Gannet Co (NYSE:GCI) Newspaper Publishing Special Situation 83.5% p.a Return

Transcription

1 Gannet Co (NYSE:GCI) Newspaper Publishing Special Situation 83.5% p.a Return Robert Yin Suresh Kanappan 1 Kaan Tuncel Greg Gabovich

2 Company Name Gannett Co. Inc Gannett is a multi platform news and media company It owns and operates local and national newspapers, and an integrated digital advertising platform GCI reaches 40% of the US digital population more than Netflix, the NYT, the Huffington Post or CBS It was spun out of Tegna in mid-2015 Some of their best newspapers 2 Gannett Co., Inc. Headquarters McLean, VA Employees 18,700 Key Markets USA and UK

3 I. Industry Overview II. Gannett Company III. Where it went wrong: tronc IV. Valuation and Entry Considerations 3

4 I. Industry Overview 4

5 I. Industry Overview Medium term history hasn t been kind Higher competition oin multiple fronts has caused large declines in revenue between local and national outlets for eyeballs with substitutes such as Google ads for advertising This has led to consolidation in the industry in terms of workforce 5

6 I. Industry Overview and asset prices have followed Number of Transactions 2013 Average Dollar/Transaction

7 I. Industry Overview The strategy forward has become clearer: Making distribution more effective Increasing the ease with which ad buyers along the entire spectrum can purchase advertising, cheaper, nationally Making it easier for consumers to purchase their news and content, how they want to consume it Cutting costs Eliminating a lot of redundancies across the industry in terms of overlapping printing shops in the medium term Streamlining the content and news cycle in the longer term 7

8 The strategy is led by a lot smart buyers Jeff Bezos, the founder of Amazon, bought the Washington Post for $250 mm on October 1st, 2013 Acquired multiple assets of the flagship Washington Post masthead Printing facilities Spanish language paper El Tiempo Free distribution Express Daily newspaper Washington Gazette weekly Not the only billionaire who purchased a print paper John Henry, a former trading firm manager worth $2.1 bn purchased the Boston Globe for $70 mm in August 2013 Warren Buffet has purchased more than 28 daily newspapers at an aggregate cost of more than $344 mm since 2011, through Bekshire Hathaway Media Group At appropriate prices and that means at a very low multiple of current earnings we will purchase more papers of the type we like. - Warren Buffet, 2013 BRK AR 8

9 Jeff Bezos s Strategy Overlaps with GCI s Washington Post USA TODAY Network Building up a centralized news team of over 700 journalists, including hiring superstar investigative reporters A centralized investigative reporting network that connects the over 3,000 USA TODAY journalists under central management Increased accountability through using analytics including survey, and reducing reader hostility Increased use of Big Data analytics, including; A-B testing Usability testing Created a technology team of around 200 employees Created a technology team of around 80 at the corporate level, with many more local content coaches Costs are being cut through reduced funding of the pension fund for legacy employees Rationalization of locals with respect to national and sports teams better served by the wider USA TODAY network 9

10 Newspaper assets are even more undervalued than they appear at face Net Operating Loss carry-forwards DTA A majority of newspaper companies have NOL carryforwards despite being profitable These assets create direct discounts to the value of future cash flow equivalent to free cash and so discount the value of the assets acquired Ganett Time Inc As the market has become more competitive the share of newspapers failing has increased over time This was amplified by the high leverage a historically stable business encouraged This presents opportunities for more disciplined buyers to prevail 10 9% - The New York Times Company Meredith Corporation tronc, Inc. The McClatchy Company News Corporation New Media Investment Group Increased share coming from distressed sales DTA % of EV 2000 Public newspapers PE Independents 0% % % % % % - 0% 2014 Family Owned Large Private Newspaper Lender Controlled

11 II. Print Segment 11

12 II. Print Segment The remaining customers are higher quality and stickier Gannett s locally focussed newspapers are more favourable to a demographic over 40 years age The older demographics tend to be more interested in print as a news source whilst at the same time having more disposable income We believe these demographics favour Gannett on both the circulation and advertising side % Population over 40 45% 40.07% 40% 35% Percentage 30% 32.70% 35.24% 28.40% 25% 20% 15% 10% 5% 0% New Media Lee Enterprises McClatchy Gannett Supporting price raises into the future The less price elastic older generation can support this without the strong revenue reaction that would have occurred previously We see a lot of evidence in the market that price raises are the way to go The internet has caused information overload that has prioritised curated and quality content Simon-Kucher & Partners, strategic consultants, emphasises the need to focus on raising prices 12

13 II. Print Segment Gannet has the quality to drive pricing In Understanding Media Economics, Gillian Doyle argues costcutting ineffective in media markets Optimal competitive strategy maximizing revenue through content Gannett continues to invest in journalism Goal to preserve the best principled journalism for years to come Won three Edward R. Morrow awards in 2016 Detroit Free Press: Best Feature Award Milwaukee Journal Sentinel: Best Website Audio Burlington Free Press: Best Reporting in Sports Video Award Winners by Major Outlet

