First Gannett Co., Inc. (NYSE:GCI) did it. Now Tribune is doing it. Pretty soon, the entire media landscape will be different. That’s a good thing for these former newspaper companies.
The internet killed the newspaper star
While the company has tried to change with the digital times, it hasn’t succeeded. For example, The Times sold About.com to internet scavenger IAC/InterActiveCorp (NASDAQ:IACI) in 2012 for over $100 million less than it paid. Now the company is circling its wagons around the Times brand, looking to sell off The Boston Globe and associated assets and rebranding The International Harold Tribune with The New York Times Company (NYSE:NYT) name.
This is a risky strategy for a company who’s top line has been falling since 2005. Earnings, while in positive territory last year, have bounced between black and red ink over the past seven or eight years. Aggressive turnaround types might like to take a look, but only because of the strength of the Times brand. If the company’s image falters, there’s little reason to like the shares.
A different path
While The New York Times Company (NYSE:NYT) has pared itself down to its core newspaper business, Gannett Co., Inc. (NYSE:GCI) has been looking to pivot to a more modern medium—television. The company has experience in the space, so the move makes complete sense.
The big transaction was its recently announced $1.5 billion deal to buy Belo Corp (NYSE:BLC), bringing twenty new television stations into the fold. If the transaction is consummated, it will nearly double Gannett Co., Inc. (NYSE:GCI)’s station count. More importantly, it will diminish the company’s reliance on newspapers.
When a company makes a big acquisition, its shares normally fall. That didn’t happen this time, as Gannett Co., Inc. (NYSE:GCI)’s shares jumped 34% on the news. Clearly the market likes the television pivot. The all-cash deal means that Belo Corp (NYSE:BLC) shareholders should probably lock in gains now. There’s little reason to stick around and risk the deal falling apart.
Out of the ashes
The Tribune Company, which only recently exited from bankruptcy, is following both The Times and Gannett Co., Inc. (NYSE:GCI)’s leads. The company has announced that it is shopping its newspapers so it can focus on more modern media formats. And, now, it has announced a $2.7 billion deal to buy 19 television stations from a private equity firm.
This move will bring the company’s station count to 42. This pair of corporate actions clearly shows that a revitalized Tribune is going to push hard to get its ship heading in the right direction. Like Gannett Co., Inc. (NYSE:GCI), it has plenty of television experience, so the purchase makes strategic sense.
The big benefit for Gannett and Tribune will be expansion in a still desirable entertainment medium. The moves will give both companies more clout to negotiate higher advertising rates and reduced content costs. Both will be key factors going forward. And, although television is shifting toward the Internet, broadcasting hasn’t been devastated in the same way that newspapers have.
In fact, for now, it appears that broadcast TV is relatively safe. The business is very profitable for both the distributors and content creators, and neither wants to rock the boat by getting in bed with an Internet TV “station.” That should give these companies time to create their own online distribution platforms. Although the current dynamics will change eventually, the power that television players have is still material and should continue to provide protection from outsiders unwilling to work within older business models.
Similar stories, different risks
Gannett Co., Inc. (NYSE:GCI) has done something that most other paper companies haven’t been able to do, it has remained profitable in nine out of the last ten years. In fact, the company earned an impressive $1.80 or so a share in 2012. While its paper business is clearly in decline, Gannett is making the right moves to keep itself viable and, in fact, growing.
A price to earnings ratio of about 14 and share price that is still well off its highs makes this a good option for turnaround investors. The fact that it still makes plenty of money adds a notable level of safety. An around 3% dividend yield backed by a disbursement that’s been increasing again is another nice sign.
Tribune, meanwhile, is a more risky turnaround story. Although a trip through bankruptcy has cleaned up its balance sheet and given it a new lease on life, it still had $10 billion in debt and negative shareholders equity at the end of the first quarter. The TV deal will just add more debt. It looks like management is making the right moves, but only aggressive investors should consider the shares as Tribune continues its renewal process outside the protection of the bankruptcy courts.
The article Reshaping the Media Giants originally appeared on Fool.com and is written by Reuben Brewer.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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