Monday, July 08, 2013
Investing in TV Broadcasting
This Monday free weekly stock pick is Belo Corp.
Zacks Investment Research reports Belo might seem like an odd Bull of the Day bull of the day being that it has agreed to be acquired by (merge with) Gannet Inc (GCI), Zacks Rank #3. Even so, I thought it was important to dig a little deeper into this deal and determine if Belo (BLC) (soon Gannet) can remain a strong force in our world’s changing media landscape and if Belo or GCI is worth your time.
I also consider it vital to clarify the deal and perhaps explain why Belo is trading above its purchase price of $13.75 as many retail investors may be piling into a stock that has a firm ceiling that it would be able to climb above.
Belo Meet Gannet
BELO Corporation was, essentially the largest pure-play publicly-traded television station company in the nation. The Company owns and operates twenty major television stations, including ABC, CBS, NBC, FOX, CW and MyNetwork TV affiliates reaching over14 percent of U.S. television households, and their associated Web sites, in 15 highly-attractive markets across the United States. Belo stations rank first or second in nearly all of their local markets.
Gannett Co., Inc. operates 22 television stations in the United States and is an international news and information company that publishes daily including USA TODAY, the nation's largest-selling daily newspaper. The company also owns in excess of 400 non-daily publications in the USA and USA WEEKEND, a weekly newspaper magazine. Gannett’s subsidiary Newsquest is the United Kingdom's second largest regional newspaper company.
Gannett will acquire all outstanding shares of Belo for $13.75 per share in cash, or approximately $1.5 billion, plus the assumption of $715 million in existing debt for an enterprise value of approximately $2.2 billion.
According to a recent press release by Gannett, the combination of Belo and Gannet will create a broadcast "Super Group," catapulting Gannett into the nation's fourth-largest owner of major network affiliates reaching nearly a third of all U.S. households.
After the deal is complete, Gannett's broadcast portfolio will almost double from 23 to 43 stations, including stations to be serviced by Gannett through shared services or similar sharing arrangements. Gannett's new broadcast segment will have greater geographic and revenue diversity, with 21 stations in the top 25 markets and will become the #1 CBS affiliate group, the #4 ABC affiliate group, and will expand its already #1 NBC affiliate group position.
The transaction is expected to close by the end of 2013 and will be subject to antitrust approval.
Is it Worth Your Investment?
Belo is already trading above the $13.75 cash acquisition price, after sharply rising after the merger announcement last month. If gannet was utilizing a stock for stock acquisition method, then shares of BLC could continue to rise if GCI stock increases as there would be a quantifiable connection between the two, but with this being an all cash deal, that’s not the case.
Given the premium to offer, you should probably avoid the stock (BLC) here as its upside will be limited unless of course you’re a merger arbitrage specialist. Gannett, on the other hand, stands to gain potential appreciation from here. While it’s only a Zacks Rank #3 now, that could change as the deal comes to an end.
Before the announcement, both companies were on the right earnings trajectory as of late as estimates were on the rise, but both were seeing year over year growth contraction. Both companies were looking for moderate earnings growth in 2013, on a slight decline in revenues.
There is no doubt that investors like the prospects of the combined entity as both stocks rallied sharply on the news.
The company also believes that this is a win-win; they anticipate that the transaction will generate approximately $175 million in annual run-rate synergies within three years after closing. The transaction is additionally expected to generate significant free cash flow and be accretive to non-GAAP earnings per share by approximately $0.50 within the first 12 months.
The transaction valuation implies a 9.4x average 2011/2012 EBITDA multiple prior to synergies, and a 5.4x multiple assuming expected synergies (according to Belo).
Mark Fratrik, a vice president and chief economist for BIA/Kelsey believes that this deal could propel Gannett into becoming the number 3 local station owner in the United States, by revenue. News Corporation ranks first with 27 stations and CBS Corporation, which owns 29 stations, is currently number 2.
This deal goes beyond the local news. Gannett is invested heavily in advertizing signage and perhaps most importantly, internet properties (websites). The acquisition of Belo will continue to add pricing and a competitive edge to Gannett’s franchise.
While you might not get your local newspaper delivered by the paperboy anymore, trusted information and quality journalism will never go the way of the Dodo.
If you are going to buy either company, look to GCI for the longer term play despite the Zacks Rank of 3 as shares of Belo shouldn’t be going much higher from here. You might also wait for a move back into the $24.00 range for GCI as shares are slightly overbought here.
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