Inc.’s board of directors implemented the spin-off for the following reasons:
Allowing Gannett Co., Inc. and TEGNA Inc. to be separately valued based on their unique investment identities. Both Gannett Co., Inc. and TEGNA, Inc. would now be able to more effectively pursue their own distinct operating priorities and strategies and would allow Executives and the Board to pursue and focus on unique opportunities Each of the two companies can now concentrate its financial resources solely on its own operations, providing greater flexibility to invest capital in its business at a time and in a manner appropriate for its distinct strategy and business needs. The spin-off will provide greater opportunity to grow organically and pursue value-enhancing acquisitions with fewer regulatory obstacles in two consolidating industries. There are certain FCC cross-ownership regulations that prevent the publishing or broadcasting business from entering certain markets which the spin-off mitigates. That said though, the FCC regulations are more significant to TEGNA Inc. rather than Gannett Co., Inc. Each company can now enjoy direct access to capital markets and facilitate the ability to capitalize on their unique growth opportunities as oppose to attracting capital based on a combined strategy. Incentive compensation arrangement for employees are more directly ties to their performance in their respective company. Management and employee incentives would be better aligned with performance and growth objectives.
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Timeline
Below dates are a list of notable announcements since Gannett Co., Inc.’s announcement of the spin-off on August 5th, 2014 and some of the announced future earnings (as of October 1st, 2015). They include former Gannett Co., Inc., TEGNA, Inc. (up to the spin-off on June 29, 2015) and Gannett Co., Inc.
August 5, 2014: Icahn announces 6.63% ownership position of total shares outstanding in Former Gannett Co., Inc. Carl Icahn acquired the positions in the shares in the belief that they were undervalued and that value could be created by splitting Former Gannett Co., Inc. into separate print and broadcast companies. Prior to August 5, 2014, Icahn had not had any contact with the Issuer according to 13D filing. Former Gannett Co., Inc. announces two industry-leading companies with scale through spin-off of publishing business to former Gannett Co., Inc. shareholders. Accelerate growth of digital portfolio with $1.8 billion acquisition of remaining 73% interest in cars.com.
September 3, 2014: Former Gannett Co., Inc. Announces Offering of Senior Notes. Former Gannett Co., Inc. Announces Pricing of $675 Million of Senior Notes.
September 8, 2014: Former Gannett Co., Inc. Announces Completion of $675 Million Offering of Senior Notes.
October 1, 2014: Former Gannett Co., Inc. Completes Acquisition of Remaining 73% Interest in Cars.Com. Rapidly Growing Business Doubles Former Gannett Co., Inc.’s Digital Portfolio. Announces October 29th Investor Meeting Focused on Company’s Digital Portfolio.
October 20, 2014: Former Gannett Co., Inc. Reports 37% Increase in Non-GAAP Earnings per Diluted Share to $0.59; Earnings per Diluted Share of $0.51 on a GAAP Basis; Record Broadcasting Revenue and Adjusted EBITDA.
November 5, 2014: Former Gannett Co., Inc. releases 10-Q.
November 21, 2014: Gannett Co., Inc. was incorporated in Delaware.
January 21, 2015: Carl Icahn launches proxy fight and sends Former Gannett Co., Inc. open letter highlighting a number of concerns including investors being frozen out of major governance decisions after the planned spin- off. Icahn was also concerned Gannett may adopt a so-called poison pill as an anti-takeover measure. Furthermore, he wanted a majority vote of shareholders and ability for meetings to be called if at least 10% of shareholders wanted.
February 3, 2015: Former Gannett Co., Inc. Reports 55% Increase in 2014 Fourth Quarter Non-GAAP Earnings per Share and 57% Increase in Adjusted EBITDA; Broadcasting and Digital Segments Achieve Record Revenues and Profit for the Quarter; Resumes Share Repurchase Program.
February 25, 2015: Former Gannett Co., Inc. files 10-K.
March 2, 2015: Former Gannett Co., Inc. Announces Corporate Governance for Publishing Company Spin-Off Carl Icahn Withdraws Board Nominations and Other Proxy Proposals.
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April 21, 2015: Former Gannett Co., Inc. Reports 2015 First Quarter Non-GAAP Earnings per Share of $0.49 and 14% Increase in Adjusted EBITDA.
April 29, 2015: Members of the Boards of Directors announced for Gannett Co., Inc. and TEGNA.
May 6, 2015: Former Gannett Co., Inc. files 10-Q.
May 8, 2015: Gannett Co., Inc. announces notice of Blackout Period for directors and executives during pension plan blackout periods. Former Gannett Co., Inc. board approves completion of spin-off transaction.
June 18, 2015: Gannett Co., Inc. files Form 10.
June 26, 2015: Gannett Co., Inc., enters into a Separation and Distribution Agreement with TEGNA Inc., also known as Former Gannett Co., Inc., pursuant to which it agrees to transfer its publishing business to the Gannett Co., Inc. and distribute 98.5% of the outstanding common stock of the Gannett Co., Inc. to TEGNA Inc. stockholders in a distribution intended to be tax-free to Tegna Inc. stockholders.
June 29, 2015: Distribution of Gannett Co., Inc. shares to TEGNA Inc. also known as Former Gannett Co., Inc. effective at 12:01 a.m., Eastern Time, on June 29, 2015 was made to stockholders of record as of the close of business on June 22, 2015. Gannett Co., Inc. enters into new five-year revolving credit facility in an aggregate principal amount of $500 million with JP Morgan Chase.
July 29, 2015: Former Gannett Co., Inc. reports Second Quarter 2015 Results of Operations. Former Gannett Co., Inc. Q2 2015 Earnings Call.
August 6, 2015: Former Gannett Co., Inc. files 10-Q.
September 28, 2015: Gannett Co., Inc. announces new director.
