There was only one surprising thing about Gannett’s (GCI) decision to jettison its slow-growing newspaper publishing business from its more lucrative television and web operations.
Namely, that it took so long.
Earlier this year, Rupert Murdoch’s media empire shifted its publishing assets, such as the Wall Street Journal, into News Corp (NWSA), which coincidentally and confusingly was the company’s old name.
Time Warner (TWX) recently pushed its Time Inc. (TIME) magazine division out the door, as did Tribune Publishing (TPUB), the owner of the Los Angeles Times and Baltimore Sun. E.W. Scripps (SSP), the owner of the Memphis Commercial Appeal, announced plans late last month to sever its print and publishing business and merge its newspapers with Journal Communications (JRC).
Heck, there are even rumors floating around concerning a possible BuzzFeed offering.
But don’t look for investors to get excited about these stocks anytime soon.
Publishing Stocks — OK, And That’s It
There are terabytes worth of stories out there about how newspapers and magazine were caught flat-f00ted by the rise of the Internet. I’m not going to rehash those arguments.
What many people might not realize, however, is that many of these legacy print properties are in decent financial shape thanks to bankruptcy reorganizations. They’re hardly thriving — many still lose money on a net basis — but they’re in OK shape.
- GCI, the parent of USA Today, earned $99.6 million in non-GAAP operating income in its newspaper business in the most recent quarter. The company also recently agreed to spend $1.8 billion to buy out its partners in Cars.com.
- Tribune has been a basket case for years, but in the most recent quarter, the company’s newspaper division earned $55.8 million in adjusted EBIDTA, essentially flat from a year earlier. Its Scripps’ newspaper division earned $8.5 million in the first quarter versus $2.6 million in the year-earlier period.
- Restructuring charges pushed Time Inc., the owner of People and Sports Illustrated into the red, resulting in a net loss of $32 million; however, on an adjusted basis, Time earned $33 million.
- News Corp is a bit different. It includes other businesses such as book publishing and cable network programming. Its News and Information division, which includes the Wall Street Journal, reported EBIDTA of $146 million, a decrease of 12% on a year-over-year basis.
Think of the publishing sector like the air leaking out of a pinpricked balloon — it’s dying, but at a very slow rate. None of these companies are in danger of closing their doors anytime soon.
Newspapers are hanging in thanks to growth in digital subscriptions (though that seems like it’s starting to trail off as well). Many — particularly in second-tier cities and small towns — remain formidable competitors for local advertising dollars. The outlook for magazines is less certain, though many of them will muddle along just fine for the next few years as well.
What to Expect
A couple of things are going to happen to these publishing companies over the next few years.
First, they are going to consolidate since the economies of scale — for everything from newsprint to newsrooms — are too compelling to ignore. Bigger companies such as Tribune will continue to add titles as they come for sale — and they will since wealthy individuals such as Amazon.com (AMZN) founder Jeff Bezos are starting to “collect” newspapers the way their predecessors collected art. Bezos can have all the patience in the world to turn around the Washington Post — that’s one of the perks of being a billionaire.
Gannett, for its part, may try to unload some papers in the U.S. and U.K. and may add others as well. Gannett CEO Gracia Mattore told investors during he recent earnings call:
“Yes, there are newspapers for sale. Look, what this company is focused on and laser focused on as I said before is creating additional strong shareholder value. And we are open to any opportunities that will do that.”
For years, we have heard rumors about the Tribune selling the Los Angeles Times to local owners, and that might come to pass. Meredith (MDP), whose properties include Good Housekeeping, could take the plunge and acquire Time Inc. — a move that observers have expected for what seems like an eternity.
Private equity players might start taking more of a shine to the publishing sector since it offers stable cash flow. The prices for some properties have gotten to cheap to ignore for the likes of Warren Buffett and U.K. private equity operator Better Capital, which acquired Reader’s Digest for 1 pound earlier this year.
But for as exciting as all of that M&A talk might seem, it’s hard to recommend any of the aforementioned stocks, simply because there’s no growth left in the space. It’s consolidation, not expansion — and while that’s a good enough reason to hold, it’s not a good enough reason to invest new money.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.