Gannett Co Inc shares soared 27 percent to a five-year high after the largest U.S. newspaper chain struck a $1.5 billion deal for television company Belo Corp, dramatically increasing TV's importance to Gannett's results.
Gannett's surge nearly equaled the entire purchase price, an unusual move for the buyer in a takeover. Analysts said it would probably mean a richer valuation for the company, and might spur buyout interest in peer companies with local TV assets.
The deal would nearly double Gannett's broadcasting holdings, making it the fourth-largest U.S. owner of major network affiliates, reaching nearly one-third of U.S. households, the company said on Thursday.
It also means that TV would now account for just more than half of the combined company's operating earnings, with stronger cash flow and a deeper 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.," said Bill Smead, chief investment officer of Smead Capital Management, whose largest holding is Gannett as of Thursday.
"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 generate significant free cash flow and increase its operating earnings per share by about 50 cents in the first year. It will also result in some $175 million of annual savings within three years after closing.
Gannett Chief Executive Gracia Martore made clear that the purchase would not keep Gannett from pursuing future deals.
"I think what we have is tremendous financial flexibility," she said on a conference call with analysts. "We have a balance sheet that is actually even financially stronger today."
Gannett's shares rose $5.34 to $25.20 in midday trading, the stock's highest level since June 2008.
"The television business has gotten a lot better. The stock is up and it puts Gannett back up to more of a broadcast multiple than a print multiple," Benchmark Co analyst Ed Atorino said.
Publishers trade at an average of about 13 times forward earnings expectations, according to Thomson Reuters data, while broadcasters trade at a bit over 25 times. Gannett trades at nine times forward earnings.
Gannett's $13.75-per-share offer represents a 28 percent premium to Belo's close on Wednesday. Belo Chief Executive Dunia Shive told analysts that the company had not set out to sell itself and did not conduct an auction, but found the Gannett offer too strong to pass up.
Belo's directors and executive officers, who collectively own about 42 percent of the voting power of Belo's outstanding stock, have already agreed to vote in favor of the deal.
Belo's shares rose 27 percent by midday to $13.66, the stock's highest level since early 2008.
The deal is a contrast to other recent transactions where media companies have split off newspaper assets to focus solely on TV. Media General sold its papers to Warren Buffett last year, and Tribune Co has been contemplating the sale of its papers as well.
Belo itself split into separate newspaper and TV businesses in 2008. The newspaper business, A.H. Belo Corp, is not affected by Thursday's deal.
Benchmark's Atorino said the Gannett deal could make companies like EW Scripps or Journal Communications attractive for their TV assets. Even before Thursday's deal, there had been about $2 billion of deal activity in the sector over the last year, according to Dealogic.
Scripps shares were up 3.8 percent and Journal shares gained 6.7 percent.
Belo owns and operates 20 television stations, with nine in the top 25 markets, and their associated websites.
The deal, which is expected to close by the end of this year, will need antitrust approval, Federal Communications Commission (FCC) approval, and approval by holders of two-thirds of Belo shares, Gannett said.
Despite the new company's scope, Gannett executives said they did not expect any regulatory problems.
There are five markets where the company said it would have to make licensing arrangements with other operators for certain TV stations. Gannett said it would still be able to recognize the financial performance of those stations in its own results.
"Our FCC counsels, a couple of them, have given us great confidence that we'll be able to do that," Martore said.
One veteran of the U.S. Department of Justice said he expected the deal to be approved. If anything, he said, the government might be concerned about access to affordable advertising for small, local companies like funeral homes and car dealerships in the areas where Gannett and Belo overlap.
"That will scare the Justice Department into taking a close look," said Stephen Axinn, an attorney now in private practice.
Gannett expects to finance the purchase through cash on hand and accessing capital markets as well as bank financing.
J.P. Morgan Securities provided financial advice and Nixon Peabody and Paul Hastings were legal advisers to Gannett. Belo's financial adviser was RBC Capital Markets and Wachtell Lipton Rosen & Katz acted as its legal adviser.