Gannett Co., the publisher of USA Today, surged the most in more than four years after agreeing to buy Belo Corp. for about $1.5 billion, gaining TV stations to reduce its dependence on its shrinking newspaper business.
Gannett rose 34 percent to $26.60 at the close in New York, the biggest one-day gain since April 2009. The McLean, Virginia-based publisher will pay $13.75 per Belo share in cash and assume $715 million in debt, according to a statement today. The per-share price is 28 percent above Belo’s closing price yesterday, a premium that’s 14 percent higher than the average for similar deals, according to Bloomberg Industries analyst Paul Sweeney.
The acquisition will make Gannett the fourth-largest owner of major network affiliates, almost doubling the number of stations to 43 from 23. Adding more local broadcasters in U.S. cities such as Houston gives Gannett leverage with cable and satellite distributors when they renegotiate licensing fees.
“It gives them bargaining power like crazy,” William Smead, chief executive of Smead Capital Management Inc., said in an interview. His firm manages 1.1 million in Gannett shares.
In addition to Houston, the deal gives Gannett stations in other major markets in Texas as well as in Arizona and in parts of the South and Northwest. The stations, and the broadcast networks they’re affiliated with, are beginning to extract fees from cable and satellite operators such as Comcast Corp. and DirecTV in exchange for distributing local-TV programming. Those fees are estimated to rise 28 percent this year to $3 billion industrywide, according to SNL Kagan.
The pace of mergers has accelerated in the broadcast-TV industry: Last week, Media General Inc. agreed to buy New Young Broadcasting Holding Co., while Sinclair Broadcast Group Inc. has spent more than $1.84 billion on broadcasters in the past two years.
“Consolidation continues in the industry,” Tracy Young, a media analyst at Evercore Partners, said in an interview. “At the end of the day there’ll be a handful of players.”
The transaction also underscores Gannett’s exposure to the weakening newspaper industry. The company’s publishing business declined 23 percent in operating income last year from 2011. Gannett’s broadcast division, meanwhile, gained 47 percent in the same period. Gannett’s broadcasting division already accounts for 52 percent of its annual operating income.
Gannett’s acquisition doesn’t include newspapers such as the Dallas Morning News, which Belo spun off into a separately traded company in 2008 called A.H. Belo Corp.
“We wanted to move Gannett into being a more diversified multimedia company,” said Gracia Martore, president and chief executive officer of Gannett, in an interview. “This was a unique transaction which provides enormous scale, and it solidifies Gannett as the largest local-media company in the U.S.”
Gannett shares have advanced 48 percent this year. Dallas-based Belo jumped 28 percent to $13.77 at the close in New York, its biggest one-day increase in more than four years. Other media stocks also gained on the news. Sinclair rose 13 percent to $27.15, while New York Times Co. gained 6 percent to $10.75.
The deal is expected to increase earnings by about 50 cents a share within 12 months, Gannett said, citing a measurement that doesn’t conform with generally accepted accounting principles. The improvement in cash flow will help Gannett pay down debt while remaining committed to capital allocation, the publisher said.
Gannett will continue share repurchases and replaced its old plan with a new $300 million authorization expected to be used over the next two years, according to the statement.
JPMorgan Chase & Co. is providing financial advice to Gannett, and Nixon Peabody LLP and Paul Hastings LLP are the acquirer’s legal advisers. Royal Bank of Canada is Belo’s financial adviser, while legal advice is being provided by Wachtell Lipton Rosen & Katz.