The latest round of consolidation in the newspaper and broadcasting industries involves McLean, Virginia-based newspaper publisher Gannett Co., Inc. (NYSE:GCI) and Dallas-based broadcaster Belo Corp. (NYSE:BLC). In addition to its potential arbitrage opportunity and attractive synergies, this deal is interesting from a “macro” standpoint. Although regulators and private firms have traditionally been reticent to mix daily newspaper operations and broadcasting functions under the same roof, the shrinking market for these traditional sources of information has rendered this somewhat unusual marriage more attractive.
Judging by investors’ reactions to the news of the merger, the Gannett Co., Inc. (NYSE:GCI)-Belo Corp. (NYSE:BLC) combination has a very high likelihood of going through in some form. After the announcement, Gannett’s stock shot up by more than 21 percent. Belo added nearly 30 percent. Of course, there are plenty of reasons to be skeptical about the wisdom of a merger in an always-staid and often-troubled industry. Investors should investigate further before pulling the trigger.
Gannett, Belo and the Competition
Gannett Co., Inc. (NYSE:GCI) is one of the publishing industry’s most recognizable names. The company owns USA Today, Careerbuilder.com and other prominent properties. With a diversified portfolio and a decreasing reliance on traditional print media assets, the company most closely resembles The New York Times Company (NYSE:NYT).
These three firms have much in common. For starters, Belo Corp. (NYSE:BLC) and NYT have roughly equivalent valuations in the low nine-figure range: Belo’s valuation of about $1.5 billion compares well to NYT’s $1.6 billion valuation. Meanwhile, Gannett Co., Inc. (NYSE:GCI) has a larger footprint of around $5.8 billion. In 2012, the larger firm earned about $460 million on $5.4 billion in gross revenues. The New York Times Company (NYSE:NYT) took in $154 million on total revenues of about $2 billion. For its part, Belo earned $101.5 million on revenues of $719 million to produce a more attractive profit margin.
Thanks to strong corporate governance and conservative growth policies, NYT has far less leverage than its peers. Its roughly even debt-to-cash ratio compares favorably to Gannett Co., Inc. (NYSE:GCI)’s 10:1 ratio and Belo Corp. (NYSE:BLC)’s troubling 144:1 figure. It is likely that Gannett factored this unseemly debt pile into its offer for Belo. Despite its debt problems, Belo’s price-to-book ratio far exceeds those of its peers. Its 4.72 figure is roughly 100 percent higher than The New York Times Company (NYSE:NYT)’s 2.44 tally and Gannett’s nearly identical 2.4 ratio.
How the Deal Is Structured
The terms of this merger are straightforward: According to the announcement, Gannett Co., Inc. (NYSE:GCI) will issue cash payments of $13.75 for each outstanding Belo Corp. (NYSE:BLC) share. Although the deal’s exact closing date has not yet been announced, it should be completed by the end of 2013. Obviously, such completion is contingent on shareholder approval votes and a customary review by the Federal Communications Commission.
Gannett Co., Inc. (NYSE:GCI)’s offer represented a tremendous premium to Belo’s pre-announcement share price. However, enthusiastic investors have wiped this potential arbitrage opportunity away. In fact, Belo Corp. (NYSE:BLC)’s current share price of about $14.10 exceeds Gannett’s offer price by about 2.5 percent. This may indicate that market players believe that a higher offer or bidding war could be in the cards.
Legal Issues and Other Complications
At this point, there are no unusual legal issues or complicating factors that could delay or derail this merger. Although several law firms have launched preliminary investigations into the terms of the deal or issued warnings about the extent to which it undervalues Belo Corp. (NYSE:BLC), the merits of these actions appear to be limited. However, it is certainly possible that persistent legal challenges could force Gannett Co., Inc. (NYSE:GCI) to rethink its offer orcome back with a higher bid. Belo’s troublesome debt situation makes such a move unlikely, but it cannot be ruled out entirely.