Gannett to spin off publishing business

Gannett on Tuesday became the latest media giant to announce it will split off its publishing business from its faster-growing assets.

The owner of USA TODAY, founded in 1906 as a small newspaper publisher in Upstate New York, joined a quickly growing list of media companies — including News Corp., Time Warner and Tribune media in about the past year — that have embraced the strategy to shield more profitable business lines from the decline in print advertising.

Gannett said Tuesday that it will split its publishing business and its broadcasting and digital businesses into two separate, publicly traded companies next year.

"It is a bittersweet moment for me because I love both of these businesses," Gannett CEO Gracia Martore said in an interview. "It was not a simple decision to be the CEO that spins out our publishing business. But what I had to look at, in the future, was, 'What is the right structure for this company going forward?' And the board and I concluded that the right structure at this moment in time is to spin out the publishing business."

PRESS RELEASE: Gannett to create two industry-leading companies

The plan is not a surprise for many of the company's followers and investors, some of whom had called on Martore to unlock the growth potential of the broadcasting and digital businesses by separating them from the print unit, where revenue has fallen steadily in recent years.

"Gannett is separating the secularly declining newspapers from TV stations and digital," said Craig Huber, independent media analyst at Huber Research Partners. "It all originated from huge pressure from investors over the years."

The McLean, Va.-based media company said that the separate companies will be able to make strategic investments, acquire competitors or manage capital expenses without worrying about how the moves might affect other divisions.

In recent two years, Martore has acquired additional broadcasting and digital assets to diversify the company and convince shareholders and analysts that it's looking at a future beyond its roots in newspapers. Last year, Gannett bought rival Belo for $2.2 billion to double to 46 the number of TV stations it owns or to which it provides services. It also increased its stake to a majority in the venture that owns leading job site CareerBuilder. And on Tuesday it announced that it will double the size of its digital unit by spending $1.8 billion to buy the 73% it does not already own of car-shopping site Cars.com.

While such splits have become a trend for media companies, it's too soon to be able to judge the long-term implications, particularly for the new publishing companies.

The move comes just a day after Tribune Media announced that it had completed spinning off its publishing unit while keeping its broadcasting and digital properties. The publishing unit, which was renamed Tribune Publishing and began trading publicly Tuesday, operates The Los Angeles Times, Chicago Tribune and eight other daily newspapers.

Media companies spinning off publishing units also have included News Corp. in 2013, which split assets including The Wall Street Journal and book publisher Harper Collins from its Fox movie, TV and cable businesses. Time Warner in June shed its Time Inc. magazine operation. Other companies that have or plan to split off their publishing arms include Media General, E.W. Scripps and Journal Communications.

The Belo TV station group Gannett acquired last year was itself the result of a split from that company's publishing business, now called A.H. Belo, whose flagship newspaper is The Dallas Morning News.

Martore will be the CEO of the new broadcasting and digital company, which will be renamed, and both new companies will continue to be based in McLean, Va.

The planned spinoff of the publishing business — which includes USA TODAY and 81 daily community newspapers and their affiliated websites — will be done with a tax-free distribution to shareholders in a formula to be determined. It will retain the name Gannett, and the CEO will be Robert J. Dickey, currently president of Gannett's U.S. Community Publishing division.

The company said the publishing unit will be "virtually debt-free" after the spinoff, with the broadcasting and digital company retaining Gannett's existing debt. It said it anticipates the initial combined quarterly dividend of the two companies "will not be less than" Gannett's current 20 cents per share.

Investors cheered the move early after it was announced early Tuesday, with shares of the company up more than 6% in pre-market trading. But shares fell back 45 cents, or 1.3%, to close at $33.87.

In its second-quarter earnings report, Gannett said print advertising revenue fell 5.7% to $530.1 million. Broadcasting revenue rose 87.9% to $398.3 million, taking into account the revenue added by the Belo stations.

Martore said in a conference call with analysts that Gannett will continue its "cross-platform efforts" after the split.

Gannett's various divisions currently share content widely and use common content management software. For example, its TV station and print websites stations and local newspapers receive a large chunk of their national news content from USA TODAY. The newspapers also widely use TV station videos to accompany stories on their websites.

As Gannett restructures, the broadcasting and publishing companies will have to strike new content and shared services agreements. Some corporate functions and Gannett's marketing services offered to local businesses to help them find customers could be included in new agreements.

Martore characterized the plan as a way for "the two companies that are unfettered to invest in great transactions" and grow beyond its current limits. Acquisitions could be central to their growth strategies.

While few companies are buying newspapers, Martore said "there have been attractive newspaper properties" for sale that Gannett might have looked at had it not been constrained by a federal rule that prohibits companies from owning a daily newspaper and a full-power broadcast TV station in the same market.

"We bump into it more often than you'd imagine," she said.

With a positive cash flow, "an incredibly strong balance sheet" and no TV ownership problems, the publishing company will be able to look for opportunities, she said.

The other media companies that embraced the carve-out-print strategy still are working through the operational kinks, but as a financial strategy, "it seems to be working," said Ken Doctor, an analyst who writes about the media business on his website, Newsonomics.com.

The market value of the broadcasting and digital entities tends to be close to that of the previously combined company, so the value assigned to the publishing company is "icing on the cake," Doctor said. "This does maximize shareholder value. It works financially."

But the publishing companies, without the financial growth of the more profitable divisions, may find survival difficult as publicly traded companies that have to show incremental improvements each quarter.

The new News Corp. publishing unit reported in May that its fiscal third-quarter revenue fell 5% year-over-year while the quarterly net income also declined. In July, its Wall Street Journal cut jobs in the newsroom.

When the new Gannett publishing company is created, "there's no place to hide the numbers going forward," says Doctor. "The stark reality is magnified. Because that safety net is gone, it's going to be more of a do-or-die time."