The following segment was excerpted from this fund letter.
Gannett’s recent results were disappointing, as ongoing secular headwinds that face the newspaper portion of the business weakened further. In addition, ongoing inflation (newsprint, paper, delivery, and wages) added $50M in incremental costs in the first half of the year. To further accelerate the company transformation, management is undertaking a significant cost reduction program (15-20% of total costs), removing a significant amount of fixed costs from the company’s business model.
The cost reduction program is expected to be fully implemented in the fourth quarter and initiatives are designed to generate more than $200M of annual cost savings. Importantly, Gannett’s ongoing growth initiatives remain on track; digital subscription business and digital market solutions which carry attractive margins should eventually help the company return to growth over time. In the meantime, as the cost reduction plan enhances profitability, management plans to continue to aggressively reduce their overall debt levels.
Over the past 3 years, Gannett has paid off close to $600M in debt and year-to-date has already reduced debt by $130M. With ongoing non-core asset sales, Gannett is expected to maintain ongoing debt reduction which should unlock significant equity value over time. With the current market capitalization below the company’s normalized EBITDA and free cash flow, the marketplace fears of further secular challenges and potential recession impact appear significantly discounted in the share price.
We remain patient with Gannett management’s multi-year transformation plan and believe the significant cost reduction program, further debt reduction, and extensive asset base provides a sufficient margin of safety in the near-term. With the share price near all-time lows, we see a significant price-to-value gap and believe long-term upside potential remains at multiples of the current price level.
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