Thursday, June 28, 2012

Stock | In News Corp. split, what's GCI's next move? Deal announced today adds pressure on Martore

Since last July, Gannett has announced two big dividend increases, set jaw-dropping goals for digital initiatives like USA Today Sports Media Group, and launched paywalls that are already producing results.

Wall Street's reaction: Until early this week, GCI's stock had climbed only 2% from last summer.

Instead, it took News Corp. splitting its entertainment and publishing businesses to send GCI soaring: Shares are up more than 9% over the past two days alone, when reports first emerged about internal discussions at the Rupert Murdoch-controlled conglomerate. NWS announced the deal moments ago.

Now, the question becomes: What can CEO Gracia Martore do to unlock any hidden value and keep GCI shares up, once the NWS-driven hallo effect fades across the rest of the industry?

At NWS, publishing, including its flagship Wall Street Journal, generates lower profit margins than its TV and entertainment portfolio, best known for Fox News and 20th Century Fox studios.

Separating the two would presumably hand the entertainment division more valuable shares to make more deals. But it would leave the publishing side weakened without entertainment to bolster its results. "That has been the perception,'' an unidentified WSJ reporter told The New York Times for a story today. "You’re part of something a whole lot bigger so you’re going to be O.K."

A glance at GCI's most recent quarterly report shows a similar profit divide.

The publishing segment, which includes USA Today and about 80 U.S. community papers, generated 72% of the company's $1.2 billion in overall first-quarter revenue. But it accounted for just 46% of the $136 million in operating income.

Broadcasting leads
The 23-station broadcasting division, on the other hand, produced only 15% of revenue, yet fully 54% of income. This year, especially, will be a gangbuster one for broadcasting because of political advertising during the national elections and the summer Olympics on its 12 NBC affiliates.

Only last week, the WSJ's influential "Heard on the Street" column noted that, despite the past seven especially difficult years, GCI's profit margins were still 18.3% in 2011. But, the report said, that's a far cry from 29.6% in 2005.

"Analysts are skeptical that small-market customers will pay for content," the WSJ says, although GCI "has expressed early optimism about its paywall rollout, which it expects to extend to all newspapers by year-end."

And despite financier Warren Buffett's recent spate of newspaper buying, there's little on the horizon to show GCI and other publishers can reverse plunging ad sales.

Wall Street has bid up virtually all newspaper publisher shares this week amid the NWS speculation, suggesting investors may be anticipating an industry-wide restructuring. GCI closed yesterday at $14.41, up 2.6%.

Stay-whole strategy
There's been no hint that Corporate will pursue any strategy as aggressive as that at NWS. Throughout the past years of industry turmoil, Corporate has rebuffed Wall Street's calls to, for example, sell the U.K. newspaper division Newsquest.

Instead, it has taken the more conservative path: keeping the company whole while pursuing investments in digital businesses such as online coupon site DealChicken and the Sports Media Group. It's now launching paywalls across the U.S. newspapers that it forecasts will generate an additional $100 million in profits starting next year.

Wall Street, however, has greeted those initiatives with a yawn. Corporate's presentation to media stock analysts a week ago revealed details on existing projects, but nothing dramatically new.

The board at NWS announced its approval of the split this morning. Completing the deal will take about a year, the WSJ says.

During those 12 months, what will Martore and the rest of GCI's board of directors do?


  1. This company wont do a spinoff because on division is on a no growth trajectory and the other is too volatile to stand by itself.

    Sure, broadcast will get a nice election/olympics bump this year.
    But unlike News Corp., it has no division producing money generating films and TV programming. News Corp. is also 20 times the size of Gannett. Its spinoff is about unlocking value thats actually there.

  2. 8:17 said it. News Corp is breaking-up to unlock actual value while GCI would break-up to further rape the company and cut costs.

  3. Jim asks: "During those 12 months, what will Martore and the rest of GCI's board of directors do?"

    I answer: "Continue to drain tangible assets from the company, divert the temporary profits to bloated executive compensation packages, and seek a buyer so they can deploy those golden parachutes stuffed in their back pockets." Evidence suggests that that's what they are doing now.

    Nothing this management team has done in the last several years has indicated to me that anyone there has any interest in continuing to operate Gannett as a viable, independent, and respected news organization. They have sold off anything they could - presses, real estate, etc. - and offloaded all but a minimum of staff, while at the same time expanding the ranks of SVP's. They have alienated their biggest source of income - news consumers - by making repeated decisions which have reduced the relevancy of their core product and have further obstructed access to it by the use of outrageous price increases, the facebook commentary platform(which can be monetized, btw), and the roll out of non-functional paywall architecture which only works to impede readers with no knowledge of technology whatsoever.

    Are any of these moves designed to strengthen and improve the delivery of news? I think not.

    I hereby appoint myself as SVP of Common Sense at Gannett. On my first day I am going to hire back solid reporters and editors, negotiate content contracts with companies already in the business of electronic information delivery (Google, Amazon, Comcast, etc.) so I have viable electronic distribution channels, and bring some long-term vision back into management. Oh, and I pronounce that most of the rest of those SVP's get to go back to Cannes. And stay there a very long time where they can do no further harm.

  4. Nice article, Jim — appreciate the analytical nature.

  5. Actually, 9:20, in all respect, anybody who actually thinks that Gannett's "biggest source of income" is or ever was "news consumers", should be appointed SVP of Cluelessness.

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  8. You need the readers to sell the advertising. Lower the price of the e-versions. This stuff is worth a few bucks a month and the physical paper is worth maybe an extra $ 10.00 per month. Readers always knew that the delivery added expense and they will pay for it. What they won't pay for is overpriced content delivered electronically. I would pay about $ 2 per month for the content of my local paper. I would pay about $10.00 per month for someone to deliver the physical paper. The pricing is the problem with this electronic content. You guys want all the revenue, but the customer wants the benefit of the cost savings from e-delivery. The customer understands fixed e-delivery costs versus variable physical delivery costs. The content in my local paper should be free, it appears to be written, edited, and researched by college students and folks with those skill sets. Low grade content should be free via e-delivery. High quality content is worth more, up to maybe $25 per month.

  9. "I would pay about $2 per month for the content of my local paper. I would pay about $10.00 per month for someone to deliver the physical paper."

    Remind me not to put you in charge of my 401(k).

    Seriously, what conceivable rational basis is there for that statement? That's a lot of fishwrap.

  10. 10:22 To repeat something I've written many times before: I don't care about the personal lives of Gannett executives -- unless they impact their work lives in ways that can be documented.

    That's why I removed your comment.


Jim says: "Proceed with caution; this is a free-for-all comment zone. I try to correct or clarify incorrect information. But I can't catch everything. Please keep your posts focused on Gannett and media-related subjects. Note that I occasionally review comments in advance, to reject inappropriate ones. And I ignore hostile posters, and recommend you do, too."

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