Gannett Co., Inc. (NYSE:GCI) is aiming to alleviate slowing revenue comparisons in its massive newspaper business through the buyout of a television station owner. The deal to acquire Belo Corp. (NYSE:BLC) for $13.75 a share would increase its station total to 43 from 23. It would also provide a boost to the operating margin and probably put Gannett back on track for earnings growth. Shares of both companies soared subsequent to the announcement in excess of 27%, signaling that investors view the deal very favorably.
Indeed, when was the last time the shares of an acquirer gained such substantial ground on news of a deal. Gannett Co., Inc. (NYSE:GCI) shares had been trading just below $20, just 13 times trailing 12 month earnings. Shareholders were looking for a catalyst to stop the stock from floundering. The decision to utilize cash for this purpose, in lieu of debt reduction, share repurchases, or a dividend was reason enough to bid up the stock. Belo Corp. (NYSE:BLC)’s takeover price of more than $1.4 billion amounts to a 28% premium to its pre-announcement value. It is expected to close by the end of this year, pending regulatory and shareholder approvals.
Gannett’s current station ownership
As of now, Gannett Co., Inc. (NYSE:GCI) owns 23 stations in 19 U.S. markets, broadcasting locally-oriented programming including news, entertainment, and advertising. Its Broadcasting segment was its fastest growing in 2012, with segment income increasing more than 45%. The company takes pride in its news, both in covering major new events and offering local coverage. Its 12 NBC affiliates are the outlet for numerous highly-watched broadcasts throughout the year.
That said, broadcasting is only a small portion of Gannett Co., Inc. (NYSE:GCI)’s business, delivering 17% of overall revenue in 2012. To its benefit, advertising time has garnered heightened demand, thanks to spending budget hikes from the important automotive sector, as well as retail and telecom sectors.
What Belo brings to the table
Belo’s 20 TV stations include four NBC affiliates, along with four and five ABC and CBS stations respectively. Television stations, by nature, bring in extensive cash flows that can be reinvested in operations or returned to shareholders. Profit growth, if realized at all, may well be modest on an organic basis, but further station purchases would support earnings upside.
Income gains are limited by the continued ceding of market share to cable networks, along with digital forms of media, while ad demand jumps every other year on midterm and presidential election advertising. Nevertheless, TV stations are worth owning based on their wide operating margins and cash flows, with programming and salary expenses staying relatively flat year over year.
A comparison
Sinclair Broadcast Group, Inc. (NASDAQ:SBGI) is the largest company solely focused on broadcast station ownership, having 85 properties as of March 31. Incidentally, Sinclair shares, already a high flier this year, climbed nearly 13% on the Belo news. The expansion of its station count, consisting of 20 agreements during 2012, plus its recent deal to buy three more stations from TTBG and the purchase of four from Cox Media Group, would bring its total stations to 92.
Sinclair Broadcast Group, Inc. (NASDAQ:SBGI)’s largest affiliate contingency is FOX with 24 at the end of March. It also owns a sizable number of MyNetworkTV and CW stations. Although these three station groups combined have only shown modest ad sales increases of late, sales are on the rise. However, expense hikes are likely to hurt profits versus 2012 results this year, partly a reflection of this being a cyclically slow year.
The run up in Sinclair’s share price has reduced its appeal. Still, seeing how the station owner is building its asset base, it is largely justified.
A Fool’s take
Gannett Co., Inc. (NYSE:GCI)’s pending purchase of Belo should have positive ramifications with regard to its profitability and cash flows. Traditional publishing revenue and earnings are retreating, while digital businesses take hold. As of now, Gannett’s digital business is about a third the size of its publishing unit in terms of revenue, with modest margins. The Belo assets should benefit from Gannett’s resources, while it continues to grow its digital operations as well. The station ownership companies on their own are limited in price appreciation potential, but offer good dividend yields.
Damon Churchwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Damon is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article How Gannett’s Investment in TV Stations Will Payoff originally appeared on Fool.com and is written by Damon Churchwell.
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