Fault lines

5 Aug 2014 By Jeffrey Goldfarb

Gannett is redefining the digital divide. The media conglomerate unveiled plans on Tuesday to spin off newspapers, including USA Today, to showcase the value of its broadcasting operations. At the same time, the company will take control of the parent of Cars.com, paying $1.8 billion for the 73 percent it doesn’t already own. Instead of using that online asset to buffer the weaker half, however, Gannett is forcing print to stand on its own.

The breakup makes sense, following in the footsteps of Time Warner, News Corp, Tribune and most recently Journal Communications and E.W. Scripps, which last week agreed to combine their TV businesses and carve out newspapers. Based on a Breakingviews analysis in June, Gannett seemed to be missing out on up to $3 billion of value, 50 percent more than its market capitalization at the time, because of the print burden. Since then, the shares have gained 18 percent, compared with a flat S&P 500 Index.

The structure of the breakup is reasonable in at least one way. It shifts debt to broadcasting, leaving the newspapers with almost none. Most of the obligations were incurred to buy TV stations and Cars.com parent company Classified Ventures. The arrangement contrasts starkly with how Time Warner loaded $1.3 billion of debt on magazine publisher Time Inc, which slashed its revenue forecast on Tuesday in its first standalone earnings. Tribune’s publishing arm was spun off with $350 million in debt.

Gannett’s newspapers could have been set free with even more help, though. When Rupert Murdoch, for example, separated his beloved Wall Street Journal, the Sun and other publications, he gave them an Australian digital real-estate advertising business. The fast-growing operation, while garnering less attention globally, accounts for a significant portion of News Corp’s $10.3 billion valuation.

Keeping high-growth, high-margin businesses together seems to be Gannett’s thinking on Cars.com and its CareerBuilder.com job site. The company can also reasonably argue that TV stations rely on auto dealer relationships as much as newspapers do. Yet broadcasters typically fetch about 10 times expected EBITDA for the next 12 months. Standalone U.S. publishers, such as McClatchy, trade on a multiple of only about seven times. News Corp, however, commands a premium to peers. Therein lies the beneficial digital divide.


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