Description

IMPORTANT DISCLOSURES

Current Investment. We currently have a significant long position in the position mentioned in this presentation. Therefore, we and our clients will benefit if GCI’s stock price increases.  We may buy, sell or sell short the securities at any time without notice to anyone. No representation is being made with respect to whether such investment would be profitable.

No Offer or Solicitation; Not Investment Advice. The information in this presentation is not an offer to sell or the solicitation of any offer to buy any securities, or an offer to provide investment advice or a solicitation of such an offer. This information is not investment advice, and no one should rely on the information contained in this presentation to make any investment decision.

Statements of Opinion, No Duty to Update. This document expresses our opinions with respect to GCI as of the date specified, which opinions are based upon, without limitation, field research and inferences and deductions through our due diligence and analytical processes. To our knowledge, the information contained herein is current as of the date of this document, and has been obtained from sources that we believe to be reliable. However, such information is presented “as is,” without warranty of any kind, whether express or implied. The presentation contains and is based in information (including information from third party sources) that we believe to be correct, but it has not verified that information and does not represent that such information is accurate or complete. We make no representation, express or implied, as to the accuracy, timeliness or completeness of any such information or with regard to the results to be obtained from its use.  The delivery of this document does not imply that the information contained herein is accurate or complete at any time subsequent to the date of this document.  We have no continuing obligation to revise or update anything in this document for any reason or to notify you if any information contained herein has changed or is not accurate or complete. We accept no responsibility, and shall not be liable, for any loss arising from or related to anything in this document, any use hereof or any reliance hereon. We prepared this presentation. It was not compiled, reviewed or audited by any independent party.

All statements herein are our opinions and are not statements of fact. Further, all such opinions, estimates and projections are speculative and based on current beliefs and assumptions that are subject to change at any time and for any reason without notice. You should expect that some or all such beliefs and assumptions will not materialize or will differ materially and adversely from any expressed or implied. Use of our research is at your own risk.  We are not responsible for any trading or other losses that you believe may have been caused by your reliance on this document (or any information contained herein).

Forward-looking Statements. Certain information contained in this document constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various assumptions, risks and uncertainties, actual events, results or the actual performance of Gannett Co. may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained in document may be relied upon as a guarantee, promise, assurance or a representation as to the future.

Many statements in this presentation are our subjective views, and other reasonable persons may have differing views. Unless it is unequivocally a statement of fact, any statement herein (even if not specifically qualified as an opinion (i.e., with language such as “in the opinion of” or “we believe that”)) should nevertheless be understood and interpreted as an opinion with which reasonable persons may disagree, and not as a material statement of fact that can be clearly substantiated. 

Quintessential Value Investment – low multiple, high FCF yield, and multiple rerating catalysts

Gannett (“GCI”) offers an exciting combination of deep value, business transformation and uncorrelated, event-driven upside:

1. Cheap valuation – 5.3x EV/EBITDA and 27% FCF yield on ‘25 numbers for a business transformation story with strong management and improving profitability

2. Digital transformation is well underway with proof of concept, including 1) growing digital subs, 2) growing ad revenues and affiliate deals and 3) internal systems investments paying off

3. Ongoing debt paydown from asset sales and internal FCF should unlock a global refinancing of the capital structure, as hinted by debt tranches trading near par

4. Litigation against Google for anti-competitive behavior has merit and potentially unlocks a windfall. Additionally, AI content-copyright issues could lead to litigation claims and forward-looking licensing deals.  

We target 200 – 300% upside over the next 1-2 years upon reasonable multiple rerating without giving credit for shareholder friendly capital allocation (i.e. buybacks). 

GCI offers a combination of deep value, business transformation and uncorrelated, event-driven upside

1. GCI screens cheap on traditional metrics with an emphasis on FCF generation

• GCI trades at 5.3x EV/EBITDA on ’25 street consensus estimates

• We estimate at least $149mm of FCF before asset sales in ’25 (27% FCF yield)

• Management has guided for FCF to grow at a 40%+ CAGR from 2023 to 2026 ($57mm => $155mm)

2. Digital transformation is well underway with proof of concept, yet flies under the radar

• Gannett is successfully mitigating print declines by growing digital (both subscription and advertising revs)

• Topline will be down YoY in 2024; but inflecting to organic growth on a run-rate basis by YE’24

• Combined with excellent bottom-line execution from cost cuts – EBITDA growing consistently from 2022