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Management / Board of Directors
Gannett Co., Inc. Management Change in Pension Non- Other Name and Principal Salary Stock Qualified Year Bonus ($) Compensation Total ($) position ($) Awards ($) Deferred ($) Compensation Earnings ($) 2015 $895,000 $1,118,750 $2,685,000 * * * Robert J. Dickey 2014 $675,000 $750,000 $1,299,989 $1,164,316 $109,022 $3,998,327 President and CEO 2013 $675,000 $600,000 $1,374,995 $0 $109,115 $2,759,110 2012 $612,981 $650,000 $1,208,769 $1,189,139 $125,612 $3,786,501 2015 * * * * * * Barbara W. Wall 2014 $356,500 $230,000 $214,976 $561,601 $19,099 $1,382,176 Chief Legal Officer 2013 $342,500 $205,000 $208,002 $0 $18,505 $774,007 2012 $323,654 $190,000 $199,988 $0 $18,669 $732,311 Alison K. Engel Chief Financial 2015 $480,000 $360,000 $720,000 * * * Officer 2015 $600,000 $450,000 $900,000 * * * John M. Zidich President of US 2014 $445,000 $235,000 $309,990 $729,377 $17,443 $1,736,810 Domestic 2013 $445,000 $225,000 $280,015 $0 $17,446 $967,461 Publishing 2012 $429,231 $229,609 $298,311 $0 $17,245 $974,396 David A. Payne 2015 $580,000 $435,000 * * * * Chief Product 2014 $565,000 $415,000 $799,988 $0 $80,647 $1,860,635 Officer (to retire at end of 2013 $550,000 $415,000 $827,002 $0 $81,312 $1,873,314 FY 2015) 2012 $525,000 $435,000 $761,526 $0 $123,543 $1,845,069 * Data unavailable
Robert J. Dickey – President and Chief Executive Officer Previously served as President of Parent’s U.S. Community Publishing Division since February 2008. Senior Group President of Parent’s Pacific Group and Chairman of Phoenix Newspapers Inc. from 2005 to 2008. President and Publisher of the Desert Sun (Palm Springs, CA) from 1993 to 2005. Group Vice President of Parent’s Pacific Group from 1997 to 2006. Currently also serves on the board of the Newspaper Association of America and served as chairman from March 2014 to March 2015. Mr. Dickey brings extensive publishing industry and management experience and a deep knowledge of the Company’s day-to-day operations to the Company based on his current role as President of Parent’s U.S. Community Publishing Division and the many senior leadership positions he has held with Parent.
Alison K. Engel – Senior Vice President, Chief Financial Officer and Treasurer Previously served as Vice President of Finance of Parent since January 2015. Senior Vice President, Chief Financial Officer and Treasurer of A. H. Belo Corporation from December 2007 to November 2014. From 2003 through January 2008, held various senior positions with Belo Corp., serving as: o Vice President and Corporate Controller from January 2006 to January 2008 o Director/Accounting Operations and Corporate Controller from February 2005 to December 2006
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Ms. Engel has more than 20 years of financial management experience at diversified multi-unit business organizations and PricewaterhouseCoopers.
John M. Zidich – President of U.S. Domestic Publishing Previously served as Chief Executive Officer and Publisher of Parent's Republic Media business, which includes The Arizona Republic, azcentral.com and 12 News since December 2010. Also, served as President of the West and Interstate Groups of Parent's U.S. Community Publishing Division since April 2013. President and Publisher of The Arizona Republic, from 2005-2010. President and Chief Operating Officer of The Arizona Republic, from 2004-2005. Executive Vice President of The Arizona Republic, from 2001-2004. President and Publisher of the Reno Gazette-Journal, from 2000-2001. Mr. Zidich serves on a number of community and charitable boards, including the Greater Phoenix Economic Council, The Cronkite School of Journalism and Greater Phoenix Leadership.
David A. Payne – Interim Chief Product Officer Will serve as Chief Product Officer during initial transition period following the distribution pursuant to the Employment and Separation Agreement dated June 5, 2015, between Mr. Payne, Parent and Gannett Co., Inc.. Under this agreement, Mr. Payne will continue to serve as an executive officer of Gannett Co., Inc. until the time of his separation from Gannett Co., Inc., which is anticipated to be on or about January 1, 2016. Previously served as Chief Digital Officer of Parent since March 2011. President and CEO of ShortTail Media, Inc., a video advertising technology start-up Mr. Payne co- founded in 2008. Senior Vice President and General Manager of CNN.com, which produced and distributed all of CNN's digital services, from 2004 to 2008. From 1993 to 2004, he served in numerous roles at Turner Broadcasting serving as: o Senior Vice President of Business Operations and Development of CNN o Senior Vice President and General Manager of CNN/Sports Illustrated Interactive Prior to joining Turner, Mr. Payne served as an Assistant U.S. Attorney in the U.S. Attorney's Office in Washington D.C., and was an associate in Gibson, Dunn & Crutcher's Washington, D.C. office.
Andrew T. Yost – Chief Marketing Officer Previously served as Senior Vice President, Consumer Marketing for Parent, since May 2014. Senior Vice President, Marketing at Viacom leading a digital direct marketing services organization. Mr. Yost served in several consumer marketing roles at Dow Jones, Columbia House and American Express from 1993 to 2008.
Maribel Perez Wadsworth – Chief Strategy Officer Previously served as Senior Vice President, Strategic Initiatives for Parent, since May 2014. Vice President, Audience Development & Engagement and Director, Digital News from 2009-2014. Ms. Wadsworth served in a number of editorial leadership roles at The Associated Press, from 1996- 2009.
Henry K. Faure Walker – Chief Executive of Newsquest Media Group Previously served as Chief Executive of Newsquest for Parent, since April 2014. Prior to joining Parent, Mr. Faure Walker was Digital Director for Johnston Press plc, a role he commenced in 2010. General Manager of The Scotsman Publications Ltd. from 2006 to 2010. Mr. Faure Walker held a number of senior roles for Johnston Press plc, including Managing Director of JP Ventures from 2002 to 2005. Worked for The Communication Group plc, a UK marketing communications agency from 1994 to 2000, and was appointed a Board Director of this company in 1999. Mr. Faure Walker currently serves on the Board of the News Media Association, the industry body for UK news publishers.
Barbara W. Wall – Senior Vice President and Chief Legal Officer Previously served as Vice President and Senior Associate General Counsel of Parent, since 2009. Vice President, Associate General Counsel, from 2004 to 2009.
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Vice President of Parent since 1994. Ms. Wall has taught communications law as an adjunct professor at American and George Washington Universities, and, prior to joining Gannett Co., Inc., practiced law in New York City with Satterlee, Stephens, Burke & Burke.
Jamshid Khazenie – Chief Technology Officer Previously served as Vice President of Digital Technology and Operations of Parent, since June 2014. Vice President of Digital Media Technologies at Turner Broadcasting Systems, from 2011 to 2014. Ran a management consulting firm specializing in digital technology, from 2009 to 2011 Served in digital technology leadership roles at Orbitz and US News Ventures, from 2004 to 2009.
Kevin Gentzel – Chief Revenue Officer Previously served as Head of Advertising Sales for North America Held similar positions as CRO at the Washington Post and Forbes Medi
Gannett Co., Inc. Board of Directors
John Jeffry Louis Was Co-Founder of Parson Capital Corporation, a Chicago-based private equity and venture capital firm, and served as its Chairman from 1992 to 2007. Currently, a director of The Olayan Group, S.C. Johnson and Son, Inc., and chairman of the board of the U.S./U.K. Fulbright Commission. Mr. Louis has financial expertise, substantial experience in founding, building and selling companies and in investing in early stage companies from his years of experience in the venture capital industry as a leader of Parson Capital and as an entrepreneur who has founded a number of companies. He has served as a director of Parent since 2006.
