McLEAN, VA. and DALLAS—Shares of Gannett (NYSE: GCI) Thursday morning jumped nearly 25 percent on the news that the company struck a deal to buy Belo (NYSE: BLC) for $1.5 billion. Further assumption of debt makes the deal worth $2.2 billion, nearly doubles Gannett’s TV station portfolio and alters its core business.
“With the addition of BLC, GCI becomes more of a broadcaster than a newspaper company,” Wells Fargo analysts said. “By nearly doubling its broadcast assets and adding BLC’s $232 million in EBITDA, GCI’s broadcasting EBITDA as a percentage of total pro forma EBITDA jumps to 52 percent from 35 percent, while increasing its margin by approximately 400 basis points to 24.3 percent.”
The cash portion of the transaction, approved by both boards, calls for Gannett to pay Belo shareholders $13.75 a share—a 28 percent premium on Wednesday’s closing price. After closing at less than $20 Wednesday, Gannett shot up to $25.50 at today’s opening bell before settling down to around $24.75.
The combination of the two broadcasters ties Gannett as the fourth largest TV station group in the country with 43 stations, 21 of them in the top 25 markets. The group will be led by GCI TV chief, Dave Lougee. Baltimore-based Sinclair is now No. 1 with 140 TV stations, amassed through multiple acquisitions over the last two years. ION Media of West Palm Beach, Fla., is next with 60 TV stations. Next is Nexstar of Irving, Texas, with 55 TV stations. LIN Media also has 43 TV stations.
Gannett will have to craft shared services agreements in five markets where newspaper and/or TV stations overlap, including Phoenix, St. Louis, Portland, Ore., Louisville, Ky., and Tucson, Ariz. The owner of USA Today and multiple other newspapers, Gannett said the Belo buy will generate about $175 million in synergistic savings within three years of closing. The Wells Fargo team said $75 million of that would be realized within the first 12 months.
“A big chunk,” they said, “will come from retrans, as GCI has after-acquired clauses that allow for an immediate step-up in rates. Additional synergies will come from the removal of duplicative costs, and scaling up GCI’s digital marketing services. We would also note that while GCI does not currently pay reverse comp, BLC does and will continue to do so.”
Free cash flow accretive to non-GAAP earnings per share is projected at 50 cents within the first year. The transaction implicates a 9.4x average 2011-12 EBITDA before synergies, and a 5.4x after. Gannett said it will continue its share buyback program, and has replaced its existing, remaining authorization with a new $300 million authorization expected to be used over a two-year period. It also said that between its own balance sheet and Belo’s cash flow, it expects to pay down the debt from the transaction “promptly.”
“Looking at the GCI/BLC culture, market sizes and portfolios, we view this transaction as a ‘perfect’ fit,” the Wells Fargo team said. “We have been asked by investors if other bidders for BLC might emerge, and given the natural strategic fit, our response is ‘no.’”
The transaction is expected to close by the end of 2013, subject to antitrust and Federal Communications Commission approval, plus a two-thirds vote of Belo shareholders.
TV Spy obtained a memo to employees regarding the acquisition.
image byPatrick Neil
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