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Gannett Co: $1 Billion in Off-Balance Sheet Liabilities

November 19, 2012 | About:
Gannett Co. Inc. (GCI) is a leading international media and marketing solutions company, delivering content and services across an integrated, multi-platform portfolio. Its rich portfolio of iconic national brands, like USA TODAY and CareerBuilder, as well as unique local brands in more than 100 communities sets GCI apart. It is also an Internet leader with hundreds of publishing and TV web sites and several national web sites, reaching 50.8 million unique users monthly or about 23% of the Internet audience in December 2011. In broadcasting, GCI operates 23 television stations in 19 U.S. markets with a total market reach of nearly 21 million households, covering 18.1% of the U.S. population.

Valuation

GCI is currently trading at 9.22x trailing 12 months P/E and 5.68x trailing 12 months EV/EBITDA. GCI has achieved a ROE of 17.81% for the trailing 12 months.

Financial And Business Risks

GCI is highly geared with a gross debt-to-equity ratio of 67% and a net gearing of 57%. This is partly mitigated by an interest coverage ratio of 5.8 and a current ratio of 1.1. GCI repaid over $2 billion of debt from operating cash flow in 2012. This does not take into account off-balance sheet liabilities, which adds up to about $1 billion, on top of the $2.3 billion of debt on the balance sheet.

Purchase obligations amounting to $230 million, relate to printing contracts, capital projects, interactive marketing agreements, wire services and other legally binding commitments. Other long-term liabilities amounting to $489 million, primarily consists of amounts expected to be paid related to under-funded post-retirement benefit plans. Other off-balance sheet liabilities include $253 million of operating leases and $81 million of programming contracts.

Competition from alternative forms of media is the single biggest threat to GCI. Advertising produces the predominant share of its publishing, broadcasting and affiliated web site revenues as well as digital segment revenues. The continued development of alternative forms of media affects GCI's ability to generate circulation/content revenues and television audience.

Business Quality and Capital Allocation

GCI started rolling out its all-access content model, a new subscription model for U.S. Community Publishing, which charges for content regardless of platform and limits non-subscriber access in February. This provides consumers with the opportunity to subscribe and get access to all of its content on all digital platforms. Consumers have the opportunity to choose the frequency with which they want to receive the printed product on a home-delivery basis.

GCI expects this model to contribute approximately $100 million in operating income to the Publishing segment annually beginning in 2013. It also expects to generate incremental advertising revenue from digital platforms launching with the new model. As of Oct. 15, 2012, the all-access content subscription model had been launched in 71 of the 78 markets in which GCI plans to implement the subscription model.

GCI is accelerating growth by entering high-potential businesses where it has a hometown and a brand advantage, such as digital marketing services. GCI's new digital marketing services business targets small and medium-size businesses, which is expected to generate between $275 million and $350 million in annual revenue by 2015. GCI is positioning itself as a trusted partner who can help businesses navigate the complex and fragmented digital landscape, and offer a full digital marketing product set tailored to each business’ needs.

During the third quarter of 2012, GCI completed two acquisitions to grow its digital marketing services offerings. In August, it acquired BLiNQ Media which specializes in social engagement advertising. Mobestream Media, the developer of the Key Ring consumer loyalty application for smart phones, was acquired by GCI in September.

GCI is actively engaged in asset optimization, specifically its real estate portfolio, to enhance shareholder value. Since 2005, GCI has sold more than 2 million square feet of office space. It currently has more than 3 million square feet of office space actively on the market, out of its total U.S. portfolio of about 14 million square feet. GCI's properties are spread over more than 100 communities across the country, and many of them contain production facilities attached to the office space. It already has tenants in the headquarters facility, and is open to all options on any other building in the portfolio, if the economics make sense.

In February 2012, GCI announced new capital policies to return over $1.3 billion to shareholders by 2015 from the company’s cash flow. The board approved an acceleration of its share repurchases with a new $300 million share repurchase program targeted to be completed over the next two years and authorized a 150% increase in GCI’s dividend to $0.80 per share on an annual basis. GCI has returned almost $230 million to shareholders to-date this year in the form of share repurchases and dividends. Year-to-date, GCI has repurchased over 8.2 million shares for $117 million. GCI has paid a dividend for every single year since 1995 and its current dividend yield is 4.7%. Dividends are paid quarterly.

Insider Trades

For the past three months, four insiders have sold a total of 108,650 shares in GCI.

Conclusion

The future of the publishing industry and its successful transition in the digital age still remains a big question mark. Current market valuations for GCI have already priced in the huge return of capital to shareholders in the form of dividends and share repurchases.

Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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