John E. Cody Served as Executive Vice President and Chief Operating Officer of Broadcast Music, Inc. from November 2006 until his retirement in November 2010. Previously, he served as BMI's Senior Vice President and Chief Financial Officer from 1999 to 2006. Served as Vice President/Controller of the Hearst Book Group and Vice President/Finance and Chief Financial Officer for the U.S. headquarters of LM Ericsson. Director of the Tennessee Performing Arts Center. Mr. Cody has financial expertise, significant management, leadership and operational experience in the areas of licensing, information technology, human resources, public policy, business development and implementing enterprise-wide projects, and broad business experience in the music broadcast, publishing and telecommunications industries from the various senior leadership positions he held with BMI, Hearst and Ericsson. He has served as a director of Parent since 2011.
Lila Ibrahim Chief Business Officer of Coursera, Inc., an education company that partners with leading universities and organizations to offer free online courses, a position she has held since April 2014. Served as President of Coursera from August 2013 to April 2014. From July 2010 to March 2015, Ms. Ibrahim served as a Senior Operating Partner at Kleiner Perkins Caufield & Byers (KPCB), which has an ownership stake in Coursera, during which time she also served as Chief of Staff to John Doerr. Prior to joining KPCB, Ms. Ibrahim spent 18 years with Intel Corporation in a variety of roles, most recently as General Manager of the Education Platform Group from 2007 until 2010. Co-founder and serves on the board of Team4Tech, a non-profit organization established in 2012 to improve education in developing countries through innovative technology solutions. Ms. Ibrahim has extensive expertise in technology development, business development, investing in companies, building new businesses, strategic planning, and leading technology operations as a result of the various senior leadership positions she has held with Coursera, KPCB and Intel.
Lawrence S. Kramer Served with Parent as President and Publisher of USA TODAY since May 2012, and will serve in that capacity until the date of the distribution.
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Prior to joining Parent, he was a media consultant and adjunct professor of Media Management at the Newhouse School of Communications at Syracuse University. From January 2008 to January 2010, Mr. Kramer was a Senior Advisor of Polaris Venture Partners. From March 2005 until March 2008, he served in a number of positions at CBS, including President of CBS Digital Media. Prior to joining CBS, he was Chairman, CEO and Founder of MarketWatch, Inc. until its sale to Dow Jones in January 2005. He was Founder, Executive Editor, and President of Data Sport Inc. from 1991 to 1994. Prior to founding Data Sport, he spent more than 20 years in journalism as a reporter and editor, including as Assistant Managing Editor and Metro Editor of the Washington Post and Editor of the San Francisco Examiner. While a journalist, he won several awards for reporting, including the National Press Club Award, and his staff won two Pulitzer Prizes. Mr. Kramer serves on the board of directors of Harvard Business Publishing and the board of trustees of Syracuse University. He was a founding board member and former Chairman of The Online Publishers Association.
Tony A. Prophet Corporate Vice President, Windows and Search Marketing, of Microsoft Corporation, a position he has held since February 2015. Served as Corporate Vice President, Windows Marketing, from May 2014 to February 2015. Prior to joining Microsoft, Mr. Prophet served as Senior Vice President of Operations, Printing and Personal Systems at Hewlett-Packard Company from 2012 to 2014 and as Senior Vice President of Supply Chain Operations, Personal Systems Group, Hewlett-Packard Company from 2006 until 2012. Mr. Prophet has extensive leadership experience and broad operational expertise in brand strategy, product pricing and marketing, creating, managing and optimizing global supply chains, and developing new technologies and businesses as a result of the various positions he has held with Hewlett-Packard Company, United Technologies Corporation, Honeywell International, Inc., Booz Allen Hamilton, Inc., and General Motors Company. He has served as a director of Parent since 2013.
Debra A. Sandler Chief Health and Wellbeing Officer of Mars, Inc., a position she has held since July 2014. Previously, Ms. Sandler served as President, Mars Chocolate, North America from April 2012 to July 2014. Chief Consumer Officer, Mars Chocolate North America from November 2009 to March 2012. Prior to joining Mars, Ms. Sandler spent 10 years with Johnson & Johnson in a variety of leadership roles. She is a Trustee of Hofstra University, a Board member of the Ad Council and LEAD and a member of the Executive Leadership Council. Ms. Sandler has strong marketing and operating experience and a proven record of creating, building, enhancing and leading well-known consumer brands as a result of the leadership positions she has held with Mars and Johnson & Johnson.
Chloe R. Sladden Advises and invests in early stage companies at #angels, an investment group made up of current and former Twitter executives, which Ms. Sladden co-founded in 2015. Vice President, Media at Twitter, Inc. from February 2012 to August 2014. Director, Media of Twitter from April 2009 to February 2012. Before joining Twitter, Ms. Sladden held leadership positions at Current TV LLC, which previously operated a cable television channel. Ms. Sladden has significant experience in digital media, building strategic media and entertainment partnerships, advising and investing in early stage companies and driving innovation as a result of the leadership positions she held with #angels, Twitter and Current TV.
Donald E. Felsinger Serves as lead director on the boards of Archer-Daniels-Midland (ADM) and Northrop Grumman Corp. Executive chairman at Sempra Energy from June 2011 to December 2012 Previously served as chairman and CEO of Sempra Energy Formerly served as executive vice president, president and COO of Enova Corporation, the parent company of San Diego Gas & Electric (SDG&E), and held other executive positions within SDG&E.
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Mr. Felsinger was active in many groups and served on the boards of the Institute of the Americas, the Green Foundation and as Co-chairperson of the Forum Fronterizo Council of the San Diego Dialogue. He also served as a member of The Conference Board and as a director at United States-Mexico Chamber of Commerce.
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Top Shareholders/Activists
Back in August 2014, Carl Icahn announced a 6.6% stake in former Gannett Co., Inc., before its spin-off. He had been building up his position since mid-June and it was announced to the public via a 13D filing shortly after the spin-off was announced. His initial reasoning for the investment was that the company is, “undervalued and that value could be created by splitting the Issuer into separate print and broadcast companies”. In January 2015, Icahn sent a letter to Gannett CEO Gracia Martore saying he wanted to be sure that investors weren’t frozen out of major governance decisions after the planned spin-off. “I would not be surprised if either company became the target of a takeover attempt,” Icahn said in the letter. “If this occurs, the shareholders — the true owner of the company — should have the full and only right to decide whether or not to accept the offer.”
Mr. Icahn was also concerned Gannett may adopt a so-called poison pill as an anti-takeover measure. Furthermore, he wanted a majority vote of shareholders and ability for meetings to be called if at least 10% of shareholders wanted. He proposed two board candidates, Michael Dornemann, who has expertise in management consulting largely in the media space and Courtney Mather, a former MD at Goldman Sachs experienced in capital markets and M&A strategy.
