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A.H. Belo Corp (BLC), Gannett Co., Inc. (GCI): Why Wall Street Loves Media’s New TV Star

On June 13, Gannett Co., Inc. (NYSE:GCI) sent Wall Street a clear message: We are much more than the nation’s leading newspaper chain.

Gannett Co., Inc. (NYSE:GCI)

That was the day that Gannett announced plans to acquire television company A.H. Belo Corp (NYSE:BLC) for $1.5 billion, transforming Gannett’s image overnight from an old-fashioned newspaper chain (bad, bad image) to a more promising television operation (very good one).

And Wall Street sent a declaration of its own: We love the new Gannett Co., Inc. (NYSE:GCI), which boasts more of a broadcast multiple than a print multiple.

Publishers trade at an average of about 13 times forward earnings expectations, according to Thomson Reuters data, while broadcasters trade at a little more than 25 times. Gannett Co., Inc. (NYSE:GCI) stands at nine times forward earnings.

On the wings of the announcement, Gannett’s shares promptly climbed 27% to a five-year high, gaining more than $5 and smashing through the $25 threshold.

The deal underscored the changing face of the U.S. newspaper industry. Tribune, which owns the Los Angeles Times, the Chicago Tribune, and other newspapers, for example, is being examined for an acquisition by everyone from Rupert Murdoch to the Koch Brothers because of its strength as a cable and entertainment company. Belo Corp (NYSE:BLC), in fact, split itself into newspaper and television operations back in 2008.

The deal would practically double Gannett Co., Inc. (NYSE:GCI)’s broadcasting resources, making it the fourth-largest U.S. owner of network affiliates. It would reach almost one-third of U.S. households, Gannett Co., Inc. (NYSE:GCI) said at the time of its big announcement.

Crucially, TV would now represent a little more than half of the combined company’s operating earnings, with more robust cash flow and a stronger balance sheet.

“With one-third of the country covered by their TV stations, no automaker or auto dealer can ignore their power in the U.S.,” Bill Smead, chief investment officer of Smead Capital Management, whose largest holding is Gannett Co., Inc. (NYSE:GCI), told Reuters.

“This is an undervalued company and even more undervalued with an additional 50 cents per share in earnings the first year,” Smead said via an email.

Gannett said it would produce significant free cash flow and raise its operating earnings per share by approximately 50 cents in the first year. It will also generate about $175 million of yearly savings within three years after the closing.

Gannett Chief Executive Gracia Martore made clear that the purchase would not keep Gannett from pursuing future deals.