3. Equity rerate amplified by upcoming balance sheet developments

• GCI is levered 3.6x net, but the junior 1.7x turns are in the form of a convert (trading in the high 90s)

• Company is targeting a global debt refi this year before a potential favorable Google litigation development

• GCI stock should rerate substantially given 1) dilution overhang removed, and 2) maturities pushed out

4. Litigation Optionality

• Google Ad Tech Abuse litigation offers potential windfall that could be worth the market cap

• DOJ and 34 states filed lawsuits against Google for unlawful monopolization of online advertising

• GCI is the largest news publisher in the US and has its own lawsuit against Google for $1.7bn of damages

• GCI’s counsel (Kellogg Hansen) took the case on contingency – compelling signal & no cost to GCI

• AI copyright disputes could provide additional upside in the form of litigation claims (damages) and/or licensing deals 

We calculate 200-300% upside based on above catalysts, without assuming any accretion from shareholder friendly actions. That said, the FCF profile and potential litigation proceeds should allow for capital return in the not-too-distant future, which could significantly increase forward returns. 

Undeservedly Low Valuation: GCI is an exception in an otherwise secularly declining industry 

We all know that print media – in this case, newspaper businesses – trade at deservedly low multiples given rapid declines in legacy print subscriptions and advertising revenues. This is not a novel observation. The world is going digital, multi-medium, video, social, yadda yadda. We get it.  

And yet. Folks who have been paying attention have noticed that the New York Times (“NYT”) trades at 17x ‘24E EBITDA. If you travel back in time, NYT was not always a market darling; to the contrary, the stock traded in the more typical 5-8x EBITDA band until its re-rating journey took hold in 2017 or so. Over time, NYT has become a case study for how a scaled player with broad brand awareness can successfully execute a transformation to digital. It’s not make-believe or impossible. The NYT story demonstrates that the bid for news, commentary, gossip, and sports has remained steady. What has changed is the required delivery, as the modern audience wants a combination of print with audio companions (podcasts, etc.) and video. With the right mousetrap, timely content generation still has a role to play.

Enter Gannett. GCI has a crown jewel, USA Today, regional trophy assets (e.g. Palm Beach Post), and all sorts of smaller publications around the country. GCI remains a show-me story, but evidence has been mounting that the transition is playing out. We have seen notable improvements in digital KPIs, moderation in overall topline revenue declines, and affiliate partnership deals getting signed. For investors, we believe this is a key moment to take a look given that the company has explicitly guided to inflecting consolidated revenue to positive year-over-year growth at the end of this year. Upon achieving run-rate organic growth by 4Q’24 and with actual prints in 2025, our expectation is that the market should rapidly re-rate the equity. Given respective scales, we expect GCI to trade well below NYT’s multiple – we don’t want to be unrealistic – but even a range of 7-9x leads to a multi-bagger outcome from current levels.

Organic Revenue Inflection: Digital revenue growth expected to more than offset print declines by 4Q’24

This is a classic story of crossing lines (a large-but-declining segment shrinks while a small-but-growing area grows until, eventually, the negative impact from the bad is more than offset by the positive impact of the good). For GCI, total revenue declines are moderating sequentially as the legacy print business becomes a smaller piece of the pie. Meanwhile, digital revenues have had solid sequential growth throughout 2023 and are expected to ramp in 2024. Digital subscription revenues are growing high teens / low 20s, supported by ARPU upside and growth in subs, while advertising and services revenues enjoy upside from affiliate partnerships growing rapidly off a small base.

On this last point, when it comes to affiliate and content partnerships, GCI rents out platform eyeballs for 3rd party advertisers to monetize. As you can imagine, this involves little to no cost for GCI (95%+ incremental margins). We expect $20mm revenue in 2024 with minimum guarantees and management hopes to scale this to a $150-200mm topline business within 5 years. 

Refinancing Catalyst: Balance sheet repair and refinancing optionality ignored by the market 

GCI is focused on refinancing the capital structure in the near term. There are several key benefits:

• Push out maturities and create a longer runway to continue executing on the digital transition

• Resolve the dilution overhang from the converts (convertible into ~97mm shares with a $5.00/sh. strike)

• Potentially improve terms – including rate, covenants, and restricted payments capacity

We believe that the capital structure is easily refinanceable given debt paydown accelerated by ongoing asset sales, inflecting FCF generation (40% FCF CAGR guided by management over 2023 – 2026), an additional equity cushion from recent re-rating ($2.3 –> $3.8), and debt tranches all trading near par. We think it makes sense to work on the capital stack before the potentially lucrative litigation developments that might start as soon as September. We especially believe the company would aim to work something out on the convert, which has a $5 strike. 

