On June 29, 2015, TEGNA Inc. (NYSE: TGNA, $31.63, Market Capitalization: $7.2 billion), completed the tax-free spin-off of its publishing business now named as Gannett Co., Inc. (NYSE: GCI, $14.13, Market Capitalization: $1.6 billion). Following the separation, both stocks commenced regular-way trading on the NYSE on the same day. TGNA opened at $30.94, achieved an intraday high of $31.95 and closed the day at $31.63, 6% above the previous close of $29.71. GCI opened the day at $14.37, and closed 5% lower at $14.13 against the previous close. Gannett now provides content through its fl agship brand USA TODAY and will also include 92 local US daily publications. TEGNA continues to own and service 46 television stations and its digital business consists of several other well positioned and growing online companies such as Cars.com and CareerBuilder among others.
The spin-off was effected via a tax-free distribution of 98.5% shares of the spin to the parent shareholders. The spin-off ratio was 1:2, implying that each TEGNA shareholder received one share of Gannett for every 2 shares of TEGNA held as of the record date, June 22, 2015. Earlier, on June 23, 2015, Gannett and TEGNA common stock commenced when-issued trading on the NYSE under the ticker GCI WI and TGNA WI, respectively.Post spin-off, Gannett became part of the S&P SmallCap 600 index, replacing Quiksilver Inc, while TEGNA continued to be part of the S&P 500 index.
We remain positive on TEGNA as post spin-off the company retains the fastergrowing and higher margin Broadcasting and Digital businesses. We expect TEGNA to benefi t from acquisitions as well as increased contribution from Cars.com and CareerBuilder. On the other hand, Gannett Co. operates the less promising publishing business with declining traditional print advertising revenues. We have revised downwards our target price for Gannett Co. to $15.60 per share (earlier $17.25) implying a 10% upside from the current price of $14.13 per share and downgrade our rating on the stock to Hold. We have increased our target price for TEGNA to $34.75 per share (earlier $32.75), implying a 10% upside from the current market price of $31.63 per share and assign a Hold rating to the stock. TGNA has gained 4%, while GCI has dropped 1% since the when-issued trading on June 23, 2015.
Organization Structure
Investment Thesis
Post spin-off, TEGNA retains one of the largest independent broadcasting station group of major network affi liates in the US. The company comprises the fast growing and higher margin broadcasting and digital business. We expect the broadcasting business to benefi t significantly from its recent acquisitions as well as the increasing retransmission revenues. However, we remain slightly concerned that affiliation agreement renewals may increase reverse compensation expenses, dragging margins going forward. The company’s digital segment, which has steadily increased in the past is expected to continue growing due to full ownership of Cars.com and strong growth from CareerBuilder.
On the other hand, prospects of the publishing business look less promising. Decline in traditional print advertising is expected to drag the company’s revenue. However, the company’s efforts and digitization initiatives will help reduce dependence on traditional print. The company has a debt-free structure and management states that its balance sheet and cash flow generation will be strong compared to peers, allowing for fi nancial fl exibility to pursue opportunities in mergers and acquisitions.
Valuation
We value TEGNA’s Broadcasting and Digital segments at 10.6x FY15 EBITDA (earlier 10.3x) resulting in a consolidated target price of $34.75 per share (earlier $32.75). We have added the 1.5% stake in Publishing that TEGNA continues to hold post spin. We value Gannett Co. (Publishing) at 4.6x FY15 EBITDA (earlier 5.0x) marginally higher than the recently spun-off Tribune Publishing. We believe Gannett deserves the premium to TPUB due to its signifi cantly larger size, asset holdings and debt free balance sheet. Our target price for Gannett is $15.60 per share (earlier $17.25), implying a 10% upside from current levels.
1) TEGNA
2) Gannett Co.
Company Description
TEGNA (Parent)
TEGNA (TGNA) is an international media and marketing solutions company. The company has a vast network of broadcast, digital, mobile products, through which it provides information as well as entertainment, globally engaging more than 115 million people every month. As a digital media leader, its portfolio offers customized and innovative digital marketing services and internet-based human resource solutions across various platforms.
Gannett (Spin-Off)
Gannett (GCI) is the largest US newspaper publisher, including commercial printing, newswire as well as marketing and data services operations. The company includes 100 daily publications in the US and UK. It has more than 400 non-daily publications in the US, which reaches ~9.7 million dedicated US readers every weekday and ~10.5 million every Sunday. It also has more than 125 titles in the UK. It provides content through its fl agship brand USA TODAY, a multi-platform news and information company, 82 publications come from USA TODAY which is the nation’s number one newspaper in combined print and digital circulation. USA TODAY is accessed by ~73.5 million unique visitors every month and more than 21 million apps have been downloaded on mobile devices. It has an average daily circulation of 4.1 million and more than 1.2 billion per month average page views.
Source: Spin-Off Research