Initially, Gannett executives found the letter and Icahn’s intentions to be aggressive but by March 2015, Icahn had withdrawn his two nominees for the board, as well as his corporate governance proposals. Icahn’s withdrawals came as Gannett outlined the corporate governance for its newspaper publishing business. Many of the rules fit the general principles that Icahn advocated: annual elections for directors, a limited life span for anti-takeover “poison pill” plans and special meetings that can be called with the support of 20% of the company’s shares.
Holder Name Position % of Outstanding Shares BlackRock 9,033,995 7.85% Vanguard Group Inc 8,124,847 7.06% Icahn Associates Holding LLC 7,483,683 6.51% New South Capital Management 5,751,751 5.00% JP Morgan Chase & Co 4,268,992 3.71% State Street Corp 3,745,663 3.26% Capital Group Companies Inc 3,180,047 2.76% Artisan Partners Ltd Partnership 3,109,213 2.70% LSV Asset Management 2,946,350 2.56% Manning & Napier Advisors Inc 2,753,435 2.39%
The top 10 shareholders of Gannett Co., Inc. as of October 2, 2015 consist largely of institutional investors including Carl Icahn’s Icahn Associates Holding, a holding company for Icahn’s Icahn Enterprises, L.P. As one of the main shareholders of the company, Icahn holds a degree of power to influence strategy and decisions of Gannett Co., Inc. exemplified with his proxy fight he initiated in January 2015.
A quick analysis of publically announced owners of Gannett Co., Inc. according to Bloomberg shows that of the 460 institutional shareholders, only 47 reduced their positions from Q2 2015 to Q3 2015. Bear in mind that many of these positions were not completely closed out but were instead mildly reduced. 27 of these 47 shareholders / ex-shareholders completely closed out their positions. We can assume the Q2 figures represent shareholders who received Gannett Co., Inc. shares given that the spin-off itself occurred on June 29, 2015, just before the end of the second quarter when the position data is retrieved. What this shows is that despite the spin-off, many shareholders who formerly owned both the consolidated business (Broadcasting, Digital and Publishing) chose to hold their shares of the Publishing business.
One theory to explain this may be that those who were invested in former Gannett Co., Inc. and continued to hold the shares after the spin-off have faith in Gannett Co., Inc.’s spin-off and choose to hold their shares. This is further exemplified by the fact Gannett Co., Inc.’s share price that closed on the first day of its trading at $13.95 on June 25, 2015 is quite similar to its latest share price close on October 1, 2015 at $14.58. We feel that the market has yet to take into account the growth catalysts that we identify making Gannett Co., Inc. an attractive long term investment.
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Segment Analysis
Former Gannett Co., Inc. consisted of three reportable business segments; Broadcasting, Digital and Publishing.
Publishing Segment
The Publishing segment comprises 112 daily publications and related digital platforms in the U.S. and the U.K., more than 400 non-daily local publications in the U.S. and more than 140 such titles in the U.K. The Publishing segment’s 93 U.S. daily publications include USA TODAY, a nationally recognized news and information publication, which is ranked first in combined print and digital circulation according to Alliance for Audited Media’s December 2014 Quarterly Filing. In the markets Gannett Co., Inc. serves it also operates desktop, smartphone and tablet products which are tightly integrated with publishing operations. Operations also include commercial printing, newswire, marketing and data services operations. Certain parts of the Publishing business have strategic relationships with the online businesses of TEGNA, Inc. including CareerBuilder, Cars.com, and G/O Digital.
Broadcasting Segment
The Broadcasting segment broadcasts news, sports and entertainment through 46 television channels in 38 markets. To get an understanding of the relevance of this segment, its Broadcasting business is the No. 1 NBC affiliate group, No. 1 CBS affiliate group and the No. 4 ABC affiliate group. The Broadcasting segment makes up the lion’s share of its revenues from core advertising (61% of its total broadcasting revenue) which are simply any non-political TV advertisements.
Digital Segment
The Digital segment consists of its online operations including Cars.com, CareerBuilder, PointRoll and ShopLocal. Cars.com is the leading destination for online car shoppers providing information to buyers from existing consumers and experts about various cars. Cars.com generates revenues through subscription-based online automotive advertising packages targeting car dealerships and national advertisers through its own direct sales force as well as its affiliate sales channels. CareerBuilder is an online job site (the largest in the U.S. by traffic) which has a presence in over 60 countries. CareerBuilder generates revenues both through its own sales force by providing talent and compensation intelligence, human resource related consulting services and recruitment solutions and through sales of employment advertising placed by affiliated media organizations.
Publishing Segment Breakdown
In Gannett Co., Inc.’s second quarter 10-Q filing, it was able to prepare financial statements for solely its Publishing segment, a first for the company that historically consolidated financial statements and accounting records of Former Gannett Co., Inc. Gannett Co., Inc.’s financial statements report three new business segments: Advertising, Circulating and Other.
Gannett Co., Inc. generates revenue through advertising and subscriptions to print and digital publications. The advertising segment sells retail, classified and national advertising across multiple platforms including print, online, mobile and tablet as well as niche publications. In addition, Gannett Co., Inc. generates revenue by providing digital marketing products and services, ranging from search to social media to website development. Circulation revenues are derived principally from distributing publications on digital platforms, from home delivery and from single copy sales of publications. Other revenues are mainly from commercial printing and distribution arrangements.
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Gannett Co., Inc. NYSE: GCI Orange Value Fund, LLC.
Gannett Co., Inc.
Advertising Circulation Other
Digital Commercial Print Platforms Printing
Home Distribution Online Delivery Arrangements
Single Copy Mobile Sales
Tablet
Advertising Segment Breakdown Gannett Co., Inc. has experienced advertising departments that sell retail, classified and national advertising across multiple platforms including print, online, mobile and tablet, as well as niche publications. Gannett Co., Inc. has a national advertising sales force focused on the largest national advertisers and a separate sales organization to support classified employment sales – the Digital Employment Sales Center. Gannett Co., Inc. also has relationships with outside agencies that specialize in the sale of national ads. Retail display advertising is associated with local merchants or locally owned businesses. Retail includes regional and national chains – such as department and grocery stores – that sell in the local market. National advertising is display advertising principally from advertisers who are promoting national products or brands. Examples are pharmaceuticals, travel, airlines, or packaged goods. Both retail and national ads also include preprints, typically stand-alone multiple page fliers that are inserted in the daily print product. Classified advertising includes the major categories of automotive, employment, legal and real estate/rentals. Advertising for classified segments is published in the classified sections, in other sections within the publication, on affiliated digital platforms and in niche magazines that specialize in the segment.
