NEW YORK (TheStreet) -- Long known for its national newspaper USA Today, Gannett (GCI) is poised to split into two: one company for its collection of legacy print publications, and the second for its television and digital entities led by Cars.com and CareerBuilder.
Splitting off Gannett's newspaper is all about unlocking the value of its television station group, which accounted for 27% of its first-quarter revenue of $1.47 billion but 70% of its operating value. So far this year, investors have warmed to the story: Shares of Gannett, of McLean, Va., are, at %35.75, up 12% this year, extending its 12-month advance to 24%.
"It's a very smart move on Gannett's part, and that's been helping the stock of late," says Craig Huber, a media analyst for Huber Research Partners. "There's no reason to have newspapers and TV stations in the same portfolio. There's not much cost savings they have together."
The publishing assets and their affiliated digital publications, including the flagship USA Today, will retain the Gannett name while the TV stations and digital platforms will be grouped in a company called Tegna.
Gannett expects the transaction to be completed by June 29. Existing shareholders will keep the same number of Tegna shares and receive one share of Gannett for every two they own now.
Yet, splitting Gannett in two doesn't resolve the challenges confronting both publishing and local televisions: how to find growth when advertisers are moving to digital in an effort to appeal to younger viewers who are spending more time on mobile devices. Television station groups are discovering that the migration to digital is curbing sales in the way that newspapers were hit some 10 year ago.
"This secular pressure is going to continue for many more years," Huber added. "If anyone can handle that, it's Gannett. But there's only so much a great management team can do, as Gannett has found out on the newspaper side. Splitting the company does nothing about that."
Gannett's television company, which will rival Tribune Media (TRCO) and Sinclair Broadcasting Group (SBGI), could seek to acquire additional stations or beef up its digital platforms, said Morningstar analyst R.J. Hottovy. Likewise, Huber said the best chance for growth after the split in Tegna's digital assets, particularly Cars.com.
But challenges remain. On the Tegna side, the company will face negotiations with broadcasters over so-called re-transmission fees. Agreements for many of its CBS (CBS)-affiliated stations are due to end later this year, and others with Comcast's (CMCSA) NBC at the beginning of 2017. "That will begin to bite soon," Huber says.
Gannett's newspaper business stands to benefit from being virtually debt-free, in contrast to the massive debt burdens laid on publishing spinoffs created by Tribune and Time Warner (TWX) in the case of Time Inc. (TIME).
"The flip side of that is a $4.4 billion dollar debt on the Tegna side with less profits to cover it," Huber says.