Updated from 12:53 p.m. EDTBelo Corp.'s ( BLC) solution for its ailing newspaper business is hardly a cure-all, but it does buy the company more time to fix its business model. The Dallas-based company said Monday that it will spin off its newspaper business, which includes metro broadsheets like the Dallas Morning News and the Providence Journal, in a bid to win a higher valuation on Wall Street. The move will leave Belo as a television-station operator with yearly revenue around $750 million. Its shares recently were up more than 16% as investors salivated at the prospect of holding a pure-play broadcasting stock unfettered by newspaper woes in 2008, a year when the Olympics and a U.S. presidential election promise to be a boost for TV networks. "Belo has good properties in good markets, and 2008 looks like an advertising bonanza for at least some broadcasters," says Ed Atorino, analyst with research firm The Benchmark Company. "Now you've got an opportunity where they can hopefully grow the broadcast business and struggle through the newspaper business until it turns the corner." Shares of other media conglomerates also gained on Monday as investors predicted similar moves at publishers like Gannett ( GCI), Media General ( MEG) and E.W. Scripps ( SSP). Gannett was climbing 1.2%, Media General was up 8.3% and Scripps was adding 1.7%. "Nobody has a solution for the newspaper business today, but investors are demanding from these companies some sort of plan to deliver returns in the next three to five years, when it looks like the newspaper downturn is going to accelerate and get uglier," says Ken Doctor, analyst with Outsell Inc. "
Belo's spinoff will create a separate company called A.H. Belo Corp. The spinoff, expected to take place in the first quarter of 2008 via a tax-free distribution of shares to Belo shareholders, will include newspapers and Web sites, along with Belo's direct-mail and commercial printing businesses. A.H. Belo will be debt-free after the transaction, with 3,800 employees and annual revenue of roughly $750 million. Belo, meanwhile, will own and operate 20 television stations across the country. It boasts nine stations in seven of the top 25 markets in the nation, like Dallas/Fort Worth, Houston, Seattle/Tacoma and Phoenix. Shares of Belo recently were up $2.79 to $20.15. The stock shed 12% last year and dropped another 3% in 2007 as the outlook for the newspaper industry becomes increasingly uncertain amid the rise of the Internet. Its valuation was lagging behind other similar TV conglomerates, prompting investors to call for a sale of the newspaper operations. Hedge fund manager Bruce Sherman of Private Capital Management cut his Belo stake in half last spring. His firm reported ownership of 8.5 million Belo shares, a 9.7% stake, as of May 31. Previously, it held a 16.5% stake in Belo, making it the company's largest stock holder. Belo is veering away from solutions adopted by Dow Jones ( DJ) and Knight-Ridder, both of which were pressured into a sale by shareholders looking to cash out of their troubled investments at a premium. It's also a different approach than the one taken by Tribune ( TRB), which is going private by loading its balance sheet with a colossal debt burden.
"Every dollar a newspaper company puts into servicing debt is another dollar it can't invest into the business itself to keep it going and adapt to new technology," says Doctor. The transaction will give Belo's TV business a much larger debt load. The company was downgraded to junk status by Fitch Ratings for that reason, but Belo's CEO, Robert Decherd, said on a conference call following the announcement that he expected such downgrades of Belo debt. He said paying down the debt load at Belo would be a top priority. Shares of McClatchy ( MNI) and New York Times ( NYT) were also gaining Monday, but both stocks are basically pure-plays on the newspaper business. McClatchy's stock has been trounced since it doubled down on newspapers by acquiring Knight-Ridder last year. Shares of New York Times have been in free-fall, down 17% so far this year after falling 5.3% in 2006 and 34% in 2005. Investors are pressuring the company to end its dual-class share structure, which preserves control over the publisher in the hands of Chairman Arthur Sulzberger Jr. and his family. For their part, Belo's controlling shareholders -- descendants of longtime Dallas Morning News publisher George Bannerman Dealey -- are not relinquishing their control over the company's voting rights. After the spinoff, the newspaper company A.H. Belo Series A shares will have one vote per share, while Series B stock will have 10 votes per share. Belo Corp. already has that structure.
Decherd, the great-grandson of Dealey, has repeatedly said the dual-class structure would remain in place at Belo. He also has said the company will not be sold or taken private. Decherd will become chairman, president and CEO of the newspaper company A.H. Belo, as well as nonexecutive chairman of the television company Belo Corp. Belo President and Chief Operating Officer Dunia Shive will become president and CEO of the television company after the separation. "These are challenging times for newspapers generally, but I believe strongly that we have a collection of superior assets and a game plan to flourish," said Decherd. "My decision to lead A.H. Belo as chairman and CEO reflects my deep personal commitment to the newspaper business and my firm belief in the importance of newspapers making a successful transition to a technology-based society." Decherd cited Belo's advertising relationship with Yahoo! ( YHOO) as a prime example of the measures its newspaper business is taking to adjust to the Internet as the turmoil in the industry takes its toll. Other newspaper conglomerates have partnered with Yahoo!'s Internet search rival, Google ( GOOG). "There is no Plan B for Belo Corp. or A.H. Belo Corp.," he said. "We're in the business to stay."