By some measures of corporate appetites, Gannett Co. Inc. should be nursing a case of indigestion.
The Rosslyn-based publisher of USA Today and 85 other daily newspapers has spent or committed nearly $1 billion on two major acquisitions this year -- the $717 million purchase of Detroit-based Evening News Association was announced last month and the $200 million acquisition of The Des Moines Register and Tribune Co. was completed July 1. These two bites and other acquisitions will increase Gannett's assets significantly beyond the $2.2 billion on the company's June 30 balance sheet.
But Gannett Chairman Allen H. Neuharth and Chief Financial Officer Douglas H. McCorkindale said the company's balance sheet and cash flow are strong enough to support additional acquisitions of significant size.
If the right opportunity arises tomorrow, Gannett will take it, Neuharth and McCorkindale said in separate interviews. And analysts agree that the element that has set Gannett apart in the media business is its willingness to pay the highest prices for the properties it wants and its ability to make those costly deals pay off within a few years.
Gannett's financial condition has been strengthened significantly by declining losses at USA Today, Gannett's national daily. McCorkindale said the paper would lose between $40 million and $100 million this year, following even larger losses in 1983 and 1984, adding to the cash flow that feeds Gannett's growth.
"Most of our banks -- in fact, all of them, I think, without exception -- have told us there is much, much more additional capacity available to us if something else were to come along that was attractive," McCorkindale said.
"The acquisitions we have made so far this year don't put us in any bind financially," Neuharth said. "I don't have any concern about us being stretched. I don't think that we are at or near our debt limit .
"We throw off a tremendous amount of cash," Neuharth said. "We could reduce debt by $200 million to $250 million from cash flow. Our acquisitions look pretty big this year in the aggregate, but we took it easy in the acquisition field in '83 and '84 when we weren't quite sure what was going to happen with USA Today . That is part of the balancing act."
Since Gannett went public in 1967, the company has an unbroken string of 71 quarterly earnings increases, to go along with a history of growth through acquisitions. Wall Street analysts say the company occasionally has engaged in creative transactions designed primarily to ensure that the quarterly numbers showed increases.
"They manage their earnings," said Paine Webber analyst Ken Noble, who has followed the company since it went public. "Why do they go to all this trouble? Because of what determines stock prices. In this industry, the market places a high premium on consistency in earnings."
Neuharth and McCorkindale said borrowing costs related to the recent acquisitions would not lead to down quarters in the foreseeable future for the nation's largest newspaper publisher.
Part of the Gannett formula includes a rigorous control of costs -- at times at the expense of the depth of its news coverage, some journalists maintain. An equally important element in the strategy that has fueled Gannett's growth, according to other industry experts, is on the revenue side, where Gannett aggressively has raised advertising and circulation rates in good times and bad. This pricing strategy has been possible because the company has focused its newspaper acquisition strategy on dailies that are dominant in their respective markets.
"If you look at Gannett's operation, you see that what Al Neuharth has done is understand the lesson of Canadian newspaper magnate Roy Thomson," said one media industry expert who has followed the company closely for many years.
"If you have a monopoly newspaper property, you can price to beat hell, and Al's prices make Roy Thomson look soft. He does it on the pricing side, and the truth is it doesn't hurt circulation and advertising volume . Others in the industry are leaving money on the table. The business is so profitable that nobody needs to know how far you can push the prices. In Neuharth's case, he is driven by the desire to have higher quarterly earnings, and he has to push even harder because of USA Today."
While Gannett officials said they charge a single-copy price of 35 cents a day for 41 of their 87 dailies, newspaper analyst John Morton said a majority of newspapers around the country still sell for 25 cents or less.
Gannett has moved quickly to raise USA Today's price, boosting the single-copy rate to 50 cents only a year after the price was raised from 25 to 35 cents. USA Today Publisher Cathleen Black said that, when the price was raised from 25 to 35 cents last year, circulation fell less than 10 percent before rebounding. One advantage the national newspaper has in maintaining circulation, while raising rates, is that it still is being introduced in new cities.
"We all compare notes and Warren Phillips chairman of Dow Jones & Co., publisher of The Wall Street Journal told me that one of the mistakes they made was when they went from 35 cents to 40 cents, which takes three coins," Neuharth said. "We learned from that. It looks as though that is not the way to do it. Going from 35 cents to 50 cents on USA Today will bring over $40 million annually to the bottom line."
In 1984, Gannett earned $223.9 million ($2.80 a share) on revenue of almost $2 billion versus1983 earnings of about $191.7 million ($2.40 a share) on revenue of $1.7 billion. Last year, 54 percent of the revenue came from newspaper advertising, 21 percent from newspaper circulation, 12 percent from television and radio, 10 percent from outdoor advertising (Gannett Outdoor calls itself the largest billboard company in North America) and about 3 percent from other operations.
