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Gannett: Not Just a Paper Stock

Jonathan Heller

NEW YORK ( TheStreet) -- Gannett's 34% jump yesterday on heavy volume was yet another step in the company's recovery, a road that has been long and hard at times.

The stock's move, which put it at a five-year high, came after Gannett announced it will acquire Belo for $1.5 billion. Belo owns 20 television stations in Texas, Washington, Arizona, Louisiana, Idaho, Kentucky, Missouri, Virginia, Oregon, and North Carolina. These locations should help complement Gannett's 23 existing TV stations, as there is little geographical overlap. GCI data by YCharts

While you seldom see an acquirer's stock react as favorably as Gannett's did yesterday to the deal, the surprise move highlighted one of the hidden strengths of Gannett. Since Gannett has long been thought of as a newspaper company, its broadcasting segment has often been overlooked. While broadcasting represented just 17% of the company's total revenue for 2012, it accounted for more than 56% of operating income.

Belo, which generated a net profit margin of 14% for 2012, should bolster Gannett's overall profitability. In fact, Gannett believes the deal will increase earnings, adding 50 cents a share in the first year.

Gannett's stock ran into trouble back in 2008-2009 as newspaper companies fell out of favor, primarily due to plummeting advertising revenue and the move toward Internet-based news.

In early 2009, the stock fell below $2, as concerns mounted about the company's viability. A massive debt load, which stood at $3.8 billion at the end of 2008, didn't help, either. Nor did the 90% dividend cut in early 2009, which signaled that the best days of the company were long behind it.

But in that time, when the market was signaling its belief that Gannett might go under, a hard look at the company, and its efforts to right the ship, revealed a compelling story. (I did what deep-value investors do, and took a position in what appeared to be a very ugly situation). Sure, Gannett, parent of USA Today, was thought of primarily as a newspaper company, but there was clearly some value in the digital and broadcasting businesses.

Although the level of debt was of great concern, the company began to pay it down. By year-end 2010, debt was reduced to $2.5 billion, and the company was highly profitable and putting up better-than-expected numbers.

In September 2011, the company doubled its quarterly dividend from 4 cents a share to 8 cents. Just two quarters later, Gannett increased the dividend by 250%, to 20 cents. By then, debt was down to $1.4 billion, and the company was also buying back stock. GCI Long Term Debt data by YCharts

The stock is now up 13 times the low point it hit back in 2009. Along the way, skepticism has remained in the markets and among analysts, and the company has traded at very low multiples at times. Perhaps newspaper companies deserve low multiples. But the announcement of yesterday's deal might finally deal with the perception of what Gannett really is.

Even with yesterday's blistering performance, the stock yields 3%, and trades at about 11 times the 2014 consensus estimate, which does not yet include the potentially accretive nature of the acquisition. I believe that there also may be room for further dividend increases, but time will tell.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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