Circulation Segment Breakdown USCP delivers content in print and online, via mobile devices and tablets. Digital access increased across all publications, driven by the All Access Content Subscription Model. USCP's All Access Content Subscription Model has more than 1.6 million digitally activated subscribers, enabling them easy access to content-rich products. In a trend generally consistent with the domestic publishing industry, print circulation volume declined in 2014.
EZ Pay, a payment system which automatically deducts subscription payments from customers' credit cards or bank accounts, enhances the subscriber retention rate. At the end of 2014, EZ Pay was used by 63% of all subscribers at Gannett Co., Inc.’s USCP sites. For USCP, single-copy represents approximately 15% of daily and 24% of Sunday net paid circulation volume. The single copy price of USA TODAY at newsstands and vending machines was $2.00 in 2014. Mail subscriptions are available nationwide and abroad, and home, hotel and office delivery is available in many markets. Approximately 82% of its net paid circulation results are from single-copy sales at newsstands, vending machines or provided to hotel guests. The remainder is from home and office delivery, mail, educational and other sales.
Other Segment Breakdown In 2011, Gannett Publishing Services (GPS) was formed to improve the efficiency and reduce the cost associated with the production and distribution of Gannett Co., Inc.'s printed products across all divisions
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Gannett Co., Inc. NYSE: GCI Orange Value Fund, LLC.
in the U.S. GPS directly manages all of the production and circulation operations for all of Gannett Co., Inc.'s domestic publishing operations including all community newspapers and USA TODAY. GPS leverages Gannett Co., Inc.'s existing assets, including employee talent and experience, physical plants and equipment, and its vast national and local distribution networks. GPS is responsible for imaging, advertising production, internal and external printing and packaging, internal and external distribution, consumer sales, customer service and direct marketing services.
The Gannett Co., Inc. Imaging and Ad Design Centers ("GIADC"), which are utilized for commercial imaging and advertising production, serve 81 publishing properties, including USA TODAY and all USCP dailies with the exception of Guam and complete special projects for other internal businesses. GIADC is utilized for commercial imaging and/or advertising production by 44 external customers. In 2014, Gannett Co., Inc. completed the centralization of its page-release process into the GIADC centers, resulting in standardization and efficiencies. The GIADC now handles the step between the creation of the printed pages at Gannett Co., Inc.’s five regional Design Studios and the production at both internal and external plants. Almost all USCP and USA TODAY employees utilize a common content management system. The common content management system enables the communication and collaboration needed to build strong design remotely. The studios are operationally efficient while enhancing design in company-wide publications.
Gannett Co., Inc. owned a 19.49% interest in California Newspapers Partnership, which includes 19 daily California newspapers and a 40.64% interest in Texas-New Mexico Newspapers Partnership, which includes seven daily newspapers in Texas and New Mexico and four newspapers in Pennsylvania. Gannett Co., Inc. has a 13.5% interest in Ponderay Newsprint Company in the state of Washington and a 50% partnership interest in TNI Partners, which provides service to a non-Gannett publication in Tucson, AZ.
In connection with their growth strategy, on June 1, 2015, Gannett Co., Inc. completed the acquisition of the remaining 59.36% interest in the Texas-New Mexico Newspapers Partnership that it did not own from Digital First Media. Gannett Co., Inc. completed the acquisition through the assignment of its 19.49% interest in the California Newspapers Partnership and additional cash consideration. As a result, Gannett Co., Inc.will own 100% of the Texas-New Mexico Newspapers Partnership and will no longer have any ownership interest in California Newspapers Partnership. Through the transaction, Gannett Co., Inc. acquired news organizations in Texas (El Paso Times), New Mexico (Alamogordo Daily News; Carlsbad Current-Argus; The Daily Times in Farmington; Deming Headlight; Las Cruces Sun-News; and Silver City Sun-News) and Pennsylvania (Chambersburg Public Opinion; Hanover Evening Sun; Lebanon Daily News; and The York Daily Record).
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Gannett Co., Inc. NYSE: GCI Orange Value Fund, LLC.
Revenue Breakdown
During the first six months of 2015, Gannett Co., Inc.’s operating revenues decreased 9% to $1.4 billion from $1.6 billion in 2014, with decreases primarily focused in advertising revenues. Advertising sales accounted for 56% of total revenues for the first six months of 2015. Circulation sales accounted for 37% of total revenues for the first six months of 2015. Digital revenues, such as advertising on various digital platforms and subscription fees, were $351.3 million in the first six months of 2015 and $347.1 million in the same period in 2014. Digital revenues increased during the first six months of 2015 in the U.S. as well as at Newsquest in the U.K. as compared to the same period in 2014.
Gannett’s results at Newsquest are translated from the British pound to U.S. dollar at an average exchange rate. For the first six months of 2015, the average exchange rate declined 9% compared to the first six months of 2014, which unfavorably impacted year to date revenue by approximately $19.9 million.
Advertising Revenues
Advertising revenue for the first six months of 2015 decreased $108.7 million or 12%. This decrease reflects lower advertising demand due to general trends in the newspaper industry and the absence of revenues associated with USA Weekend and Apartments.com, which together accounted for $22.8 million of the decline, as well as a year-over-year decline in the U.K. exchange rate, which represented $13.3 million of the decline, partially offset by the revenues associated with TNP and RMG.
Prior to the acquisition, TNP was accounted for as an equity method investment. TNP and RMG contributed $9.3 million of operating revenue in the first six months of 2015, of which approximately $6.0 million is derived from advertising. Digital advertising revenues, which comprise retail, national and classified advertising, were $214.8 million in the first six months of 2015 and $208.9 million in the first six months of 2014, or a 3% increase over prior year.
Retail advertising revenues were down $59.1 million or 13% for the first six months of 2015. In the U.S., retail advertising decreased 10%, unfavorably impacted by lower advertising demand. In the U.K., retail advertising revenues increased 1% in local currency but were adversely impacted by foreign currency rates that resulted in a reported 8% decline.
National advertising revenues decreased $22.0 million or 17% for the first six months of 2015 due to soft advertising demand.
Classified advertising revenues declined 5% in the U.S. and 7% in the U.K. in local currency for the first six months of 2015. U.S. automotive advertising decreased $2.6 million for the first six months of 2015, while employment and real estate declined $2.1 million and $5.0 million, respectively. In the U.K., all classified advertising categories decreased compared to 2014 as a result of general trends in the newspaper industry.