In the first half of 1985, the company's earnings increased to $113.1 million ($1.41 a share) from $94.5 million ($1.18 a share) a year earlier, while revenue increased from $916.9 million to $1.04 billion.
In 1967, the year Gannett went public, it had a profit of $7.4 million on revenue of $110.2 million, from a far smaller base, which included 19 daily newspapers and 3 television stations.
"The financial integrity of this company is extraordinary," said Kidder Peabody analyst Joseph Fuchs. "The strength of Gannett is they have grown dramatically over the last 15 years through acquisitions. Among all the media companies, they have the best record of making financially successful acquisitions."
Like other major media companies, Gannett owns properties that churn out a lot of cash, which can be used for capital expenditures, explorations of new technology, debt reduction or acquisitions. The recent cash acquisitions are being financed primarily with short-term debt known as commercial paper, which the company hopes to pay down quickly out of cash flow. Short-term financing enables Gannett to borrow money for as little as 7.5 percent, McCorkindale said, and also permits it to eliminate debt more quickly than if it borrowed money on a long-term basis.
But if the chance to buy a giant media company such as CBS Inc. presented itself and the numbers worked, Gannett might try to make a mega-acquisition by offering stock to the target company's shareholders, Neuharth said, acknowledging that he had serious conversations with CBS officials after that company became the target of a hostile takeover bid from Atlanta broadcaster Ted Turner.
Gannett's latest balance sheet, dated June 30, showed total assets of about $2.2 billion and total debt of about $495.2 million. The pending $717 million acquisition of ENA, which includes The Detroit News and Washington's WDVM-TV, Channel 9, is not reflected in those numbers.
McCorkindale said the actual cost of ENA will be nearly $200 million less than the $717 million price, because Gannett will sell some properties. He predicted the company would have total debt of between $850 million and $900 million by the end of the year if the ENA deal and related divestitures are completed.
"That is more than adequately covered by our existing financial resources," McCorkindale said. "That would be a short-term position, because the cash flow of the company is so postive that it would come down very rapidly. Keep in mind that Evening News Association itself generates cash that is going to be there to help pay off the debt.
"We started the year with $188 million in debt. Without ENA, we would have been at $380 million to $390 million in debt by the end of the year. Having spent $300 million on acquisitions and $190 million on capital improvements, we would have incurred only a $200 million increase in debt, which means there is a couple hundred million dollars of extra cash flow. All media companies have terribly positive cash flow."
Neuharth and McCorkindale said separately that mismanaging ongoing businesses or making one or more bad acquisitions were the only moves that could stop Gannett from continuing to post earnings increases and continuing to grow through acqusition. However, they would not resist a new major deal just because it temporarily would depress the company's quarterly earnings.
The media industry has been a hot spot for merger activity in 1985, with the value of media companies soaring. That would appear to make it a better time to be a seller than a buyer, but the Gannett executives defended their rich takeover bids, including the winning $200 million offer for The Des Moines Register and Tribune Co. That offer surprised most industry analysts, especially because The Register is circulated statewide, and Iowa's agriculturally based economy is suffering.
"We bought $80 million in revenue for $200 million," McCorkindale said. "In the media business today, you cannot buy good franchises for 2.5 times gross revenue. They are going for four and five and other numbers. I would much rather pay $200 million for $80 million in revenue than $150 million for $30 million in revenue. I don't think anybody you talk to on Wall Street today that has analyzed Des Moines would say that the bid was outrageous anymore. That was their initial knee-jerk reaction, as it was when we bought Wilmington newspaper at $60 million."
"We paid a price that we wanted to be pretty sure would be the winning price, but we arrived at that by carefully analyzing what we think we can do with it under our ownership," Neuharth said. "We don't get too concerned with what it has earned in the past. We are quite concerned with the revenue, how much money they run through the till. Then we've had enough experience with other papers and broadcast stations to say if the market is okay and the revenues are there, you ought to be able to do X with it.
"We have seldom miscalculated on what we could do with a new acquisition in years 2, 3 or 4. The track record indicates that, if we're in the right markets, the revenues are there, and the newspapaper is either the dominant one or the only one, we can meet our expectations."
Neuharth said the Des Moines deal does not reflect a major change in strategy because it is a monopoly newspaper. He said ENA's Detroit News is farther ahead in its battle in Detroit with Knight-Ridder's Free Press than most observers realize, taking in about two-thirds of the advertising revenue, even though The News has only a 20,000-paper edge in daily circulation.
"There was a comical reference or two in The Wall Street Journal to the effect, 'Gee, Neuharth's got sentimental reasons for wanting to get back to Detroit because he worked on the Free Press ,' " Neuharth said. "We don't think with our glands. We don't make any glandular reactions. We just don't permit ourselves that.
"Unless any kind of deal, whether it's a big one or a small one, makes economic sense, we're not going to do it. We're not there just for fun. We're not anywhere for emotional or sentimental reasons."