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Aug. 5, 2014, 11:17 p.m.
Business Models
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Ken Doctor: 10 takeaways from Gannett’s blockbuster announcements

It’s a fresh start for a new set of newspaper companies, built on financial engineering — but that start comes without the safety of a revenue cushion.

Gannett has long been one of the most market-savvy American newspaper chains. It showed those smarts again today, with its twin announcements.

Had it only announced the spinoff of its distressed newspaper properties, it could have been seen as a me-too response to the split-‘em-up business model du jour (Monday’s post: “The newsonomics of splitting up media companies, with Gannett maybe next”). Or, had it only announced its acquisition of Cars.com, buying out its partners for $1.8 billion, that might have be seen as expected, and perhaps even at the lower end of the anticipated price (“The newsonomics of Cars.com”).

Combine the two announcements, though, and you can position it as a digitally propelled company of the future being born along with a newspaper company that can chart its own future. That’s blockbuster spin, and it even contains some truth. Curiously, the timing of the combined announcement looks like it was done on the fly. The new “Gannett” is unnamed at birth, and may have been premature.

Let’s do a quick assessment of what we can see in Tuesday’s moves, especially in light of the other recent action, as Tribune Publishing takes on official life this week, and E.W. Scripps and Journal Communications merge and split at the same time.

1. This isn’t a matter of “focus.”

These splits are about financial engineering. As public companies, their primary duty is indeed to maximize shareholder value. Newspaper properties are depressed and distressed, and the public markets have less and less interest in them. So sequestering the print assets to “unlock the value” of broadcast and digital just makes financial sense.

That said, if you are the new Tribune Publishing’s Jack Griffin, or the new Gannett’s Bob Dickey, or the new News Corp’s Robert Thomson, or the new Journal Media’s Tim Stautberg, you can use the shiny newness of your company as a motivator. It’s the Rocky underdog speech to the troops. That — combined with smart strategies — might provide a better future.

2. But there’s a wild card.

Though the driving purpose of the split is financial, an unintended (or maybe, in some cases, secondarily intended) consequence of them is that the new CEOs leading these companies can indeed “focus.” After all, they don’t have their sights obscured by profits rolling in from non-newspaper concerns. They can stare down the future of news publishing, digital and in print. That will be a good thing. It’s hard to call, in mid 2014, which of the new CEOs will rise to the occasion and best innovate within the constraints of the day — but new thinking is welcome.

3. The numbers tell the story of why.

For Gannett, we’re seeing 60 percent of its profits driven by broadcast — and that’s before full consolidation-with-Belo synergies kick in — even though broadcast contributes just 30 percent of overall revenues. The mismatch in revenues and profits is the simplest way to understand why, financially, the splits had to happen. Then there’s this simple fact: Gannett Publishing hasn’t grown publishing revenues in any year since 2006. It’s not much different from its peers in that regard. But that failure to grow — combined with the inability to name the future year when it would grow — is the driver of these splits.

4. This isn’t just about public splits. It’s also about privatization.

Publishers have recognized clearly over the last decade that running a publicly owned newspaper company didn’t track with the times. Shareholders want returns, and those are meager. The newspaper/digital transition still has another good five to 10 years; it’s no easy place for those having to report quarterly earnings.

Consequently, running directly parallel to all the splitting of news companies has been the privatization of some the largest and best newspaper companies in the U.S. Jeff Bezos bought The Washington Post, John Henry The Boston Globe, and Glen Taylor the Star Tribune. The new owners offer capital — and time to transition. They don’t have to answer to shareholders and next quarter’s returns. Both trends — splits and privatization — chart the future, with the best private owners seeming to offer a better resourced lifeline.

5. The Cars.com glide looks sensible.

We know that Cars.com, owned by a single company, the new as-yet-unnamed digital/broadcast Gannett, will drive more and more of its sales nationally. It will rely, as the digital classifieds companies have done, less and less on newspaper affiliates to sell its products; national sales produce better margins. So both Tribune (selling its 27.8 percent), McClatchy (selling its 25.5 percent) and Belo (selling its 3.3 percent) took Gannett’s money, but they also negotiated a five-year glide, being able to sell digital ad packages to local dealers (though at what will be higher “wholesale” cost). That tempers a potential loss of digital auto ad revenue in the next few years — an absolute key to trying to keep their heads above water. Without the glide, their digital ad revenue could easily go negative, and they need no more negatives.

