McClatchy gets $640 million payout for website in whirlwind day for newspaper companies

08/05/2014 12:02 PM

08/06/2014 5:31 AM

In a whirlwind day for the newspaper industry, The McClatchy Co. and its partners made a blockbuster deal to sell a car-buying website to Gannett Co. Inc., which also announced it would spin off its print operations into a separate company.

The twin moves reflect the huge growth of the Internet, and the challenges facing print media.

Sacramento-based McClatchy and three media partners agreed to sell the successful website Cars.com to Gannett in a transaction that values the site at $2.5 billion. McClatchy’s share will come to $640 million before taxes, some of which will be used to invest in Internet ventures.

It’s one of the biggest deals in years for McClatchy, owner of The Sacramento Bee and 28 other papers.

Besides buying the website, Gannett announced it will split itself in two in a move that puts its flagship USA Today and other newspapers into a standalone company. A second company will be fashioned out of its digital operations, including Cars.com, and TV stations. Analysts said the dramatic spinoff means the TV stations won’t have to subsidize the less prosperous newspapers.

For McClatchy, the Cars.com deal represents the latest development in its long and sometimes bumpy transition to a digitally focused company. Cars.com has been generating profits for McClatchy and helping build its digital business, but company executives said the price Gannett offered was too good to pass up.

“The Internet space has gotten relatively frothy,” said Pat Talamantes, McClatchy’s president and chief executive officer. “It was a great price.”

McClatchy plans to use the bulk of its proceeds, $406 million after taxes, to repay debt and invest in other digital businesses, he said. Along with the other sellers, McClatchy will enter into a five-year affiliation agreement to continue selling Cars.com advertising.

“This allows us to continue to participate in the growth of Cars.com,” Talamantes said.

Gannett, which already owns 27 percent of Cars.com, is paying $1.8 billion for the rest. Besides McClatchy, which owns 25.6 percent, the sellers are Tribune Media Co., A.H. Belo Corp. and Graham Holdings Co.

The deal values Cars.com in total at $2.5 billion, or nearly 15 times the website’s annual cash flow. By comparison, newspapers are generally valued at five or six times cash flow, Talamantes said. Cash flow is a measure of profit.

Craig Huber of Huber Research Partners said it makes financial sense for McClatchy to sell its share of Cars.com, even though it’s a prized Internet business. “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,” he said.

McClatchy has now sold assets totaling $821 million this year, including Cars.com, its sister website Apartments.com and the Anchorage Daily News in Alaska. Talamantes, however, said McClatchy isn’t undergoing a slow-motion breakup.

“It’s all coincidental,” he said of the multiple transactions.

The deal is the biggest McClatchy has struck since early 2007, when it sold its largest newspaper, the Star Tribune of Minneapolis, for $690 million.

Analysts said freeing up cash to pay down debt will allow McClatchy to make a swifter transition to a digital company. The company owes more than $1.5 billion, the legacy of its 2006 purchase of Knight Ridder Inc.

“If you look at McClatchy’s transformation, the overhang of the debt has been huge,” said Ken Doctor of Outsell Inc., a research and consulting firm.

Edward Atorino, an analyst with The Benchmark Co. in New York, said the deal makes sense for McClatchy, which has struggled to maintain profitability. McClatchy, like other traditional media, faces fierce competition from new sources of information and advertising on the Internet.

McClatchy profits fell to $2.8 million in the second quarter from $10.3 million a year earlier, not counting one-time adjustments. Revenue fell 3.2 percent, continuing a trend that began in 2006.

“Having cash for them right now is better than having … a piece of Cars.com,” Atorino said.

Nonetheless, Talamantes said McClatchy felt no pressure to sell its share of Cars.com. The Sacramento company has been able to refinance its debt so the bulk of it, $900 million in bonds, won’t mature until 2022, which he said gives McClatchy considerable breathing room.

“We didn’t have to do this deal; we wanted to do this deal,” Talamantes said. “We want to take advantage of this deal because of the valuation opportunity.”

Initial media reports in the spring said the owners of Cars.com were seeking a sale price of as much as $3 billion. The $2.5 billion valuation is “certainly a decent enough number,” said Barry Lucas, senior vice president for research at Gabelli & Co. in New York. A $3 billion figure “would have blown me away,” he said.

Under the deal, McClatchy will continue to sell Cars.com ads for the next five years, but on less favorable financial terms than before. Talamantes wouldn’t go into detail but said the new financial terms were factored into the $2.5 billion valuation.

“The fact that there will be a five-year affiliate agreement, albeit under inferior economic terms, provides a bit of a runway to rebuild a digital automotive business,” Lucas said.

McClatchy shares closed at $4.65, up 9 cents, on the New York Stock Exchange.

In a conference call with analysts, Gannett executives described Cars.com as a fast-growing, high-profit business that prospered even during the recession. Revenue has grown an average 19 percent a year since 2006, and will surpass $500 million this year.

“It is a business that has tailwinds going with it,” said Gannett CEO Gracia Martore.

Cars.com, launched 16 years ago, represented one of the industry’s earliest cooperative efforts to deal with the rise of the Internet. Talamantes called it “a shining example of what the newspaper industry can accomplish working together.”

Besides earning profits from Cars.com ads, McClatchy received annual dividends from that website and Apartments.com, both of which were owned by a company called Classified Ventures. McClatchy collected $23 million in dividends from Classified Ventures last year, the bulk of which came from Cars.com, Talamantes said.

With its spinoff announcement, Gannett became the latest media conglomerate to move its print operations into a separate company. Most recently, E.W. Scripps and Journal Communications said they would merge their broadcast businesses and then spin off their newspapers.

The trend shows media companies are trying to separate their broadcast operations from their struggling newspapers, said Rick Edmonds, a media analyst at the Poynter Institute, a journalism training institute in Florida.

“It says that the broadcast industry is basically very healthy. They continue to have the benefit of a tremendous amount of political advertising,” Edmonds said. Newspapers, meanwhile, are “kind of a drag on the broadcast and digital-ventures side,” he said.

McClatchy hasn’t decided exactly how to spend the proceeds of Cars.com and its other recent sales, other than it will be a mix of debt repayment and digital investments.

Talamantes said the digital investments will probably consist of a series of relatively small deals. The company has already made fairly small investments in companies like Tru Measure, a data analytics company in Colorado, which it purchased last year for an undisclosed price.

“You cut down the big tree and … plant a bunch of seedlings to regrow the forest over time,” Talamantes said.

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