Circulation Segment
For the first six months of 2015, total circulation revenues decreased 3% to $537.2 million. This change was driven by a reduction in volume, which was a result of general industry trends, and the impact of price increases in the prior year. Price increases contributed positively to circulation revenues by $48.2 million in the first six months of the year, while foreign currency negatively affected circulation revenues by $5.0 million. Circulation revenues for Gannett’s domestic publishing business were relatively flat in the first six months of 2015, reflecting ongoing strength of the All Access Content Subscription Model as well as strategic home delivery price increases at their local domestic publishing sites to offset decreases in circulation volumes. Circulation volumes have trended downwards with single copy circulation decreasing daily by 9% and Sunday by 12% in the first six months of 2015, and home delivery decreasing by 9% for both daily and Sunday.
Circulation revenues at USA TODAY were 10% lower in the first six months of 2015 due to anticipated volume losses. In the U.K., circulation revenues were 3% lower in the first six months of 2015 reflecting the impact of foreign currency rates and lower sales.
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Gannett Co., Inc. NYSE: GCI Orange Value Fund, LLC.
Other Segment
Commercial printing and other revenues declined 13% for the first six months of 2015 and totaled $99.5 million. The decrease primarily reflects the sale of a print business. Other revenues accounted for 7% of total revenues for the first six months of 2015.
Results from Operations ($ thousands) Quarter-to-Date Year-to-Date 2015 2014 Change 2015 2014 Change Operating revenues: Advertising 410,487 463,976 -12% 807,753 916,416 -12% Circulation 265,904 275,482 -3% 537,162 555,330 -3% Other 50,681 57,064 -11% 99,517 113,909 -13% Total operating revenues 727,072 796,522 -9% 1,444,432 1,585,655 -9% Operating expenses: Operating expenses 645,415 691,847 -7% 1,303,588 1,394,680 -7% Depreciation 23,958 24,403 -2% 48,386 48,842 -1% Amortization 3,608 3,475 4% 7,007 6,987 0% Asset Impairment charges 5,097 9,479 -46% 6,646 19,023 -65% Total operating expenses 678,078 729,204 -7% 1,365,627 1,469,532 -7% Operating income 48,994 67,318 -27% 78,805 116,123 -32% Non-operating income, net 27,390 3,571 667% 32,239 7,937 306% Provision for incomes taxes 23,057 18,780 23% 24,470 30,772 -20% Net Income 53,327 52,109 2% 86,574 93,288 -7%
Revenue Analysis: Matters Effecting Current and Future Operating Results
Shutdown of USA Weekend – USA Weekend ceased operating in December 2014. Through the first six months of 2015 revenue comparisons to the same period in the prior year were negatively impacted by $20.4 million. For the second quarter of 2015 comparisons to the same period in the prior year were negatively impacted by $9.2 million.
Acquisition of Texas-New Mexico Newspaper Partnership (TNP) and Romanes Media Group (RMG) – During Q2 2015, Gannett Co., Inc. acquired two businesses which they expect to be accretive to earnings in future periods. It is estimated that these two businesses, described below, will contribute approximately $100 million in revenues over the next twelve months.
On June 1, 2015, Gannett Co., Inc. completed the acquisition of the remaining 59.4% interest in the TNP that they did not own from Digital First Media. Gannett Co., Inc. completed the acquisition through the assignment of their 19.5% interest in the California Newspapers Partnership (CNP) and additional cash. As a result, Gannett Co., Inc. owns 100% of TNP and no longer has any ownership interest in CNP. Revenue results reflect an increase in total revenues of $6.5 million in the second quarter of 2015 as a result of consolidating TNP and a decrease in “Equity income in unconsolidated investees, net” of $0.9 million.
On May 26, 2015, Newsquest acquired RMG, one of the leading regional media groups in the U.K. RMG publishes local newspapers in Scotland, Berkshire and Northern Ireland and its portfolio comprises one daily newspaper and 28 weekly newspapers and their associated websites. Gannett Co., Inc. results reflect an increase in total revenues of $2.8 million in the second quarter of 2015 as a result of the acquisition.
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Gannett Co., Inc. NYSE: GCI Orange Value Fund, LLC.
Foreign Currency – Gannett Co., Inc.’s U.K. publishing operations are conducted through their Newsquest subsidiary and RMG. U.K. earnings are translated at the average British pound-to-U.S. dollar exchange rate. Therefore, a strengthening in that exchange rate will improve U.K. revenue and earnings contributions to consolidated results. A weakening of that exchange rate (i.e., a stronger U.S. dollar) will have a negative impact. Results for the second quarter of 2015 were translated from the British pound to U.S. dollars at an average rate of $1.53 compared to $1.68 in the second quarter last year. This 9% decline in the exchange rate unfavorably impacted second quarter of 2015 revenue comparisons by approximately $10.6 million. At the date of writing on October 1, 2015, the British pound to U.S. dollar exchange rate was 1.515 reflecting an unfavorable 1% decline in the exchange rate.
Facility Consolidation and Asset Impairment Charges – Gannett Co., Inc. evaluated the carrying values of property, plant and equipment at certain sites because of facility consolidation efforts. Gannett Co., Inc. revised the useful lives of certain assets to reflect the use of those assets over a shortened period as a result. They recorded pre-tax charges for facility consolidations and asset impairments of $5.1 million and $9.5 million in the second quarter of 2015 and 2014, respectively, and $6.6 million and $19.0 million for the first six months of 2015 and 2014, respectively.
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Gannett Co., Inc. NYSE: GCI Orange Value Fund, LLC.
Expense Breakdown
Operating Expenses
For the first six months of 2015, operating expenses decreased 7% to $1.4 billion compared to $1.5 billion for the first six months of 2014. Overall cost of sales decreased $75.8 million, or 7%, from the first six months of 2014.
Resource optimization efforts to improve the overall cost structure while driving greater efficiencies drove the decrease from 2014. Also included in cost of sales in the first six months of 2015 were newsprint costs of approximately $92.6 million compared with approximately $120.2 million in the first six months of 2014, a 23% decrease. This decrease represents lower prices for newsprint, lower volume and the absence of USA Weekend. The remaining decrease in cost of sales reflects the overall decline in circulation volumes and other revenues, partially offset by an increase in costs related to the new Cars.com affiliate agreement and the effect of acquisitions during the first six months of 2015.
Total selling, general and administrative costs for the first six months of 2015 decreased by $15.3 million, or 4%, from the second quarter of 2014. Other costs decreased by approximately $3.8 million, primarily reflecting volume declines, partially offset by the effect of acquisitions during the first six months of 2015.
Gannett’s space consolidation initiative continued during the first six months of 2015, resulting in sales of older, underutilized buildings; relocating to more efficient, flexible, digitally-oriented office space; reconfiguring spaces to take advantage of leasing and subleasing opportunities and combining operations where possible.
Income Tax Expenses
Gannett Co., Inc.’s reported effective income tax rate on pre-tax income was 30.2% for the three months ended June 28, 2015, compared to 26.5% for the quarter ended June 29, 2014. Their reported effective income tax rate on pre-tax income was 22.0% for the six months ended June 28, 2015, compared to 24.8% for the six months ended June 29, 2014.