Can McClatchy claim to be a digitally focused company and still sell its Cars.com share? Sure, it can. It’s moving forward in precarious balance, and the $406 million after taxes it will get will relieve a major debt burden. It won’t erase McClatchy’s debt, but makes a big dent in it. It can reduce annual debt service payments, have a little room to make digital acquisitions, and just breathe a little easier. That’s a trade-off that makes a good deal of sense.

6. Where did I leave my cushion?

You couldn’t draw a direct line between old News Corp’s Avatar success and its middle-of-the-recession investment in The Wall Street Journal, but the connection was clear. Broadcast and digital assets — now separated at almost all the companies (private Hearst owns both, as does smaller chain Schurz) — allowed newspaper companies to be squeezed a little less than they could have been.

Yes, even with the loss of 30 percent of U.S. newsroom jobs in seven years, it could have been worse — and unfortunately could still be going forward. All the newspaper companies have cut, but some more than others, and one reason has been profits from other businesses could prop up, subsidize, or make up for print shortfalls. That cushion is now deflated.

7. What’s the fresh start look like?

Indeed, these are meaningful new starts. For the most part (Time Inc. and Tribune the notable exceptions), these companies are getting debt-free, or close to debt-free starts. Pension obligations, at least for Journal Media and Tribune, are staying with broadcast company; that’s a big positive. Cash is the big differentiator. The new News Corp got a big cushion, $2 billion. Tribune got $50 million and Journal Media is getting $10 million. Billions go a lot farther than millions. Millions buy months of transition; billions buy years.

8. What’s the test of the new companies?

That’s two-fold. First, how can they continue to manage the ongoing print ad decline as gracefully as possible? Fact: The main driver of profits (still in the 5 to 10 percent range) for news companies has been cost-cutting. That can be done for years, but not decades. At some point, you cut so much that your products lose their commercial viability for advertisers and readers.

Second, how can they turn around two revenue streams? Reader revenue — flagging at Gannett and the Milwaukee Journal-Sentinel, for instance — needs to be put on a steady growth trajectory. That’s about the magic formulas of product and pricing, and the wizardry out there is uneven. Then in ad revenue, the push for marketing services and content marketing needs to move from experimental to full throttle. Easy to say, hard to do.

9. What’s the next company shoe to drop?

With Gannett’s announcement, there aren’t many newspaper/broadcast assets left to split apart. But the newspaper landscape is so unsettled that we could see unorthodox new combinations.

It’s hard to believe we’ll see any kind of national scale rollup of local dailies — there’s little rationale to do in an industry still spiraling downward — but we will see more regional clustering and unexpected buys. New Media Investment Group/GateHouse, Halifax Media, and Berkshire Hathaway have all been buying here and there, but largely staying away from metros, the most troubled of all dailies. Then, there’s the 2015-16 sales scenario for Tribune newspapers. And on any given day, plenty of publishers are willing to take a buyer’s call.

10. Is it 1995 again?

As a friend emailed me today, “Where is this ‘back to the future’ set of publicly traded newspaper companies headed? Roll up by a digital company? Bankruptcy and die? Consolidation to further cut costs? Seriously, is this 2014, because if I check the stock tables I’d swear it’s 1995!”

It’s true that public newspaper share prices had recovered from their post-recession bottoms, and largely risen with, or even ahead of the overall stock market’s growth. Gannett hit a high of $90.42 on April 8, 2004, a bottom of $2.14 on March 20, 2010. Tuesday, it closed at $33.87, down 1.3 percent (presumably attributable more to the cash it expended buying out its Cars.com partners than to the split itself).

To my friend’s point, the newspaper world seems caught in an unending cycle of woe. That may tell us that, as important as intelligence is in finding a way forward, stamina might be the most important commodity.

Photo of Gannett logo on the floor of the New York Stock Exchange by AP/Richard Drew.

POSTED     Aug. 5, 2014, 11:17 p.m.
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