Right Time to Bet on Publishing Stocks: Here's Why

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Newspaper companies are transforming their business models to better position themselves in a multi-platform media universe. Newspaper companies are focusing more on mobile devices, online advertising based on user experience and personalized content to make them less dependable on traditional advertising revenues. They are also streamlining their cost structures, strengthening their balance sheets and restructuring their portfolios.

Let's have a look at what is happening in the publishing industry and how newspaper companies are adapting to the changing face of the media to keep themselves fit to run the race for survival.

Industry's New Game Plan

Newspaper publishing companies are diversifying their revenue base. They are making endeavors to expand their presence in broadcasting and digital products with the aim of lowering dependency on soft print media business and traditional advertising, therefore reducing susceptibility to economic conditions. They are even separating their broadcasting and digital properties from the sluggish print business.

TEGNA Inc. ( TGNA ) was formed after the parent company Gannett spun off its Broadcasting and Digital and Publishing units into two separate entities. The publishing division retained the name of the parent company, Gannett Co., Inc. ( GCI ).

This is not the first time that any media company has spun off its publishing unit. Earlier, Tribune Company had separated its newspaper business into a publicly traded company, Tribune Publishing Company ( TPUB ). News Corporation ( NWSA ) and Time Warner Inc. ( TWX ) have also separated their broadcasting and digital properties from their sluggish print business.

The recent trend in the industry is towards consolidation. With an aim to strengthen its position in the newspaper industry, Gannett entered into a deal to acquire Journal Media Group, Inc. ( JMG ), the owner of the Milwaukee Journal Sentinel and other newspapers, for approximately $280 million. Journal Media Group was formed after Journal Communications and E.W. Scripps merged their broadcasting operations and split the newspaper business. The merged broadcast and digital media company, headquartered in Cincinnati, retained the name The E.W. Scripps Company ( SSP ).

The buyout - to be concluded in the first quarter of 2016 - should be accretive to Gannett's earnings by approximately 10-15 cents a share in the first full year and 20-25 cents in the second. The company's annual revenue should also get a boost of approximately $450 million. Moreover, the deal is likely to lead to operating synergies of approximately $35 million.

The acquisition of Journal Media Group will bring in 15 dailies and 18 weeklies in 14 local markets under Gannett's portfolio and increase the daily and Sunday circulation by approximately 675,000 and 950,000, respectively.

Gannett has also undertaken a massive rebranding, whereby it will bring in all its 92 local media brands plus its flagship national newspaper USA TODAY under one ambit "USA TODAY NETWORK," which it thinks will help advertisers reach greater audience through various platforms.

Earlier in Jun 2015, Gannett acquired the remaining stake of 59.36% in the Texas-New Mexico Newspapers Partnership from Digital First Media. However, the company had to relinquish its 19.49% stake in the California Newspapers Partnership and pay additional cash for completion of this deal which provides it with full control over 11 newspapers in three states.

Gannett now has complete ownership of - El Paso Times in Texas; Alamogordo Daily News, Carlsbad Current-Argus, The Daily Times in Farmington, Deming Headlight, Las Cruces Sun-News and Silver City Sun-News in New Mexico; and Chambersburg Public Opinion, Hanover Evening Sun, Lebanon Daily News and the York Daily Record in Pennsylvania.

Gannett also acquired the Romanes Media Group in the latter part of May, which comprises of one daily and 28 weekly publications, and respective websites.

Pay As You Access

"To read further please subscribe" is the new mantra that newspaper companies are fast adopting. To curb shrinking advertising revenues and improve market share battered by the recent economic downturn, some of the publishing companies are now considering charging readers for online content. We believe that this would end the free usage of online content. Despite hiccups in the economy, the online subscription-based model still promises guaranteed revenue generation.

The New York Times Company ( NYT ) fixed monthly charges of $15 for access to more than the restricted number of articles on its website and on a smartphone application; $20 for unlimited access online and on Apple Inc.'s ( AAPL ) iPad tablet computer application; and $35 for online, smartphone and iPad application. Moreover, in order to woo subscribers, the company introduced a plan of 99 cents under which one will be able to enjoy all digital offerings for one month.

The New York Times Company notified that the number of paid digital subscribers reached 1,041,000 at the end of the third quarter of 2015, rising 51,000 sequentially and almost 19% year over year. The launch of new subscription-based digital products such as NYT Now, Times Premier and Cooking product also contributed to the improvement. The New York Times Company is steadily taking strides to bring in more readers under the ambit of the subscription-based model.

Other Business-Reviving Endeavors

In an effort to offset declining revenues and shrinking market share, publishers are scrambling to slash costs. This has compelled many newspaper companies to undertake cost-cutting measures such as headcount trimming, pay cuts, furloughs, voluntary retirement programs and closure of printing facilities.

Publishing companies have been offloading assets that bear no direct relation with the core operations. The New York Times Company in May 2012 divested its remaining stake (210 Class B units) in the Fenway Sports Group, the owner of the Boston Red Sox and the Liverpool Football Club, for $63 million. Another example of asset shedding by the company is the Dec 2011 sale of Regional Media Group, which was long grappling with shrinking advertising revenues.

Waning print advertising revenues, in an uncertain economy, compelled The New York Times Company to take this tough decision of divesting Regional Media Group, part of The New York Times Media Group. This helped the company to renew its focus on its core newspapers and pay more attention to its online activities. The divestiture was also considered part of the cost-containment efforts undertaken to stay afloat in this soft environment.

The New York Times Company on Sep 24, 2012 completed the sale of About Group, which it acquired in 2005, to InterActiveCorp ( IACI ) for a consideration of $300 million. In Oct 2012, the company sold its stake in Indeed.com, a job portal, for approximately $167 million.

The New York Times Company on Oct 24, 2013 completed the sale of its New England Media Group, including The Boston Globe and its allied properties to an acquisition company spearheaded by John W. Henry, who owns Fenway Sports Group. Additionally, the company also offloaded its 49% stake in Metro Boston.

Bottom Line

With a strategic and steady newspaper budget, we could see fewer layoffs, increased focus on web and local content, improved subscription and concentration on profitable circulation. We observe that newspapers are turning more subscriber-oriented, offering reports in line with readers' choice. We expect paywall strategies, new pricing techniques and product innovation to generate more revenues for the newspaper companies.

We also believe that separating the publishing division will help to better exploit the potential of the broadcasting and digital businesses. Moreover, once the companies are spun off, these will have separate management teams and a much more defined capital structure that will provide ample room for strategic decisions related to any investment, acquisition or a new endeavor that can benefit that particular business, and in no way affect the other.

Consolidation too has its benefits of a stronger base and wider reach. No wonder, the publishing companies are bolstering their stronger side to optimize business profits.

As you can see, there are plenty of reasons to be optimistic on the newspaper publishing industry over the long term. But what about investing in the space right now?

Check out our latest Publishing Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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