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Rating Action: Moody's assigns B3 CFR to Gannett; outlook stable
Global Credit Research - 20 Jan 2021
New York, January 20, 2021 -- Moody's Investors Service ("Moody's") assigned a B3 corporate family rating (CFR) and a B3-PD probability of default rating (PDR) to Gannett Co. Inc., ("Gannett" or the "company"). Moody's also assigned a B1 rating to Gannett Holdings, LLC's proposed $1.045 billion term loan due 2026. Concurrently, Moody's assigned the company an SGL-3 speculative grade liquidity (SGL) rating. The outlook is stable.
Gannett faces secular decline in its print and advertising focused activities as demographics evolve and consumers taste continue to gravitate towards digital media. The structural decline in Gannett's advertising segment is mitigated by the company's prudent financial policy. Moody's expects that the company will apply its good free cash flow generation to materially reducing leverage over the next 12-24 months.
Assignments: ..Issuer: Gannett Co., Inc
.... Corporate Family Rating, Assigned B3
.... Probability of Default Rating, Assigned B3-PD
.... Speculative Grade Liquidity Rating, Assigned SGL-3
..Issuer: Gannett Holdings, LLC
....Senior Secured Bank Credit Facility, Assigned B1 (LGD2)
Outlook Actions: ..Issuer: Gannett Co., Inc ....Outlook, Assigned Stable
..Issuer: Gannett Holdings, LLC
....Outlook, Assigned No Outlook
Gannett's B3 CFR reflects the company's challenged business profile with around 38% of 2020 revenue derived from advertising -- of which two thirds is print advertising -- which experienced a near 30% decline in the US in 2020 and is expected to continue to decline in the face of growing digital ad spend. In addition, 41% of the company's 2020 revenue came from circulation -- most of which also continues to be print based and in structural decline. The rating also reflects Gannett's high leverage at closing of the transaction with 2020 pro-forma Moody's adjusted leverage of around 5x following the refinancing transaction. While leverage is expected to decline to below 3x in the next 12 months, this is reliant on voluntary and mandatory debt repayment and also on further cost synergies being achieved in 2021.
The B3 rating also reflects the company's position as the largest owner of daily newspapers in the United States and community newspapers in the UK. Gannett has the potential to mitigate the decline in print circulation by growing digital subscriptions from a low base through a more consistent approach to pay-walls and subscription promotions across its media portfolio. The B3 rating reflects Moody's expectation for solid cash flow generation in 2021, as the company benefits from lower cash interest expense and the realization of further cost synergies. Moody's expects that excess cash will be prioritized for debt reduction in order to bring leverage below 3x by the end of 2021.
The publishing segment includes over 260 daily publications, including USA TODAY, and weekly publications in the U.S. and U.K. Publications are largely in small or mid-sized markets, where Gannett is the main provider of local news and information. Publishing revenues are generated through print and digital subscriptions, along with local, national, and classified advertising.
Moody's does not expect the structural pressures on Gannett's advertising and print circulation to ease in the future and any acceleration in the pace of decline in print circulation revenue would cancel out any growth in the much smaller digital revenue segment.
Gannett surpassed 1 million paid digital subscribers in the third quarter of 2020 (up 31% vs 2019) and is aiming to reach 10 million over the next five years. Growth in digital-only circulation will be driven by consistent pay-meters, focus on online branding and marketing, and enhanced content and price offerings.
Other growth areas the company has been focusing on are Digital Marketing Services (DMS, 12% of 2020 revenue) and the company's local Events (1.5% of 2020 revenue). DMS offers various digital advertising and web presence services to SMEs, although the majority of its revenue is derived from more commoditized search products. The addressable market is large and fragmented and Gannett benefits from local contacts through its advertising salesforce which should allow it to grow its market share. Given the highly fragmented market, Moody' s expects that the company may look to grow its DMS through M&A once it has reduced leverage. Given the nature of the DMS products, growth in this segment will lead to EBITDA margins compression.
The Events business also benefits from Gannett's strong foothold in local communities and while small is expected to nearly triple revenue in the next two years. The company also operates its own ticketing platform for these events.
Gannett's circulation and marketing services revenue include a level of short term predictability with around 71% of 2020 circulation revenue coming from subscriptions -- albeit only monthly recurring ones - and around 53% of Digital Advertising revenue are recurring although campaigns can be paused, as they were in Q2 2020 at the onset of the COVID-19 pandemic.
Environmental risks taken into account in Gannett's ratings focused mostly on the company's newsprint sourcing which is well defined as per the company's own environmental policy with steps taken to reduce consumption (lighter newsprint) and focus on sourcing sustainability.
Social risks taken into account in Gannett's ratings include evolving demographic and social trends, with changes in the way consumers consume media. The print media industry has been affected by both changing demographics and shifts in consumer behavior for a preference towards the use of social media and digital platforms for news content. In addition, the rating takes into account social risk from potential data privacy breaches and cyber risk.
Governance risks taken into consideration include Moody's expectation that the company will apply free cash flow to reduce leverage, a prudent strategy in light of the secular business risks facing the company.
The B1 rating on the term loan B reflects the probability of default of the company, as reflected in the B3-PD probability of default rating, an average expected family recovery rate of 50% at default, and the term loan's ranking in the capital structure ahead of $500 million of convertible notes.
The SGL-3 rating reflects Moody's expectation that the company will maintain adequate liquidity over the next 12 to 18 months, driven by solid cash flow generation, though most of it is expected to be used for voluntary debt repayment or to satisfy the expected cash flow sweep requirement. The company's liquidity profile is constrained by the lack of a revolving credit facility. The credit facility is expected to contain a minimum cash balance requirement.
The stable outlook reflects Moody's expectations that the company will reduce leverage to below 3x by year end 2021, despite expected overall revenue decline as a result of EBITDA growth mostly through cost synergies and debt pay down.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ratings could be upgraded if Gannet demonstrates consistent revenue and EBITDA growth, and sustains Moody's adjusted leverage below 2x.
Ratings could be downgraded if Moody's adjusted leverage does not decline to below 3x by the end of 2021 or if liquidity materially deteriorates.
Headquartered in McLean, Virginia, Gannett is the largest owner of daily newspapers in the United States and community newspapers in the United Kingdom. Gannett is also the owner of national USA Today publication. The company is present in 46 states across the US, and Guam, and it publishes 260 dailies and more than 170 paid weeklies. In the last twelve months ended September 2020, the company generated revenue of $3.6 billion and $406 million of EBITDA.
The principal methodology used in these ratings was Media Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1077538. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Christian Azzi Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Lenny J. Ajzenman Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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