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• Content META

  Title	Fitch Places Gannett's Long-Term IDR and First-Lien Secured Debt Ratings on Negative Watch
  ID	3125878
  External ID	7201922880
  Author	Unknown
  Published Date	Oct. 10, 2024, 2:53 p.m.
  Summary	Thu 10 Oct, 2024 - 3:38 PM ET Fitch Ratings - New York - 10 Oct 2024: Fitch Ratings has placed both Gannett Co., Inc. (GCI) and Gannett Holdings LLC (Gannett) Long-Term Issuer Default Ratings (IDR) o
  Tags	None
  URL	https://www.fitchratings.com/research/corporate-finance/fitch-places-gannett-long-term-idr-first-lien-secured-debt-ratings-on-negative-watch-10-10-2024
  Sentiment	Negative: 0.93475    Neutral: 0.01395    Positive: 0.05130
  Relevance	0.03830

• Content Details

  Content ID	1555752
  Key	9d669fdf-468b-4aa4-ac0f-bef3b3f5d5d7
  Content	Thu 10 Oct, 2024 - 3:38 PM ET Fitch Ratings - New York - 10 Oct 2024: Fitch Ratings has placed both Gannett Co., Inc. (GCI) and Gannett Holdings LLC (Gannett) Long-Term Issuer Default Ratings (IDR) on Rating Watch Negative (RWN). Fitch has also placed Gannett's senior secured first-lien debt on RWN. The RWN reflects the likelihood a downgrade based on the expected increase in first-lien debt upon completion of the proposed debt exchanges. The company would increase total first-lien borrowings from $605 million, as of June 30, 2024, to an estimated pro-forma balance of $877 million, resulting in a pro-forma first-lien leverage increase of approximately one full turn, from 2.3x to 3.3x. Additionally, the potential for up to $900 million of first-lien borrowings would have a negative implication on the previously published recovery rating. Fitch expects to resolve the RWN once the proposed debt exchange is complete, likely at the end of October 2024. Key Rating Drivers Operational Headwinds: Gannett has faced major macroeconomic and operational headwinds over the past two years, including an advertising recession from 2H22 into 1Q24. The recession caused digital revenue to fall and accelerated the decline in linear advertising within the newspaper sector, causing a significant drag in 2022 and 2023. Operating performance was also dampened by the drop in linear circulation progressing faster than Fitch expected. Debt Reduction: Gannett has engaged in aggressive debt reduction efforts using a mix of FCF, asset sale proceeds and cash on hand. This saw debt fall by $254 million over the past two years to $1.09 billion at June 30, 2024, despite the operational headwinds. Overall, the company has cut debt by 38% from a peak of $1.76 billion following its 2019 acquisition by New Media Investment Group, Inc. Gannett's proposed debt exchange transaction materially improves the credit's maturity profile, as it pushes the vast majority of prior 2026 and 2027 maturity dates off to 2029 and 2031. Upon completion of this transaction, Gannett will likely not require additional capital markets access for another five years. Elevated Leverage: Fitch-calculated EBITDA leverage of 4.3x at June 30, 2024 exceeded Fitch's prior expectation of 3.5x and continues to exceed sensitivities. However, Fitch expects leverage to return to within the sensitivities in 2025 on continued operating improvements and debt repayment. Operating Recovery: Gannett's operating performance has been improving and the decline in revenue has decelerated for the last seven quarters, with a recovery in digital advertising and linear weakness appearing to have reached a trough. While Fitch expects positive momentum to continue across Gannett's digital platforms, the agency questions the long-term growth prospects of legacy media and expects linear to continue to decline. Digital to Drive Growth: Gannett's steady transition into the digital sphere via its digital marketing services (DMS) and circulation and advertising segments is a credit positive, as it counters the structural decline of its traditional linear business. Fitch expects the aggregate digital revenue contribution to exceed 50% of total revenue by 2025, against 42% in the 12 months ended June 30, 2024 and about 30% in 2020. The DMS segment offers the strongest growth potential, given the large base of untapped small-to-medium sized businesses. DMS provides a cloud-based platform, LocaliQ, which offers digital advertising and marketing solutions to businesses located primarily in the U.S. along with the U.K., Australia, New Zealand and Canada. DMS has approximately 14,700 clients and provided 19% of Gannett's total revenue in the 12 months ended June 30, 2024, against 13% in 2020. This was driven by a 39% increase in average revenue per user. Gannett plans to continue expanding this segment by developing its product portfolio using artificial intelligence-powered solutions and moving into smaller verticals. Improved FCF Generation: Gannett has returned to positive FCF