While you seldom see an acquirer's stock react as favorably as Gannett's did yesterday to the deal, the surprise move highlighted one of the hidden strengths of Gannett. Since Gannett has long been thought of as a newspaper company, its broadcasting segment has often been overlooked. While broadcasting represented just 17% of the company's total revenue for 2012, it accounted for more than 56% of operating income.
Belo, which generated a net profit margin of 14% for 2012, should bolster Gannett's overall profitability. In fact, Gannett believes the deal will increase earnings, adding 50 cents a share in the first year. Gannett's stock ran into trouble back in 2008-2009 as newspaper companies fell out of favor, primarily due to plummeting advertising revenue and the move toward Internet-based news. In early 2009, the stock fell below $2, as concerns mounted about the company's viability. A massive debt load, which stood at $3.8 billion at the end of 2008, didn't help, either. Nor did the 90% dividend cut in early 2009, which signaled that the best days of the company were long behind it. But in that time, when the market was signaling its belief that Gannett might go under, a hard look at the company, and its efforts to right the ship, revealed a compelling story. (I did what deep-value investors do, and took a position in what appeared to be a very ugly situation). Sure, Gannett, parent of USA Today, was thought of primarily as a newspaper company, but there was clearly some value in the digital and broadcasting businesses.