The market seems to be extremely excited about Gannett , pushing its stock to a five-year high to around $26.60 per share after it announced that it would acquire Belo for around $13.75 per share in cash in a total transaction worth $2.2 billion, including th assumption of $715 million in debt. Let’s take a closer look to see whether or not Gannett is a good investment opportunity after Belo’s acquisition.
The snapshot of Gannett and Belo
Gannett, a media and marketing solutions company, owns several business segments with different characteristics and operating results. Nearly 70% of its total revenue was derived from the publishing segment while the broadcasting segment generated only $906 million, accounting for 17% of the total revenue. Interestingly, the broadcasting segment was the largest profit contributor, producing nearly $444 million in operating in 2012. The publishing segment ranked second with more than $368 million in profits.
While the publishing segment has experienced declining revenue and profits, the broadcasting segment’s top line and bottom line have been rising. Consequently, Gannett could have delivered shareholders a lot of value by separating the broadcasting business away from the two.
Belo is considered one of the biggest television companies in the U.S. with 20 television stations, reaching more than 14% of the U.S. TV households. Belo derived most of its revenue from retransmission and interactive. In 2012, Belo produced nearly $715 million in revenue and around $100 million in net earnings, or $0.95 per share. Its operation carries around $733 million in long-term debt. At $13.75 per share, Belo is valued at around 7 times its EV/EBITDA.
EV/EBITDA represents Enterprise Value/Earnings Before Interest, Taxes, Depreciation, and Amortization. This ratio reflects the relationship between the market value, which has been adjusted with the company’s net debt, and its cash flow position.
Good strategic acquisition
The acquisition of Belo is a good strategic move by Gannett to expand its footprint in the broadcasting business. By having Belo in-house, Gannett nearly doubles its broadcast assets with more scale and diversity, making it the fourth biggest owner of major network affiliates, only after CBS, FOX, and Sinclair Broadcast Group . While Sinclair reaches around 34% of the total U.S. television households, the combined company has a coverage of around 30%. A $13.75 price tag represents a 28% premium to Belo’s closing price on Wednesday last week.
Gannett expects to have around $175 million in annual run-rate synergies spread over three years after the deal closed. The acquisition would be accretive to its EPS by around $0.50 in the first year. At $2.2 billion enterprise value, the EV/EBITDA stays at 9.4, excluding any synergies. However, the pro-forma EV/EBITDA was only 5.4, taking into account about the three-year run-rate synergies.
After Belo’s acquisition, the broadcasting segment will be the largest revenue contributor, accounting for 52% of the total combined company’s revenue, with an EBITDA margin of 24.3%. Going forward, Gannett said that it might spend around $300 million to buy back its shares in the next two years. It also maintains its dividend payment.
Is the offer cheap?
Gannett seems to be a good deal if it could acquire Belo as it is trading at a discount to Sinclair. Sinclair is trading at around $27.10 per share with a total market cap of $2.2 billion. The market values Sinclair at 9.6 times its EV/EBITDA, a much higher valuation than the Belo’s EV multiple of 7. Sinclair currently has around 134 TV stations in 69 markets and four radio stations with 37% of net broadcast revenue coming from FOX.
Currently, around 85% of the total revenue is derived from ads while gross retransmission revenue accounted for 9% of the total revenue in 2012. In the future, Sinclair would like to increase the percentage share of retransmission revenue. In 2016, it is expected that the gross retransmission revenue would account for 16% of the total revenue while the ad revenue share would be reduced to 77%.
Among the three companies, Gannett offers investors the juiciest dividend yield at 4%. Belo ranks second with a 3% dividend yield while Sinclair pays its shareholders dividend with a yield of 2.5%.
My Foolish take
With the acquisition, Gannett could be among the top four TV television companies in the U.S., expanding its business in the high margin broadcasting segment. With the highest dividend yield and low pro-forma valuation (including run-rate synergies), Gannett could deliver a nice return to its shareholders in the long run.
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