Description
Boring is beautiful…
Background
Gannett Corporation Inc, is a recent spin off in a beaten up industry, 5% dividend, 10% buyback, steady management, and Icahn as a 13-D holder.
Spunoff at the beginning of the year, GCI is clearly the ugly stepchild with TGNA trading at close to twice its EV/ EBITDA multiple. Gannett was originally the name combined entity, and stayed with the spinoff.
After the spinoff TGNA is now comprised of the broadcasting and digital businesses (including cars.com and careerbuilder.com), while GCI is comprised of its publishing businesses with its flagship, USA Today.
Post-spin, GCI was handed a capable management team, and a clean balance sheet which now has net cash of $63 MM, and a P/BV of 1.4X.
Armed with an undrawn $500 MM revolver, the Company is targeting acquisitions in markets with populations of 1-3 million. Given a lack of history of having success in this arena, this potentially doubles as a concern. That being said, there are significant cost synergies in a roll up. Top line synergies are also important with the potential to cross sell between regional and national publications.
Management
Pease refer to the first line of the report…
Robert Dicky, 58, is a company man and was head of the US Newspaper division under the combined entity. (Comp: $895K/yr and 125% bonus potential, 300% LT incentive comp)
Alison Engel, 44, has spent the last 20 years largely as the CFO of AHC and at PWC beforehand. (Comp: $480K/yr and 75% bonus potential, 150% LT incentive comp)
As you might expect of a company this size, the team is also comprised of other executives including strategy, marketing, technology, etc.
This management team is not exactly your dream team, but what it appears to be is a team that is incentivized to listen to shareholders with an improved corporate governance post-Icahn.
Market / Valuation
With advertising making up 65% of revenues and circulation with the balance, the waning advertising market among newspapers is of concern. Kantar Media reported a 16% decline in local newspaper media and a 13.5% decline in national newspaper media for the 1st quarter of 2015 vs. 2014 on broadly lower spending among auto, financial, retail and telecom marketers. Though we don’t have industry metrics on Q2, GCI seems to be weathering the downturn with a decline in revenues (before impact of FX and exited business) of 6%.
With peers like LEE and NYT trading at close to twice its EV / EBITDA and at a fraction of the dividend yield, we like the margin of safety that GCI presents.
If you award GCI a run rate based on the MRQ, the stock trades at approximately 3.5X EV / EBITDA. We expect the next few quarters based on management’s outlook. Though Gannett doesn’t provide guidance, the below may be helpful from Dickey (CEO) on the last call:
While we expect revenue trends to improve in the back half of the year, third quarter tends to be a slower quarter while the fourth quarter will be our best quarter of the year. We expect EBITDA margins to improve modestly, as well in the second half of the year
http://www.kantarmedia.com/sites/kantarmedia.com/files/press/kantar_media_q1_2015_us_ad_spend.pdf
https://gannett.investorhq.businesswire.com/sites/gannett.investorhq.businesswire.com/files/doc_library/file/2-New_Gannett_FINAL_presentation.pdf
http://www.sec.gov/Archives/edgar/data/1635718/000104746915005403/a2224986zex-99_1.htm
Potential Risks
Continuing decline in advertising
Somewhat unproven management
Potential imprudent acquisition strategy
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Quarterly performance
Acquisition strategy