Media giant Gannett Co. announced Tuesday it was buying the 73 percent stake held by its four partners in the auto shopping website Cars.com and will reorganize into two publicly traded media companies.
The nation’s largest newspaper publisher becomes the last big public U.S. media company to separate its print and broadcast holdings -- an exclamation point on the accelerated move to the Internet by readers and advertisers.
Under terms of the deal, Gannett will pay McClatchy, Tribune, Graham Holdings Company and A.H. Belo a total of $1.8 billion for their shares in Classified Ventures, the parent company of Cars.com.
The four partners will keep exclusive sales of Cars.com products and services in their local markets for the next five years, including the 29 McClatchy newspapers and websites; Tribune’s Los Angeles Times and Chicago Tribune; The Washington Post; and Belo’s Dallas Morning News.
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Rumored for weeks, the deal provides Gannett, publisher of USA Today, with sole control of a profitable digital site and gives the sellers an infusion of cash at a time of high valuations for Internet ventures.
“This was one of those acquisitions, simply put, that makes perfect sense financially and strategically,” said Gracia Martore, president and chief executive officer of Gannett, in a call with investment analysts.
As its sole owner, Gannett can “take the business to the next level,” said Martore, adding that she will become the CEO of the new publicly traded company that combines higher-growth broadcast and digital holdings.
Both companies will remain headquartered in McLean, Va., and Gannett expects the spinoff to be completed by mid-2015. Robert J. Dickey, now president of Gannett's U.S. Community Publishing division, becomes CEO of the new publishing company when the spinoff is completed.
Media companies have been competing increasingly for advertising revenue against digital-only companies like Google and Facebook, which have captured the lion’s share of digital advertising gains.
The deal is part of a bigger strategic shift at Gannett and within the media sector to pare off the more profitable broadcast operations from the struggling newspaper business.
“It says that the broadcast industry is basically very healthy. They continue to have the benefit of a tremendous amount of political advertising,” said Rick Edmonds, a media analyst at the Poynter Institute, which offers journalism training in St. Petersburg, Fla. and online.
Broadcast stations are also now receiving transmission fees from cable companies, a relatively new development, and that adds to their improving revenue outlook.
“That’s a big new source of revenue. A number of these companies have expanded by purchasing other operations,” said Edmonds, noting that having newspaper holdings “is kind of a drag on the broadcast and digital-ventures side.”
There is a potential silver lining for newspapers, however.
“The theory is they’ll do better in a company by themselves. They won’t necessarily be last in line to get capital or management attention,” he said.
Gannett’s move follows other media companies that have separated their print and broadcast holdings. These include Belo, News Corp, Tribune and Scripps/Journal Communications. Tribune finalized its splitting of media holdings on Monday, while E.W. Scripps and Journal Communications on July 30 announced their intent to merge broadcast operations and then spin off newspaper publishing.
Gannett executives said they will use cash on hand and issue new bonds to help finance the acquisition of Cars.com and creation of a new standalone company, not yet named.
“One of the smartest things Gannett is doing is not putting any debt on the newspaper operation they're spinning off,” Craig A. Huber, an independent media research analyst at Huber Research Partners.
For McClatchy, he said, the sale allows it to work off more of its high debt. The $406 million in estimated after-tax proceeds from the sale, he said, will help knock down the $1.3 billion of net debt on the Sacramento, Calif.-based company's balance sheet.
“It's kind of like selling your wife's wedding ring, your very best asset, but it gives them breathing room to pay down debt," said Huber. “It's a good thing for McClatchy, they'll be able to lower their huge debt load.”
Investors seemed to agree. Shares in Gannett opened up 0.52 cents to $34.84, while shares in McClatchy traded up 0.29 cents to $4.89 within the first half-hour of trading.
McClatchy CEO Patrick Talamantes suggested that Gannett’s purchase of the stakes in Classified Ventures is a success story for all involved.
“Cars.com is a shining example of what the newspaper industry can accomplish working together. We joined forces and from scratch developed a highly successful Internet company,’’ he said.
McClatchy is expected to take away $640 million for its 25.6 percent share in Classified Ventures, $406 million after taxes.
“This transaction will provide funding for the continuing digital transformation of McClatchy, including the ability to find other exciting digital investments. It will allow us to continue to pay down debt and will generate liquidity for other uses.”
McClatchy has sold a number of assets in the past year, including its stake in the Apartments.com website, the Anchorage Daily News and McClatchy-Tribune Information Services, a joint wire service now operated by Tribune.
A company spokesman said the timing of the sales were coincidental and did not represent any change in strategy.
Cars.com, which has 10 million monthly unique users and lists 4.3 million new and used cars from 20,000 dealers, has grown steadily since its creation in 1997. At the time, it was a way for newspapers to stem the losses of local classified advertising.
But now Gannett plans to locate this business alongside its broadcast operations, not publishing. Martore said this reflected the reality that Cars.com has grown into a true digital business whose reach goes beyond cities with particular newspapers.
The sale of Cars.com comes seven months after Cox Enterprises paid $1.8 billion for a 25 percent share of Autotrader.com, the leading auto site with 14 million unique users a month.