Gannett and Tribune pivot to TV: Is it wise?
Turning away from their roots in the newspaper business, Gannett Inc. and Tribune Co. are embarked on a pair of ambitious transactions that will transform them into two of the largest players in local TV broadcasting, but here’s the irony:
They are trading their prominence in one fading media vertical for dominance in another legacy business that could be headed for the sort of pounding that has cut aggregate newspaper advertising revenues from a record $49.4 billion in 2005 to $22.3 billion at the end of last year.
Why would they do that? Simple:
In pivoting from print to broadcasting, the senior executives of both companies are focusing on a business they know that has been far better to them in recent years than the increasingly gnarly newspaper business on which both media empires were built. By massively scaling up their broadcast operations, the managers can increase revenues, cut costs and boost profitability in ways that are bound to enhance shareholder value – and, not incidentally, their personal compensation – in the immediate future.
But will these choices prove to be wise over the long term? We’ll discuss that tomorrow. Today, let’s look at what these companies are doing – and why:
The scramble to acquire television assets began in mid-June, when Gannett (GCI) agreed to pay $1.5 billion for Belo Corp. (BLC), the sister company of A.H. Belo (AHC), the publisher of the Dallas Morning News and other newspapers. The acquisition will make Gannett the fourth-largest owner of major network affiliates in the United States, almost doubling the number of its stations to 43 from 23.
The Belo twins, which had operated as a single entity until 2008, were split into two separate publicly traded companies in the hopes of maximizing the value of the broadcast assets as the newspaper business contracted. With GCI paying an aggressive 28% premium to acquire control of BLC, it is clear the plan worked.
As discussed previously here and explicitly referenced in the press release announcing the transaction, GCI has been on a long-running campaign to de-emphasize its reliance on the newspapers that generated more than two-thirds of its $5.4 billion in sales in 2012. When the BLC transaction is complete, the company’s broadcast revenues will increase by nearly 80%, substantially improving the print-to-TV balance on its P&L. Wall Street instantly cheered the deal, raising Gannett’s stock to its highest level in more than five years. So, the plan to lift the value of GCI’s shares is working, too.
Not to be outdone, the Tribune Co., which recently emerged from an epic four-year bankruptcy, announced last week an even bigger deal, agreeing to buy the assets of Local TV LLC for nearly $2.8 billion. By adding the 19 outlets owned by Local TV to its 23 stations, the transaction will make Tribune the largest local broadcaster in the land.
Like GCI, Tribune today draws nearly two-thirds of its sales from print. While privately held Local TV does not publish its revenues, a bit of reverse financial engineering suggests that the acquisition would contribute something in the neighborhood of $1 billion in revenues to Tribune’s broadcast business, thus bringing the print-broadcast balance close to 50-50.
But Tribune is not stopping there: The company, which owns one of the largest newspaper portfolios in the land, is well along a path to sell some or all of its publications. If the company succeeds in jettisoning the Chicago Tribune, Los Angeles Times, Baltimore Sun, Orlando Sentinel and half a dozen other publications at acceptable prices, then Tribune would become a pure-play broadcasting company.
Meanwhile, the pending broadcast acquisitions, if properly executed, should deliver instant financial gains for both Gannett and Tribune, as they would provide each with unprecedented reach in advertising sales along with fresh opportunities to cut the costs of everything from programming to paperclips. Here are some ways this could play out:
Sales people calling on national advertisers potentially could double the size of the orders they write by simply placing ads at more affiliates than they can today. If advertising production were centralized, the stations could cut costs by repurposing creative assets from market to market. Billing, trafficking and all manner of other back-office functions – from purchasing to payroll – could be streamlined and consolidated as never before.
By expanding their affiliate bases, each of the super-broadcasters would have a growing pool of sharable news and entertainment content. Instead of investing in elaborate weather setups at every station, Gannett might create a central, technology-rich facility where a handful of crack meteorologists sequentially knocked out forecasts for multiple markets. Tribune might hire star sportscasters at a single hub to provide localized feeds, assembly line-style, to all the affiliates in its portfolio. Health, food and gardening segments produced in one place could be shared across the in-house networks. Gannett or Tribune could even produce their own morning, mid-day or evening programs, thus turning the syndicated programming they buy today from a cost center to a profit opportunity.
The rich content produced for TV could be repurposed in any number of ways for web and mobile use. Operating at scale, the respective companies could invest in sophisticated, video-rich websites that are updated 24/7 by regional or centralized teams. Each company could afford to build state-of-the-art mobile apps for everything from traffic to selling used cars. Gannett might even share some of the digital goodies with its newspapers.
Assuming the economy remains relatively healthy, it is fair to conclude that the upcoming acquisitions will provide the publishers-turned-broadcasters with sales and profit opportunities surpassing those available to them today. So, the immediate appeal of the acquisitions is obvious.
The problem is that this strategy is built on the premise that local television audiences – and, therefore, the advertising revenues generated by serving them – will remain as robust today as they have been in the past.
Fueled in part by vigorous election-year spending, the combined ad sales for national and local TV in the United States hit a record $49.7 billion in 2012. But there are reasons to fear that the television business is headed for same sort of traumatic, and so far unmitigated, dislocation that newspapers have been suffering for more than seven years. Tune in here to see why.
Next: How TV could suffer fate of newspapers