The tax rate for the six months ended June 28, 2015 was lower than the comparable rate in 2014 due to a one- time tax benefit from a change in accounting method filed with the IRS to amortize previously non-deductible intangible assets.
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Gannett Co., Inc. NYSE: GCI Orange Value Fund, LLC.
Revolving Credit Facility
On June 29, 2015, Gannett entered into a new five-year secured revolving credit facility in an aggregate principal amount of $500 million.
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Gannett Co., Inc. NYSE: GCI Orange Value Fund, LLC.
Mergers & Acquisitions
Gannett Co., Inc. expects the acquisitions of Romanes Media Group ‘RMG’ and Texas-New Mexico Newspaper Partnership ‘TNP’ to contribute approximately $100 million in revenues over the next twelve months.
On May 26, 2015, Newsquest Media Group Ltd., and operating subsidiary of Gannett U.K. LTD paid $23.5 million, net of cash acquired, to purchase 100% of the shares of Romanes Media Group ‘RMG’, one of the leading regional media groups in the U.K. RMG publishes local newspapers in Scotland, Berkshire and Northern Ireland and its portfolio comprises one daily newspaper, 28 weekly newspapers and their associated websites.
On June 1, 2015, Gannett Co., Inc. completed the acquisition of the remaining 59.4% interest in the Texas-New Mexico Newspapers Partnership ‘TNP’ that they did not own from Digital First Media. Gannett completed the acquisition through the assignment of their 19.5% interest in the California Newspapers Partnership ‘CNP’, valued at $34.4 million, and additional cash consideration, net of cash acquired, of $5.2 million. As a result, Gannett Co., Inc. owns 100% of ‘TNP’ and no longer has any ownership interest or continuing involvement in ‘CNP’. Through the transaction, they acquired news organizations in Texas (El Paso Times), New Mexico (Alamogordo Daily News; Carlsbad Current-Argus; The Daily Times in Farmington; Deming Headlight; Las Cruces Sun-News; and Silver City Sun-News) and Pennsylvania (Chambersburg Public Opinion; Hanover Evening Sun; Lebanon Daily News; and The York Daily Record).
On September 4, 2015, five of the nation’s largest newspaper chains were reportedly in talks to band together to form a new company to sell ads to national advertisers in 30 major metro markets. The new company would include Gannett Co., Inc., Advanced Publications Inc., Hearst Corp., McClatchy Co., and Tribune Co. The proposed deal is still in early stages however, if the new company is formed, it would likely result in major downsizing of staffs at each of the five companies. The companies would be able to eliminate the redundancy of paying competing national sales staffs. Tribune co. is said to be the driving force behind the proposed deal.
On October 7, 2015, Gannett acquired Journal Media Group at $12 a share for a total of $280 million. It will provide a yearly revenue increase of $450 million and adjusted EBITDA will increase $60 million. Although we found Gannett to be paying more than what we found Journal Media Group to be worth (our discounted cash flow model found the company to be worth $233 million), a premium over the price is expected in acquisitions. This acquisition was financed in part using Gannett’s $500 million revolving credit line discussed on the previous page. The acquisition will result in an additional 8 million unique visitors to their digital business per month bringing the total digital audience per month of Gannett’s products to 100 million visitors per month.
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Gannett Co., Inc. NYSE: GCI Orange Value Fund, LLC.
Industry Overview
Below, we analyze the Publishing industry in the U.S. to illustrate the variety of factors that affect the industry and thus affect Gannett Co., Inc.’s operations.
Supply
The suppliers for raw materials in the newspaper publishing industry tend to be ink manufacturing companies, paper mills and printing companies. Gannett Co., Inc. buys printing ink from a manufacturer and the value of their ink can be found under the Inventories section of their Balance Sheet. In 2014, Gannett Co., Inc. found no problems with sourcing paper for newsprint. Much of Gannett Co., Inc.’s printing is done in-house at Gannett Publishing Services. Gannett Publishing Services provides printing services in 35 U.S. locations and distribution services in all 50 states. Providing an efficient, cost-effective print platform and distribution network has resulted in substantial cost savings and superior operational performance.
Demand
The Publishing industry’s main revenue driver tends to be the advertising industry, newspaper. U.S. advertising revenues have steadily grown since 2009 from $120 billion to $131 billion in 2014. This growth reflects a healthily growing industry which will continue to drive Gannett Co., Inc.’s revenues considering approximately 56% of their total revenues come from advertising. It is important to note though that print advertising expenditure is seeing a decline and has fallen 1.1% since 2010. This fall is likely to continue as consumers switch to digital forms of consumption for news. Although, their focus on growing their online presence in their Publishing business will be well rewarded considering U.S. Digital (Internet) advertising revenues have rapidly grown since 2009 from $9.5 billion to $19.3 billion in 2014.
Key Economic Drivers
The Publishing industry is economically driven largely by Print advertising expenditure, per capita disposable income, corporate profit, the world price of wood pulp and the number of adults between 20 to 64. IBIS World estimates all of these factors are stagnant (between -1% to 1.5%) except for corporate profit which is likely to see 2.3% growth over the next 5 years. From this, we can conclude the paper publishing business as a whole is unlikely to see much growth. However, Gannett Co., Inc.’s pursuit and expansion of digital publishing will be a source of growth in coming years.
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Gannett Co., Inc. NYSE: GCI Orange Value Fund, LLC.
Catalysts & Drivers for Growth
Catalysts
Quarterly cash dividend of $0.16 per common share. On an annual basis, this amounts to a 4.28% dividend yield based on $15 per share. The first cash dividend is payable on October 1, 2015 to shareholders of record on September 4, 2015. The Board of directors approved a $150 million share repurchase program over a three year period. The repurchase program is at management’s discretion whether to be through the open market or in privately negotiated block transactions. Management will repurchase shares taking into account the current share price at the time and other corporate liquidity conditions. Gannett is currently trading at a 34.5% discount based on a $15 share price and 2.5% annual EBITDA growth. The acquisitions of Romanes Media Group and Texas-new Mexico Newspaper Partnership are a catalyst for revenue growth, estimated to create $100 million of additional combined revenue over the next twelve months as of the end of the second quarter of 2015. Gannett’s acquisition of Journal Media Group on October 7, 2015, will provide a yearly revenue increase of $450 million and adjusted EBITDA will increase $60 million.
Near-Term Drivers for Growth
Gannett’s Digital Platform is performing very well with 92 million average monthly unique visitors in Q2 2015. This represents a growth rate of 16 percent. Gannett’s acquisition of Journal Media Group will bring the average monthly unique visitor figure to 100 million per quarter. Digital revenue growth in the UK at Newsquest was 11.5 percent. Revenue has historically improved in the second half of the year. Digital only subscriptions are up about 40 percent year over year. USCP’s All Access Content Subscription Model has achieved activation rates near 64 percent In 2014, mobile page views increased 114 percent and mobile visitors increased 184 percent on a year-over-year basis.
