Monday, August 18, 2014

GCI: We now value it at $44.00/sh, 27% upside ...

With the announcement of a spin-off in mid-FY '15 and the planned acquisition of, we now think the combined companies of Gannett (GCI) are worth approx. $9.9bil, or $44/sh, which represents a 27% upside from where the stock closed at on Friday.  The stock has gone up 28% since we discussed it on 1/27/14.  In addition, on Thursday (8/14), the well-known activist investor, Carl Icahn, filed a 13D on GCI stating that he now owns approx. 6.63% of GCI (based on a 225.65MM sharecount).   



Regarding, we are assuming low double-digit top-line growth until FY '19.  We plugged in 9% revenue growth for FY '19 and FY '20. revenues' 6-year CAGR (from end of FY '14 until end of FY '20) is approx. 12%.  NADA (National Automobile Dealers Association) is assuming a 4-year CAGR (until end of FY '18) of 17%+ in auto digital ad spending.  We believe NADA's estimates are based on the assumption that affiliate programs will continue to grow, with which we disagree.'s bigger margins will help expand GCI's digital segment margin an average of 300bps per year.  We think GCI's digital EBITDA margin will be between 25% and 27% going forward.  We have assumed a 7.2% 5-year CAGR (ending in FY '20) for total digital revenues. 

Given the sizable margin expansion and slightly higher top-line growth that the acquisition of brings to GCI's digital segment, we are now applying an EV/EBITDA of 9.5 (up from 8.0) to average EBITDA of FY '15 and FY '16.  

We also upped the EV/EBITDA multiple applied to the broadcast segment to 9.5 (from 8.0) as not only is broadcast's forward top-line growth comparable to digital, but its EBITDA margin is likely to be double that of digital.  In addition, the risk of the Aereo case is now non-existent.  And other companies in the space are trading at a much higher multiple.  Simply put - our sum-of-parts valuation assumption for the broadcast segment is conservative.  

We continue to apply 5.0 to the publishing segment's EBITDA.  Our sum-of-parts model (which includes net debt adjustments based on the upcoming acquisition) results in a total valuation of $44.30/sh for GCI. 

Discounted cash flow    

Assuming a spin-off, we also applied separate 6-year DCFs to publishing, and digital & broadcasting.  We used 6-year DCF in order to have same amount of odd years as even years, given the significant impact that planned worldwide events (such as the Olympics) and U.S. mid-term and Presidential elections can have on broadcasting and publishing. 

Given that most of the debt on the balance sheet is related to acquisitions made in the digital and broadcasting segments, we basically assumed a net debt of zero for publishing.  Based on continuing decline in newspaper publishing and circulation, we assumed a 4.5 terminal EBITDA multiple, which when applied with a 13.3% WACC, results in a $1.5bil equity value of the publishing segment, or $6.85/sh (based on the latest GCI sharecount).  

Assuming a net debt of $4.6bil (by the end of FY '14) for GCI's digital and broadcast segments, along with terminal EBITDA multiple of 9.5 and WACC of 8.9%, the digital and broadcast DCF model resulted in an equity valuation of $8.3bil, or $36.91 per share.  This makes our DCF-based valuation of the entire company, approx. $43.76/sh. 

Again, our latest valuation of the entire company is $44/sh (up from $40/sh), which is the average of DCF and sum-of-parts results.  Based on where GCI closed at on Friday, our new valuation of GCI now represents a 27% upside.  We note the stock has already moved up 28% since we initially discussed it on 1/27/14.

Icahn's wager on GCI

Regarding Icahn's 13D filing, it appears that he was a bit late this time in trying to force management of a publicly traded company to follow his instructions, as GCI made the spin-off announcement before Icahn started to 'suggest' it.  According to the 13D, Icahn and GCI management did not have any contact before the filing. 

We looked at Icahn's 6.63% share of GCI and noticed that call options expiring in Jun. '16 with a strike price of $20.15, represent 81.73% of his position.  Initially, one might think that Icahn is not that confident in GCI given that most of his holdings are in options.  However, his options position is not simply being long the call options.  According to the 13D filing, Icahn also wrote the same amount of puts with the same strike price, expiring in Jun. '16.  This synthetic long strategy, even though it lowers the dollar amount needed to acquire that many shares, shows he is actually very confident about that investment in GCI.  We estimate the average price at which Icahn purchased the stocks at $29.70.

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