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Indy Star will be carrying lots of baggage to new home

September 6, 2014

The Indianapolis Star this month will relocate to the former Nordstrom space at Circle Centre, a move the newspaper’s embattled reporters and editors hope signals a fresh start after years of cutbacks.

But newspaper analysts aren’t sure the pain is over. They praise parent Gannett Co. Inc.’s plan, announced in August, to break into two, with an as-yet-unnamed company taking the parts that get investors revved up—TV stations and digital properties like Cars.com—while leaving daily newspapers and their websites behind.

To be sure, a management team devoted solely to making hay in publishing might find opportunities that Gannett’s current leadership, with its increasing focus on TV and digital, has not.

Even so, what’s driving Gannett’s split, and similar splits announced by other newspaper publishers, is “financial engineering,” media analyst Ken Doctor wrote in a blog post.

“Newspaper properties are depressed and distressed, and the public markets have less and less interest in them,” wrote Doctor, author of “Newsonomics: Twelve New Trends that Will Shape the News You Get.”

“So sequestering the print assets to ‘unlock the value’ of broadcast and digital just makes sense.”

These are challenging days for all newspapers, including IBJ, which have seen print revenue fall faster than they can make up through Web advertising and new digital products. But the pressures are especially intense for daily papers.

Many, like The Star, have restricted free access to online news, in a quest for circulation revenue. But the abundance of free, general-interest news from other sources, including TV stations, limits their leverage.

Analysts aren’t anticipating relief anytime soon. The research firm Jefferies Group projects that Gannett’s publishing arm, including USA Today and 81 other daily newspapers, will generate revenue of $3.2 billion in 2014, down from $3.5 billion in 2012 and $3.3 billion the following year. Jefferies pegs revenue at $3.1 billion for 2015 and $3 billion for 2016.

The good news is that publishing remains solidly profitable, a point that’s easy to forget amid the onslaught of negative headlines. Jefferies said Gannett’s publishing arm this year will throw off $460 million in so-called EBITDA—earnings before interest, taxes, depreciation and amortization.

Gannett in recent years has propped up those results through aggressive cost-cutting, a game plan the company can carry only so far before it undermines the long-term marketability of its publications.

The Indianapolis Newspaper Guild says layoffs announced at The Star last month are the sixth round of cutbacks in six years. The reductions will shrink the newsroom to about 90 employees covered by the Guild and 16 managers. In 1998, The Star had 279 employees covered by the Guild.

At this point, Gannett has “exhausted the easier cost-cutting options,” Barclays Capital analyst Kannan Venkateshwar said in a report.

Once the spin-off is complete next year, the company likely will attempt to entice investors with a robust cash dividend and by making acquisitions that provide opportunities to “squeeze out corporate expenses, printing facilities and marketing & distribution infrastructure,” Venkateshwar wrote.

“There is a base of newspaper companies which could combine together to create value, contingent, of course, on deals with reasonable valuations,” he wrote.

A smart sale

All the current challenges add an exclamation point to this reality: The Star’s former owner, the Pulliam-controlled Central Newspapers Inc., sold at the right time.

In 2000, Gannett paid an eye-popping $2.6 billion in cash for Phoenix-based Central, whose holdings also included The Arizona Republic and smaller newspapers.

Analysts figure a split-up Gannett is worth a total of about $38 a share, with no more than $10 of that value coming from publishing. Based on the number of shares outstanding, they’re valuing the entire publishing business at $2.3 billion.

If any Central executives foresaw the trouble ahead, they weren’t letting on. In correspondence explaining the deal to shareholders, Central said that “its size and scale were not sufficiently large to enable the company to benefit from economies of scale available to larger competitors in the industry.”

Central’s rationale said nothing about the Web.•

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