Long-Term Drivers for Growth
Gannett is very well capitalized with zero long term debt. This allows for management to make strategic, accretive acquisitions. This is clearly shown by Gannett’s recent acquisitions of Romanes Media Group by Newsquest in May as well as Texas-New Mexico Newspapers Partnership in June. The company and management is committed to reducing costs. In June, Gannett initiated $57 million of cost reductions including the consolidation of five printing and distribution facilities. Gannett has plans to eliminate an additional $10 million in costs to be effective in the first half of 2016. The board of directors has approved a $150 million share buyback program and is dedicated to return capital to shareholders. After the spin-off, Gannett Co., Inc. will now be able to more effectively pursue its own distinct operating priorities and strategies and will allow Executives and the Board to pursue and focus on unique opportunities After the spin-off, Gannett can now concentrate its financial resources solely on its own operations, providing greater flexibility to invest capital in its business at a time and in a manner appropriate for its distinct strategy and business needs.
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Gannett Co., Inc. NYSE: GCI Orange Value Fund, LLC.
Investment/Value Thesis
Safe
Gannett Co., Inc. is a virtually debt free company. Extremely competent management who are focused on accretive acquisition, partnerships, and returning capital to shareholders via a dividend program as well as a stock repurchase program. Gannett has a portfolio of strong intangible assets and recognizable brands such as USA TODAY, the nation’s number one newspaper. Every month, approximately 73.5 million unique visitors access USA TODAY content and approximately 30 million unique visitors seek out digital media associated with Gannett’s local publications. Newsquest is a digital leader in the U.K. where its network of websites attracts nearly 20 million unique visitors monthly.
Cheap
On July 28, 2015, GCI declared the first-ever quarterly cash dividend of $0.16 per share. The dividend will be payable on October 1, 2015 to shareholders of record on September 4, 2015. Additionally, Gannett’s board of directors has approved a share repurchase program authorizing management to repurchase shares with an aggregate value of up to $150 million over a three-year period. As shown by our Discounted Cash Flow model, Gannett is currently trading at a discount of 35.1 percent with an assumed 2.50 percent growth in EBITDA. We believe Gannett is a prime acquisition target in a quickly consolidating industry because they are trading at a discount compared to their intrinsic value as well as their virtually debt free capital structure. Gannett is a virtually debt free company and based on our Leveraged Buyout analysis, we believe Gannett is a prime candidate for an LBO.
Investment Risks
Macroeconomic Risks
A drop in consumer spending could have an adverse effect on Gannett’s Revenue An increase in the U.S. Dollar could affect the net income of Newsquest Media Group Ltd. In 2014, Newsquest results were translated into U.S. dollars at the average rate of 1.65
Sector Related Risks
Advertising and Circulation revenues continue to drop.
Investment Recommendation
We recommend buying Gannett Co., Inc. at the current price due to its strong fundamentals and appeal as a likely acquisition target. In addition, based on our discounted cash flow analysis, GCI is trading at a 35 percent discount. We also believe that Gannett’s management is extremely competent and shareholder friendly as shown through their dividend program as well as their share repurchase program.
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Gannett Co., Inc. NYSE: GCI Orange Value Fund, LLC.
Financial Valuation
Gannett Co., Inc. Leveraged Buyout Valuation:
Based on our LBO valuation, we believe Gannett is an extremely attractive candidate for a leveraged buyout due to their debt free capital structure as well as their discount to future free cash flows of 35.1 percent seen in our DCF valuation. In our LBO model, we assumed a firm will pay a 25.0 percent control premium over the current share price of $14.18. This would represent an IRR for the firm performing the LBO of 38.3 percent which we feel is extremely attractive.
Gannett Co., Inc. Discounted Cash Flow Valuation:
In our DCF valuation we see that Gannett Co., Inc. is trading at a significant discount to its future free cash flows. We assume that interest rates rise and that cost of equity for Valero increases from 5.4% to 10%. Assuming that we see growth from Gannett in EBITDA of just 2.5% than the stock is still more than 35.1% undervalued.
Gannett Co., Inc. With Zero Growth in EBITDA:
Gannett
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Gannett Co., Inc. NYSE: GCI Orange Value Fund, LLC.
Co., Inc. under 2.5% Growth Assumption:
Gannett Co., Inc. EBITDA Growth to Justify Current Share Price:
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Gannett Co., Inc. NYSE: GCI Orange Value Fund, LLC.
Comparable Analysis
Using a comparative valuation Gannett remains undervalued. Gannett currently trades at 3.70x LTM EV / EBITDA. Gannett trades below the industry average of 6.69x implying that there should be more upside to the stock.
Company Price per (Total Discount / Current EPS P/B Share value per (Premium) Market share) EV/EBIT Value with DA 0% EBITDA Growth
Gannett Co., Inc. $ 14.20 $ 19.73 28.0% 3.70x $ 1.77 1.66x The New York Times $ 11.80 $ 9.67 -22.0% 7.20x $ 0.16 2.35x Company News Corporation $ 12.73 $ 7.85 -62.1% 7.10x $ 0.26 0.63x Meredith Corporation $ 41.98 $ 29.48 -42.4% 8.20x $ 3.07 2.00x Tribune Publishing Company $ 7.98 $ 8.13 1.8% 5.10x $ 3.88 0.76x The McClatchy Company $ 0.94 $ 2.04 53.9% 6.10x $ (0.09) 0.41x Daily Mail and General Trust £ 7.48 £ 3.09 -141.8% 11.70x £ 0.90 10.49x plc Journal Media Group, Inc. $ 7.56 $ 7.84 3.6% 4.40x $ 0.48 0.78x AVERAGE -22.6% 6.69x $ 1.30 2.39x
Company EV/EBITDA Annual Debt/EBITDA Cash/EBITDA EBITDA Dividend Yield Gannett Co., Inc. 3.8x 4.28% 0.00 0.20 359 The New York Times Company 8.3x 1.23% 3.06 1.26 140.1 News Corporation 8.2x 0.00% 0.00 8.04 391 Meredith Corporation 9.0x 3.96% 3.79 0.17 209.5 Tribune Publishing Company 9.8x 5.71% 4.41 15.71 92.6 The McClatchy Company 6.0x 0.00% 9.70 2.16 102.1 Daily Mail and General Trust 11.4x 2.84% 3.14 0.12 370 plc Journal Media Group, Inc. 7.9x 0.33% 0.00 0 -24.1 AVERAGE 8.1x 2.29% 3.0 3.5 205.0
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