generation, generating $56 million in 2023 and $55 million in the 12 months ended June 30, 2024. This was after operational headwinds compressed margins and led to negative FCF of $5 million in 2022. Fitch expects positive FCF generation to continue improving and for Gannett to realize annual low-single-digit revenue growth from 2025, as digital revenue growth offsets the ongoing decline in linear revenue. Fitch expects the annual cash interest expense to continue falling, even assuming higher refinancing rates, given historical and expected aggressive debt repayment. Capital intensity is expected to remain below 2%. Industry Headwinds: Industry-related risk weighs heavily on Gannett's rating, stemming from the ongoing decline in linear circulation and readership amid rising digital news consumption and audience fragmentation. Fitch expects linear media to become increasingly hyper cyclical and continue losing share to digital, as seen in Gannett's increasing portion of revenue from digital. Fitch expects the fall in print advertising and circulation to continue and for digital advertising revenue to exceed revenue from linear advertising starting in 2025. Diverse Portfolio: In addition to DMS, Gannett is the leading U.S. news media publisher based on circulation and owns USA TODAY and daily and weekly content brands in roughly 220 local markets. Its U.K. operations comprise over 150 daily and weekly newspapers and 70 magazines and related digital news and media sites. The company had more than three million paid subscribers as of June 30, 2024, including two million digital-only subscribers and 185 million aggregate unique monthly visitors to its websites. Rating Linked with Parent: Fitch equalizes the ratings of Gannett and its parent, GCI, in accordance with its Parent and Subsidiary Rating Linkage Criteria using a 'strong subsidiary/weak parent' approach. Fitch assesses the quality of overall linkages as high resulting in an equalization of the ratings, reflecting open legal ringfencing and open access and control across the capital structure. Derivation Summary Gannett is a global multi-media company consisting of publishing and digital media solution segments in the U.S. and U.K. Although Gannett is facing the same industry challenges as News Corporation's (BBB-/Stable) print media segment, Gannett has a smaller scale, lower diversification and higher leverage. This leads to the multi-notch rating differentiation. Gannett's rating reflects its substantially smaller scale and higher leverage relative to larger and more diversified media peers, like The Walt Disney Company (A-/Stable), Warner Bros. Discovery, Inc. (BBB-/Stable) and Paramount Global (BBB-/Negative). Gannett has lower leverage than Gray Television Inc. (BB-/Negative) and The E.W. Scripps Company (B/Stable), but this is offset by its narrower margin, greater operating volatility, smaller advertising market share and greater industry-related challenges. Key Assumptions --Revenue declines continue decelerating in 2024, as digital revenue maintains its positive growth trajectory and linear revenue declines moderate. Margin to improve driven by revenue growth deceleration and stabilizing operating leverage; --Revenue to rise in the low-single-digits annually from 2025 on the continued deceleration in linear revenue losses and high-single-digit annual digital growth. Total revenue momentum is driven by aggregate digital revenue, which continue to take share from linear, and are likely to exceed 50% of total revenue in 2025; --EBITDA margin to see a slow annual improvement, reaching about 11.6% by 2027 on improving operating leverage from both linear, which benefits from a smaller cost base, and digital; --Capex intensity between 1.3%-2.0%; --Improving FCF generation over the medium term, with the margin nearly tripling to 6.0% in 2027 (2023: 2.1%); --Real estate and non-strategic asset sales totalling $45 million in 2024, with proceeds used to pay down debt; --Proposed Apollo term loan and debt exchange transactions are completed at end of October 2024; --Shareholder returns remain paused. Recovery Analysis The recovery analysis assumes Gannett would be considered a going concern (GC) in bankruptcy and would be reorganized rather than liquidated. Fitch also assumes a 10% administrative claim. GC Approach Gannett's recovery analysis assumes that the company is unable to expand its digital subscriptions, advertising or media solutions business segments and reset its cost structure sufficiently to offset accelerated declines in linear subscribers and advertising. Fitch believes a GC EBITDA of $200 million is appropriate, as it expects Gannett's aggregate digital revenue to exceed linear revenue starting in 2025. This is in line with Fitch's expectation that linear platforms have become increasingly hyper-cyclical and will continue