UPDATE: Indy Star owner to break into two companies

Gannett Co. plans to split into two publicly traded companies by spinning off its publishing business, including USA Today and The Indianapolis Star, and also said it has agreed to buy full ownership of Cars.com.

Gannett will separate the publishing business through a tax-free distribution to shareholders, leaving behind a company focused exclusively on broadcasting and digital assets, including Cars.com and CareerBuilder, according to a written statement Tuesday. Gannett also agreed to buy the 73-percent interest it doesn’t already own in Classified Ventures LLC, the parent company of Cars.com, for $1.8 billion in cash.

The publishing business will keep the Gannett name, and the broadcast and digital operations will adopt a new, yet-to-be-determined moniker.

“The creation of two highly focused companies with enhanced financial and regulatory flexibility will accelerate growth and create additional value for our shareholders,” Gannett Chairwoman Marge Magner said in a prepared statement.

Gannett had been one of the last holdouts in an industry that’s forsaking the traditional newspaper-TV marriage. The company is now joining a long line of media companies splitting publishing from broadcasting. Time Warner Inc. spun off its Time Inc. magazine division this year; Tribune Co.’s assets split as of this week; and Rupert Murdoch’s News Corp. last year became 21st Century Fox Inc. for the film and TV business and News Corp. for the newspapers.

“The main reason any company has done this is to separate out broadcasting, which is becoming a higher-valued asset, from publishing, which, even though it has been stabilizing, clearly has more challenges than the other part of the business,” said Jim Goss, an analyst at Barrington Research in Chicago. “I assume they came to the same conclusion as many others that with this, there is great value creation and benefit to shareholders.”

Gannett shares rose 1.7 percent, to $34.90 each, in early trading Tuesday, giving it a market value of about $7.9 billion.

Higher payments

Local broadcasters are extracting higher payments from cable and satellite operators for the right to carry their programming. Gannett’s TV unit booked $88.7 million from retransmission fees in the 13 weeks that ended June 29, more than double the same period a year earlier.

Newspapers, meanwhile, have steadily lost money and readership since hitting a sales peak in 2005. Classified advertising has been hardest hit, dropping by more than half between 2000 and 2008 to $9.9 billion, according to the Pew Research Center. Competition from the Internet—including sites like Cars.com—has cut into that revenue.

Gannett said its two new companies will be able to expand in their industries because they have financial flexibility for acquisitions. The newspaper unit will be almost debt-free, with the broadcasting division retaining debt of $4.6 billion. The newspaper unit’s cash flow will let it buy other companies without adding substantial debt, CEO Gracia Martore said Tuesday on a conference call.

‘Attractive’ properties

“They can do a variety of acquisitions and investments without really in any way levering up in that business,” Martore said. “Clearly there have been attractive newspaper and local-media properties that have been on the marketplace.”

Splitting the operations will also make acquisitions easier by helping the new companies avoid regulations that restrict combined ownership of TV stations and newspapers, she said.

“We view the moves favorably, as the sum of the parts should be greater than the whole; each remaining company will be able to pursue acquisition growth opportunities,” Michael Kupinski, an analyst for Noble Financial Capital Markets, said Tuesday in a note to clients. The Gannett newspaper company will “be well positioned to be a leader in what is expected to be a heightened environment for industry consolidation.”

Gannett’s newspaper unit, which includes publications like Florida Today and the Arizona Republic, will retain the Gannett name and its digital publishing platform. The company, to be led by Bob Dickey, president of Gannett’s local-newspaper unit, will continue to have a relationship with Cars.com and Career Builder.

The broadcasting and digital business unit will own or provide service to 46 TV stations, including markets like Dallas, Houston, Washington and Seattle.

Cars.com, which was started in 1998, lets users check prices, compare models and read reviews of auto dealers.

Gannett already owned 27 percent of the auto-sales website. Classified Ventures is backed by four media companies in addition to Gannett: McClatchy Co., Tribune Media Co., AH Belo Corp. and Graham Holdings Co.

The purchase price implies a multiple of 11.7 times estimated 2014 earnings, Gannett said.

Bloomberg News reported earlier that Gannett agreed to buy the remaining stake in Cars.com for $1.8 billion, citing a person familiar with the matter.

Shares of McClatchy rose 12 percent, to $5.09 each, early Tuesday. AH Belo added 14 percent to $11.98. Tribune and Graham Holdings were little changed.

Gannett owns more than 80 daily newspapers, including The Star, which it acquired in 2000 as part of the $2.6 billion purchase of Phoenix-based Central Newspapers Inc.

The Star's newsroom has endured round after round of cutbacks in recent years, as financial pressures increased. The Sunday Star now has circulation of about 280,000, down from 363,000 when Gannett acquired it.

Last year, Gannett acquired Belo Corp. for about $1.5 billion, almost doubling the number of TV stations it controls. Talk of a split was raised almost immediately as the broadcast division's dominance grew over the publishing wing, something that has happened across the media sector as digital media evolves.