14 II. Print Segment Its competitors are doing the opposite giving it an advantage June, 2016: The Vermont-based Rutland Herald and its sister newspaper the BarreMontpelier Times Argus are eliminating print publications on Monday, Tuesday, and Wednesday July 2016: Starting August 1st, the Idaho Press is eliminating Monday print publications August 2016: Kevin Mowbray, Lee s CEO stated "we have months of cost-cutting left through staff reductions. Afterwards, we will seek to cut costs by reducing the number of newspaper days" Breaking the daily news reading will erode audience loyalty. - Paul Grabowicz, a former Oakland Tribune Reporter and longtime professor at UC Berkeley 14

15 III. Digital Segment 15

16 III. Digital Segment USA Today has the strongest digital presence of the media space M monthly unique visitors 22+ million downloads of mobile app 85M mobile unique visitors, up 20% YoY 100m video views in June % of mobile users are below the age of Ad-Supported (July) Unique Vistors (MM) Paywall 16

17 III. Digital Segment GCI s value from monthly visitors shows room to grow The average time spent by readers on USA Today s website is much higher than most of its competitors Thus, each visitor should be worth more for USA Today Tronc, whose three top newspapers (The Chicago Tribune, LA Times, and Orlando Sentinel) have much lower audience retention times, makes an average of about $3.75 per year per monthly unique visitor. USA Today network made only $3.46 annualized in 2016 due to a monetization lag of new users Gannett has the potential to raise its revenue per user to that of its competitors and back to 2015 levels 17

18 III. Digital Segment ReachLocal is one way to unlock this higher revenue per use All-in-one digital marketing system Website management, search ads, social media ads, retargeting software, lead conversion software, effectiveness tracking software Expertise in ad targeting and increasing lead conversion Skilled management team to lead digital services segment Adds 50% growth to digital revenues, more exposure to digital trends. Increases revenue mix to above 30% from digital sources. 18

19 III. Digital Segment Gravity 750% increase in interaction over a standard ad unit 92% increase in interaction time compared to pushdown ads Over 50% of users watch the video multiple times 19

20 III. Digital Segment Nucleus Marketing provides another lever to push Aver Revenue Joint venture by four leading media companies: Gannett, Hearst, McClatchy, and Tribune Publishing Company Marketing solutions provider that will reach about 168 million unique individuals every month This consortium will reach over 70% of the consumers in the top 30 U.S advertising markets Will turn these four companies into strong competitors against the likes of Facebook and Google. Facebook has about 160 million unique monthly users. 20

21 IV. Accretive M&A 21

22 III. Accretive M&A Acquisition Strategy Acquire local markets to add scale and increase national footprint Gain cross content platforms by using best content across all publications Focus on a Local Sales Expertise through sales persons training programs Integrate a variety of digital platforms to cut costs and offer top of the line content Ability to pay premiums for acquisitions because of cost savings on the back end. Source: Company Presentation 22

23 III. Accretive M&A JMG Acquired JMG in April of 2016 for $280 million Paid 4.6x synergy adjusted 2015 EBITDA, 5.6x PF non-synergy adjusted Acquisition driven by 3 main reasons: Expand portfolio of local markets, bringing the total to 106 Increase digital presence to a combined digital audience of more than 100 million unique domestic visitors every month Opportunity to realize synergies and increase JMG margins closer to the company average. Heavy investment in integration, realizing a lot of costs earlier than planned, not actually bad for the company If GCI can bring JMG margins to their targets in the coming year it would make this deal a great value 23

24 III. Accretive M&A ReachLocal $320 million in annual digital revenue, bought for $4.60 a share ($160 Million EV) Business: Provide digital advertising solutions that optimize campaigns Enabling clients to build leads and convert them into customers Was awarded prestigious 2015 Google Quality Award Revenue Cost of revenue Operating expenses: Selling and marketing Product and technology General and administrative Impairment of Goodwill Restructuring charges Total operating expenses Operating loss D&A Stock-based Compensation Acquisition and Integration Restructuring Charges Impairment of Goodwill Adjusted EBITDA % margin Accelerates digital growth strategy and addresses need to meet changing demands from advertisers Company focus on small and medium sized businesses, in line with GCI s strategy for expansion Ability to sell ReachLocal products abroad Q Q $ 78,709 $ 81,460 $ 382,597 43,851 45, ,409 23,124 6,086 7,878 2,456 39,544 (4,686) 4,533 1, ,456 3, % 22,975 6,063 9, ,807 (2,938) 4,432 1,397 2, , % 126,966 28,414 39,332 27,800 7, ,058 (60,870) 19,681 8, ,546 27,800 (24,958) -6.5%

