Thursday, June 13, 2013

Analysis: GCI may have bought self 3-5 more years

From industry consultant Ken Doctor's analysis today of Gannett's $2.2 billion deal for Belo Corp.:

Broadcast advertising has been less disrupted than newspapers, but faces heightened digital competition over the next several years. Last year was a good one, but political/Olympics years always are for broadcasters and political advertising can generate as much as one in six dollars in those years. Think about how much digital targeting could take away political broadcast money by 2016.

The broadcast business is a maturing less quickly than the newspaper business. Gannett may have bought itself another three to five years of relative revenue stability.

1 comment:


    The other stock we are looking at today is Gannett. GCI is in the news after buying out Belo (BLC), a company that owns twenty television stations as well as fifteen websites....
    ...So, is this a "super" deal? First, let's talk about how much it cost to buy the company. GCI is paying $2.2B for the company. Last year, BLC made $715M. GCI, therefore, only paid about 3x revenue. The company earned $103M, and in that sense they paid about 21x earnings. A good deal to pay 21x earnings for BLC. Before today's announcement, shares were trading at 11x earnings. That price seems a bit steep. As of today, the company had only $140M on its balance sheet and a FCF level of $540M, so the company will need to take on debt or more equity to pay the deal. What are the benefits to GCI?

    With a larger amount of stations, the company will be able to market itself in more markets and leverage advertising opportunities. Companies in cross-markets can take on bigger deals in two markets. More importantly, though, with such a large amount of local TV stations, the company hopes to be able to keep the retransmission fees of original programming from networks like NBC/ABC/etc. down. With more stations, GCI can come to the table with more to offer and keep costs in check. Additionally, it expands GCI into Texas and the Pacific Northwest where they have little exposure. Additionally, growing the business helps them to not become marginalized in an ever-changing media landscape. The face of TV continues to change as more moves online.

    Here are some statistics that trouble us though about local TV stations. We believe that advertisers are starting to move towards cable and online as ratings grow for cable television series on channels like Bravo, AMC, and Food Network. Just this week, News Corp (NWSA) FOX noted that they were seeing volumes down 10% year/year as their ratings fell. Broadcast networks are not doing as well as in the past due to devices like the Hopper from Dish Network (DISH) and Aereo, where you can watch live TV online without paying for any cable and save shows. The problem is that commercials are not streamed as much, and therefore, the free TV model that the broadcast networks employ may soon disappear. Acquiring a bunch of new broadcast channels may not be all that the gains in GCI appear to be. These issues are real for the company.

    The deal does add $750M+ in sales and $100M+ in earnings this year. That would push GCI's revenue from $5.3B to over $6B and help earnings rise from $424M to over $525M. EPS will grow from 1.85 to 2.3. Before today's surge, PE for GCI sat at sub-10. At today's close, PE is at 13.6. When adjusted for a new EPS, PE sits at 11.6. Therefore, shares are still pretty cheap, and the market gave a bit of future value to the deal. The future, though, for us remains cloudy. We see too many issues like cable's rise, online streaming of shows, and online news to jump behind this deal. Shares are still cheap, but with strong levels of debt taken on and a definite overpay for BLC, we have to say that this deal is not a game changer for GCI.

    Recommendation: Avoid GCI


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