The Gannett Co.’s announcement Tuesday that it was buying out its four media partners in Cars.com to the tune of $1.8 billion is both a success story for the struggling newspaper sector and a sign of the challenges ahead.
The largest U.S. newspaper publisher, Gannett said it was buying the 73 percent stake held by McClatchy and three other partners in Classified Ventures, the parent of popular auto shopping website Cars.com. Also selling stakes to Gannett were Tribune Media Co., Graham Holdings Co. and A.H. Belo Corp.
And as had been predicted by several industry watchers, Gannett also reorganized into two publicly traded media companies, leaving its newspaper publishing operations in one standalone business and lumping its digital ventures into a new company that also will retain Gannett’s vast broadcast holdings.
The deal provides Gannett, publisher of USA Today, with sole control of a profitable digital site and gives the sellers an infusion of cash at a time of high valuations for Internet ventures.
“This was one of those acquisitions, simply put, that makes perfect sense financially and strategically,” said Gracia Martore, president and CEO of Gannett, during a call with investment analysts.
As its sole owner, Gannett can “take the business to the next level,” said Martore, adding that she will become the CEO of the new publicly traded company that combines higher-growth broadcast and digital holdings.
In an interview, McClatchy CEO Patrick Talamantes hinted that the sale marked a milestone.
“We were in it for 17 years. It was a joint venture for all that time. As often happens to joint ventures, eventually there is an ownership transition,” he said. “There has been enough change amongst the ownership group, and change among each owner even, that it just made a lot of sense for some owners to move on and for Gannett to provide the means by which the others could move on.”
Here’s why the sale marks a milestone. When started in 1997, Classified Ventures was a way in which newspaper publishers could share the risk in creating a digital company that helped offset what became a massive loss of print revenues from classified advertising. At the time, classifieds were disrupted by Craigslist and other online-only sites.
But the newspaper companies stuck together and turned Cars.com and similar sites into important online companies in their own right. The sale for $1.8 billion speaks to how well that venture did and the potential it offers going forward.
“They’re moving from a startup (business) to an ownership mode,” said Ed Atorino, a veteran securities analyst specializing in media for New York-based The Benchmark Co.
Cars.com, which has 10 million monthly unique users and lists 4.3 million new and used cars from 20,000 dealers, has grown steadily since its creation in 1997. The sale of Cars.com comes seven months after Cox Enterprises paid $1.8 billion for a 25 percent share of Autotrader.com, the leading auto site with 14 million unique users a month.
“All that has happened is the market for Internet assets became stronger and stronger,” said Talamantes, adding that revenue from the sale _ which will net McClatchy about $406 million after taxes _ will enable the company to reinvest in new Internet ventures. “Cars.com only addresses a fairly limited segment of our overall business. We think that by selling the asset that we’re able to benefit our entire portfolio of advertising business and not just the automotive segment.”
Media companies have been competing increasingly for advertising revenue against digital-only companies like Google and Facebook, which have captured the lion’s share of digital advertising gains.
“I don’t think Gracia (Martore) is going to put Google out of business,” said Atorino, who was quick to warn that shrinking print advertising revenue continues to dampen the longer-term outlook for newspapers _ one reason Gannett pared off its newspaper arm.
“Newspapers have a challenging environment. And television is booming. End of story,” said Atorino.
Where revenue is going
Gannett is separating its faster-growing broadcast business from its slower-growing newspaper business. Shifts in mobile ad revenue, shown above, reflect changing consumer habits, including the growth of car-buying apps like the one offered by Cars.com.
Gannett becomes the last big public U.S. media company to separate its print and broadcast holdings, part of a bigger strategic shift there and within the media sector to pare off the more profitable broadcast operations from the struggling newspaper business.
“It says that the broadcast industry is basically very healthy. They continue to have the benefit of a tremendous amount of political advertising,” said Rick Edmonds, a media analyst at the Poynter Institute, which offers journalism training in St. Petersburg, Fla., and online.
Broadcast stations are also now receiving transmission fees from cable companies, a relatively new development, and that adds to their improving revenue outlook.
“That’s a big new source of revenue. A number of these companies . . . have expanded by purchasing other operations,” said Edmonds, noting that having newspaper holdings “is kind of a drag on the broadcast and digital-ventures side.”
There is a potential silver lining for newspapers, however.
“The theory is they’ll do better in a company by themselves. They won’t necessarily be last in line to get capital or management attention,” he said.
Gannett’s move follows other media companies that have separated their print and broadcast holdings. These include Belo, News Corp., Tribune and Scripps/Journal Communications. Tribune finalized its splitting of media holdings on Monday, while E.W. Scripps and Journal Communications on July 30 announced their intent to merge broadcast operations and then spin off newspaper publishing.
Gannett executives said they will use cash on hand and issue new bonds to help finance the acquisition of Cars.com and creation of a new standalone company, not yet named.
“One of the smartest things Gannett is doing is not putting any debt on the newspaper operation they’re spinning off,” said Craig A. Huber, an independent media research analyst at Huber Research Partners.
For McClatchy, he said, the sale allows it to work off more of its high debt. The $406 million in estimated after-tax proceeds from the sale, he said, will help knock down the approximately $1.5 billion of debt on the Sacramento, Calif.-based company’s balance sheet.
“It’s kind of like selling your wife’s wedding ring, your very best asset, but it gives them breathing room to pay down debt,” said Huber. “It’s a good thing for McClatchy.”
Investors seemed to agree. Shares in Gannett and McClatchy opened up strong but lost most of Tuesday’s early gains in a down day for equities on the New York Stock Exchange. McClatchy closed up nine cents to $4.65 a share, while Gannett finished off by 45 cents to $33.87.
McClatchy has sold a number of assets in the past year, including its stake in the Apartments.com website, the Anchorage Daily News and McClatchy-Tribune Information Services, a joint wire service now operated by Tribune.
McClatchy said the timing of the sales was coincidental and did not represent any change in strategy.