25 III. Accretive M&A North Jersey Media Acquisition closed in 2016 Q3 with an undisclosed amount (estimated to be around $40 million) Sold by the Borg family who has owned the company since 1930 Strategic Rationale: The Record : the second largest newspaper in the state; more than 120 years old Expected to generate $90 million in revenue A network of 49 community newspaper 778,000 total daily circulation Following this acquisition, GCI has become the largest print media network in New Jersey This acquisition follows closely inline with GCI s plan to focus more on local markets that has sticky user base 25 Gannett has cut more than 100 jobs at NJMG, which used to have 426 employees We estimate the direct cost synergies to be over $10 million

26 III. Accretive M&A North Jersey Media Gannett expects the acquisition to contribute approximately $90 million in annual revenues and will approach approximately corporate-average margins by the end of the first full year of operations. - GCI Press Release, Jul. 6,

27 V. Tronc Optionality 27

28 V. Tronc - Optionality Company Overview: tronc, Inc. (formerly Tribune Publishing) is an American newspaper print and online media publishing company based in Chicago, Illinois. Newspapers: Chicago Tribune, Los Angeles Times, Orlando Sentinel, Sun-Sentinel, The Baltimore Sun 5% of total market share (fourth largest player in the industry Strategic Rationale: troncm The traditional troncx The digital publishing arm publishing arm Creates traditional Uses dedicated content newspaper content, and earns money by selling ads and subscription fees Source: S&P Capital IQ; Company Filings and traditional content to drive viewership and clicks-per-ad 28 Gannett seeks to leverage their USA Today brand as best as possible, Tronc provides a new platform for reaching their goal of making USA Today have the largest digital presence of any publication. Similar digital marketing service business arms can experience tremendous cost synergies leading to improved, sustainable margins

29 V. Tronc - Optionality Divided Shareholder Base Source: Company Presentation 29

30 V. Tronc - Optionality Additional Synergy Opportunity The proposed transaction is expected to deliver substantial synergies of approximately $50 million annually, subject to due diligence, that are anticipated to drive compelling near- and long-term growth and value creation at the combined company. -- Company Press Release, Apr. 25, 2015 Most of the synergies we are estimating are from overhead cut and does not include much of savings from operational improvement. -- Direct Call with Michael Dickerson, Sep Source: Company Presentation 30

31 V. Tronc - Optionality Geographical Overlap Source: Company Presentation 31

32 Gannet s existing print and distribution network 32 NM MA OH SC OH TX CO IA MI FL TX IN MO NV CA KY WI MN AL TN OK FL AZ NY NJ MO FL UT CA WA MO VA DE NC Albuquerque Boston Cleveland Columbia Columbus Dallas Denever Des Moines Detroit Fort Lauderdale Houston Indianapolis Kansas City Las Vegas Los Angeles Louisville Milwauke Minneapolis Mobile Nashville Oklahoma City Orlando Phoenix Rochester Rockaway St. Louis St. Petersburg Salt Lake City San Jose Seattle Springfield Springfield Wilmington Winston-Salem

33 Tronc s Existing print and distribution footprint Illinois CA FL MD CT VA PA 33 Chicago Chicago Chicago Chicago Los Angeles Los Angeles San Diego Broward County Broward County Orlando Orlando Baltimore Annapolis Westminster Middlesex County Newport News Lehigh Valley

34 GCI+TRNC Co s consolidated print and distribution network 34

35 V. Tronc - Optionality Additional Synergy Opportunity Outside printing and production Circulation and distribution Outside services Occupancy Promotion and marketing Q Q Q Q Q Q Q $ 11 $ 12 $ 15 $ 12 $ 11 $ 12 $ Quarterly Savings Circulation & Distribution % haircut Outside Printing and Production Cost % haircut Occupancy Cost % haircut Marketing Cost % haircut Total Potential Synergies, ex. Layoffs Source: Company Presentation % 12 50% % 15 0% 8

36 VI. Valuation 36

37 Comparable Company Analysis Source: Company Presentation 37

38 VI. Valuation 1 Without Tronc Merger Source: Company Presentation 38

39 VI. Valuation 2 With Tronc Merger Source: Company Presentation 39

40 Risks and Possible Hedges Risk Possible Hedge 40

41 Alternative Investment Strategy OPTIONAL: Covered call to hedge catalyst risk We see the largest known-unknown as being uncertain as to when exactly the market will rerate the assets We are pretty sure it will be less than 5 years, but can t be more exact due to it being very complex issues of S&D As remedy for this we recommend initiating this investment using a covered call The covered call lets us give some of our upside in exchange for certain return Pricing Considerations Date 11/22/2016 Stock Price 11.6 Strike Price 12.5 Premium 0.35 Days until expiration % return exercise 10.78% % earned if strike not reached 3.02% Annualized Strike return Profit if strike 52.84% $ 1.25 Annualized if Cost of Stock not exercised if not strike 14.80% $ 11.25