By: Jennifer Saba
The print advertising slump affecting the newspaper industry is going to hang around for some time and it does not “show signs of a correction,” according to a new report released by Prudential Equity Research.
There’s even bad news for those hoping a recent stock rally is a point of inspiration. McClatchy’s surprise fire sale of its largest property, the Star Tribune in Minneapolis, has thrown cold water on investors looking for merger and acquisition activity to heat up the sector.
“Recent lower-than-expected sale multiples have investors thinking twice about premiums generated from M&A,” wrote Prudential’s lead analyst Steven Barlow. “Longer term, investors may become restless waiting for the Internet operations to make positive incremental EPS impact.”
On the acquisition front, Barlow explains why private equity and local investors have taken a sudden fancy to newspapers. Of course, it’s cash but in his analysis, Barlow predicts the metros, at least, are headed for 15% cash-flow margins. “Many newspapers operate at a 30% level, but those don’t seem to be the ones for sale,” he wrote.
At a 15% level, one could make a return of about 10% to 12% during a five-year period. “Not a home run, but owning a newspaper does give one a platform for sharing one’s views,” Barlow wrote.
Since Tribune is on the block, deal activity is not expected to slow. “Our best guess is the company sells itself off in pieces (we had originally thought just a paring of the portfolio would happen),” according to the report. Prudential analysts do no think Gannett will belly up to the table for Tribune given several cross-ownership issues.
Once Tribune is taken care, chances are very high that investors will turn their eyes to Gannett since it has one class of stock. The most likely outcome: Gannett will raise its dividend from the current 2.1% to perhaps 4%, predicts Prudential.