Free call options (ad tech abuse & AI): Gannett’s litigation opportunities could be worth $1bn+

Google’s Alleged Ad Tech Abuse: Google has enjoyed a stranglehold on the digital advertising ecosystem ever since it acquired DoubleClick in 2007. On 1/23/23, the DOJ filed a civil antitrust suit against Google alleging monopolistic ad tech abuse. A few points are worth calling out. First, this is not the Google vs. DOJ search case. That is separate and unrelated. Second, the DOJ is not acting alone: 17 state AGs signed on while Texas brought its own case and has been joined by 16 additional states. In total, it is the DOJ + 34 states all going after Google. Third, the case is proceeding in the “Rocket Docket” of Eastern District of Virginia with trial scheduled to start 9/9/24. Litigation can drag forever, so we find this timing relevant.

Gannett’s potential upside is not rooted directly in the DOJ/state case, though it is related. On 6/20/23, Gannett filed suit against Google alleging abusive behavior in digital advertising. Notably, the law firm of Kellogg, Hansen decided to take the case entirely on contingency, meaning GCI is not paying a cent while this proceeds (i.e., this is a truly “free” call option). Though estimating the value to GCI is difficult, we believe damages could be in the $1.7bn range and would be subject to automatic trebling ($5.1bn). From Google’s perspective the money is trivial, given a current cash balance of more than $100bn and $29bn CFO in Q1’24. What is more impactful, for Google, is keeping its company together. Therefore, if they find a path forward with the government, we believe settlement talks with Gannett would occur in short order. Any reasonable figure – say, $500mm – would be material given GCI’s market cap.

AI Copyright Infringement. Artificial Intelligence (“AI”) algorithms require massive amounts of data for training/improvement. Moreover,  original content is invaluable to this effort. Lucky for Gannett, creating reams of content is what it has been doing for decades. 

Ever since the recent AI explosion, accusations of AI developers using content without permission have abounded. This yields two potentially lucrative angles for Gannett. With a backward-looking lens, GCI can seek damages. As one example, consider the NY Times lawsuit filed in December 2023 against OpenAI and Microsoft for copyright infringement. NYT noted “billions” in damages. Looking forward, GCI can aim to strike licensing deals to capitalize on this new source of content demand. As an example of what this might look like, consider the deal News Corp signed last month (May 2024) with OpenAI for 5 years and a total value of $250mm. Between damages and go-forward deals, GCI could unlock another $500mm+ of value over time from the AI gold rush. 

Putting it together, we see a few shots on goal that cost the company next-to-nothing and could be worth multiples the market cap. It is rare to have something be literally free and yet potentially lucrative. 

Risks & Mitigants

Risk (1): Aren’t newspapers going away?

O Answer: sure, print is secularly challenged. However, two points. One, GCI has a plan to offset with digital transition. Two, the tail is longer and fatter than investors recognize. GCI has 1mm+ paying for print, 60+ age, 2.3 people reading each purchased paper, and they won’t all die tomorrow.

Risk (2): Isn’t the leverage profile dangerous?

O Answer: optical leverage is high but the deleveraging path is accelerated by non-core asset sales and underlying FCF generation. GCI management. has outperformed historical deleveraging targets and we expect the trend to continue. Any positive outcome from Google litigation will cause a step-function decrease in leverage

Risk (3): What happens if the Digital transition fails?

O Answer: the low trading multiple of GCI stock prices in market skepticism on upcoming digital inflection despite solid execution to date in growing digital subscription revenues. A path to consolidated organic growth is not guaranteed, but we believe the risk/reward profile here to be excellent

Risk (4): What if Google prevails in the lawsuit?

O Answer: GCI stock is certainly not pricing in a positive outcome with respect to Google litigation. We like taking advantage of market mispricing given: 1) our opinion of the litigation having significant merit and 2) the legal counsel putting their money where their mouth is by taking the case on contingency

Risk (5): Stock illiquidity?

O Answer: Gannett equity trades ~$4mm per day and carries some illiquidity risk. We believe the upside profile justifies the risk and have sized the position appropriately. That said, we expect liquidity to improve substantially (perhaps $15mm+ ADV context) upon hitting 2025 estimates 

Catalyst

Revenue inflection. Asset sales. Debt Paydown. Global Refinancing. Google Ad Tech Abuse case. AI copyright cases and potential deals.