ceding market share to digital. Although Fitch believes Gannett will be unable to recover the linear revenue lost over the last two years, it expects linear declines to moderate. Fitch also expects the DMS segment, with its substantial portion of recurring revenue, will generate 20% of revenue in 2025. Fitch assumes a GC recovery enterprise value (EV) multiple of 4.5x EBITDA based on the following factors. In September 2020, The McClatchy Company was acquired out of bankruptcy for $312 million, or an estimated 4.2x 2021 adjusted EBITDA, based on McClatchy's financial projections provided in its February 2020 disclosure statement as part of its initial proposed equitization reorganization. Additional transactions include the acquisitions by New Media Investment Group, Inc. of several news, media and digital marketing providers for an average 4.1x multiple and Gannett in November 2019 for $1.34 billion, or 4.2x in the 12 months ended June 30, 2019 EBITDA. Similar public companies trade at EBITDA multiples ranging from the mid-single-digits to low teens, with the higher multiples belonging to large newspapers with national distribution and industry-leading digital subscriber success. The 4.5x multiple exceeds the M&A transactions, but is supported by the expectation that Gannett's ability to offset linear revenue declines with digital revenue growth will accelerate in the next 12 months, reversing the decline in total revenue and proving that the new paradigm is defensible. The multiple is further supported by Gannett's ownership of USA Today, a newspaper with national distribution; Newsquest, which has outperformed Gannett's domestic newspapers; and DMS, which is largely unaffiliated with the newspaper sector and continues to boost average revenue per user and revenue. Finally, the 4.5x exit multiple is in-line with multiples of peer companies covered in Fitch's latest technology, media and telecom bankruptcy case study. The proposed new Apollo term loan would potentially materially increase its first-lien debt and impact its calculated recovery value. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade --Successful execution of strategic operating transformation leading to sustainable total digital revenue growth that meaningfully offsets the decline in legacy revenues; --Consistent EBITDA and FCF margin improvement; -- Fitch-calculated leverage (total debt with equity credit/operating EBITDA) declines below 2.0x on a sustainable basis. Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade Fitch anticipates resolving the RWN when the proposed debt exchange is complete, likely at the end of October 2024. --Digital revenue growth slows or declines and is insufficient to meaningfully offset print subscriber declines; --Fitch-calculated leverage exceeds 3.5x without a creditable plan to return leverage within sensitivities. Liquidity and Debt Structure Adequate Liquidity: The company had $99 million in cash and cash equivalents as of June 30, 2024, and generated $55 million of FCF in the 12 months ended June 30, 2024. Gannett does not have a revolving credit facility as it typically generates FCF. Fitch expects FCF to rise in the medium term due to EBITDA growth, consistent with company guidance for FCF to accelerate over the 2025/2026 timeframe. The new Apollo term loan requires annual amortization of $68 million which will thereby require the company to direct the vast majority of free cash flow to be directed to loan repayment. Issuer Profile Gannett is a global media company offering a broad array of digital and linear news and media brands in the U.S., where it has the largest aggregate circulation, and the U.K. It also provides digital advertising and marketing solutions to SMB clients. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included. ESG Considerations The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores RATING ACTIONS Entity / Debt Rating Gannett Co., Inc. LT IDR B Rating Watch On B Gannett Holdings LLC LT IDR B Rating Watch On B senior secured LT BB Rating Watch On BB Additional information is available on www.fitchratings.com PARTICIPATION STATUS The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Corporate Monitoring & Forecasting Model (COMFORT Model), v8.1.0 ADDITIONAL DISCLOSURES ENDORSEMENT STATUS Gannett Co., Inc. EU Endorsed, UK Endorsed Gannett Holdings LLC EU Endorsed, UK Endorsed
  Content Reference URL	None

• Publisher

  Publisher Name	Fitch Rating (#3235)
  Publisher URL	https://www.fitchratings.com
  Description	None
  Trust Flow Score	33
  Citation Flow Score	46

• Data Source

  Data Source Name	Quantexa News (#5)
  Data Source Type	news
  Data Source URL	https://app.aylien.com/dashboard
  Description	Welcome to Quantexa News API — the most powerful way to aggregate, filter, and integrate global news data into your apps and models.
  Weight	10