Gannett Co Inc (NYSE:GCI), the owner of USA Today, is buying Journal Media Group Inc (NYSE:JMG) for $280 million or $12 per share in cash. Shares of Journal Media Group surged by 44.10% in trading yesterday, while shares of Gannett rallied by 1.74%. The deal has been approved by the boards of both companies and is expected to close in the first quarter of 2016. Gannett will finance the acquisition with $500 million in revolving debt and cash on its balance sheet. Let’s take a closer look at the two media stocks, examine the hedge fund sentiment towards them, and determine whether Gannett should be considered by investors following this deal.
Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 60 percentage points since the end of August 2012. These stocks returned a cumulative of 118% vs. a 58% gain for the S&P 500 Index (read the details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).
There have been a spate of newspaper buyouts in recent years. The Nikkei bought The Financial Times for $1.3 billion in July. Jeff Bezos bought The Washington Post for $250 million. Gannett Co Inc (NYSE:GCI) buying Journal Media Group is just the latest example of newspaper companies merging with other newspapers to survive in the era of digital media.
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By purchasing Journal Media Group, Gannett will be buying the Milwaukee Journal Sentinel, as well as 16 other daily newspapers and 18 weekly newspapers. Management hopes the deal will add $450 million to annual revenue and $60 million in adjusted EBITDA to Gannett’s annual statements. Management also estimates the companies can realize up to $10 million in initial synergies and another $25 million in additional cost savings down the line.
Our data shows that hedge funds were bearish on Gannett Co Inc (NYSE:GCI) in the second quarter. A total of 14 funds reported stakes in the latest round of 13F filings, with Carl Icahn‘s Icahn Capital LP leading the way with 7.48 million shares, while Ric Dillon’s Diamond Hill Capital owns 1.99 million shares. Shareholders of Gannett’s parent company Tegna Inc (NYSE:TGNA) received one share of Gannett for each two shares they held of Tegna as of June 22.
It seems hedge funds were right in being bullish on Journal Media Group Inc (NYSE:JMG) in the second quarter. Our data shows that 13 funds owned $27.62 million of the company’s shares on June 30, representing 13.70% of the float, up from a mere three funds with $1.32 million in holdings on March 31. GAMCO Investors owned 1.23 million shares while Mario Gabelli‘s Gabelli Funds owned 412,098 shares.