Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Gannett Co., Inc. and Gannett Holdings LLC at 'B'.
It has also revised the Rating Outlook to Negative from Stable.
The change in the Outlook to Negative is due to lower than expected FY21 and 1H2022 operating performance, driven by macroeconomic headwinds and related operational challenges, which drove Fitch-calculated leverage just outside its negative sensitivities. Fitch expects leverage to increase slightly then reverse over the next 18 to 24 months due to operating improvements and debt repayment.
Key Rating Drivers
Leverage Trend: Gannett's Fitch calculated leverage was 3.9x as of June 30, 2022. Although Fitch expects it to peak in the low 4.0x, it is expected to return within sensitivities within 18 to 24 months. The leverage increase was driven by print advertising and circulation declines and cost inflation in FY2021 and into 1H2022 that exceeded Fitch's expectations. Fitch expects the declines will continue at roughly their current level and that inflation will moderate into 2023.
Fitch takes significant comfort from Gannett's ongoing debt repayment, recognizing the company has repaid more than $525 million of debt since peaking at $1.8 billion peak when it was acquired by New Media Investment Group, Inc. (NMIG) in 2019. The company is expected to continue repaying debt given significant required amortization and required excess cash and asset sale proceeds repayments.
EBITDA Margins to Improve: Fitch expects Gannett's EBITDA margins to improve by approximately 150bps through 2024 due to improved operating leverage from digital marketing solutions growth and targeted cost savings of between $200 million to $240 million recently disclosed by the company. Fitch believes the cost synergies are largely attainable as the company continues to focus on rightsizing its legacy print business, and its rating case assumes more than 90% expense realization success. Neither Fitch nor the company included any revenue synergies in their calculations.
Secular Headwinds: Gannett will continue facing negative secular headwinds in print circulation and readership driven by increasing digital news consumption and audience fragmentation, which will be a drag on total advertising revenues. While these headwinds are pandemic-related, it remains too early to determine if the accelerated declines will continue, which could preclude Gannett from returning to the pre-pandemic decline trajectory of high-single digit to low-teens.
Advertising Environment: Fitch is modeling a U.S. advertising recession starting in late 2022 and continuing into 2023, leading to low to midsingle-digit revenue declines, followed by a recovery into 2024 in line with historical trends. While Fitch expects Gannett to see continued positive momentum across its digital platforms, it does remain concerned about legacy media's long-term growth prospects and expect print to continue to decline.
Digital Expected to Drive Growth: Gannett's steady transition into the digital sphere via its digital marketing solutions and advertising segments are viewed as a credit positive as it counters the structural decline of its traditional print business. Fitch expects Gannett's digital revenue contribution to rise above 40% over the rating horizon, from 35% for LTM ended June 30, 2022 and 10% in FY2017. Gannett's conversion of several local papers to digital subscriptions have been promising and the company has experienced strong digital subscriber growth of 35% during 1H22.
Gannett's digital marketing services (DMS) offers the best growth potential given the large base of untapped SMBs despite an industry-wide elimination of digital marketing incentives. Prior to the pandemic, Gannett saw a significant increase in the number of annual events held and saw events return to prior growth trajectory in 2022.
Gannett Media Revenue to Decline: Fitch expects Gannett's Media segment to experience revenue declines of around 10% by financial year end (Dec. 31 2022; down 6% yoy during 1H22). This is primarily due to softer advertising market conditions, which have exacerbated some of the structural challenges in its traditional print business. Fitch does not expect the prevailing market conditions to continue, therefore the agency projects an eventual recovery in 2023, as businesses will look to increase marketing expenditures as a means to capture economic recovery.
Diverse Portfolio: As of Dec. 31, 2021, Gannett is the largest U.S. newspaper publisher, serving more than 600 communities with more than 260 local and national daily newspapers, including USA Today, 302 weekly newspapers, 383 locally-focused websites, and 74 business publications and also publishes 143 daily and weekly newspapers and 32 magazines in the U.K. and related platforms. As of June 30, 2022, it had approximately 3.5 million total paid subscribers, including 1.4 million digital only subscribers and had approximately 165 million unique monthly visitors.
Parent Subsidiary Linkage: Fitch links and synchronizes the IDRs of Gannett and Gannett Holdings as they operate as a single enterprise with strong legal and operational ties. Fitch believes the cross-guarantees provided by Gannett and Gannett Holdings solidify the strong linkage between the entities.
Gannett is a multi-media company consisting of publishing and digital media solutions segments in the U.S. and U.K. and Fitch does not rate any direct comps. Two indirect comps with similar revenue growth trajectories are Verizon Media Group (BB-/Stable) and Frontier Communications Parent, Inc. (BB-/Stable), both of which are rated higher due to lower leverage. While a third indirect comp, Windstream Services LLC (B/Stable), also has a similar revenue growth trajectory, its lower leverage is offset by a limited capacity to mitigate execution risks.
Fitch's Key Assumptions Within the Rating Case for the Issuer
Revenue decline of approximately 7% in 2022 driven by macroeconomic weakness leading to lower advertising spend and 2% in 2023 due to continuing macroeconomic overhang. Thereafter, revenue grows by low single digits as DMS growth more than offsets continued print declines;
EBITDA margins to contract to 10.7% in 2022 due to a lower top line and then recover due to increasing operating leverage at DMS and renewed cost cutting efforts, reaching 12.7% by 2025;
Capex intensity at 1.3% of revenue;
Positive FCF generation over the rating horizon;
Asset sales totaling $60 million in 2022, with proceeds used to pay down debt;
No share repurchases or dividend payments over 2022 and 2023.
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes Gannett would be considered a going concern in bankruptcy and would be reorganized rather than liquidated and assumes a 10% administrative claim.
Going-Concern (GC) Approach
Gannett's recovery analysis assumes the company is unable to grow its digital subscriptions, advertising, or media solutions business segments sufficiently enough to offset accelerated print subscriber and advertising declines. As such, the post-reorganization going concern EBITDA is $338 million, which represents an approximate 20% decline from financial year ended Dec. 31, 2021, Fitch-calculated EBITDA of $423 million.
Fitch assumes Gannett will receive a going-concern recovery 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 their February 2020 disclosure statement as part of their initial proposed equitization reorganization). Fitch's July 2021 TMT bankruptcy case study exit multiples for peer companies ranged from 4.2x-7.8x, with an average of 6.3x. While the 4.5x multiple is below the case study average exit multiple, the bankruptcies occurred between 2009 and 2011 and the newspaper industry has only seen continued erosion in print circulation and advertising that digital subscription is not yet fully replacing.
Additional factors include NMIG acquisitions 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 LTM ended June 30, 2019 EBITDA. Similar public companies trade at EBITDA multiples ranging from the mid-single digits to low teens, with the higher end multiple driven by a large newspaper with national distribution and significant industry-leading digital subscriber success.
Fitch estimates full recovery prospects for the first lien senior secured term loan and rates it 'BB'/'RR1', or three notches above Gannett's 'B' IDR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The Outlook will be resolved once Fitch-calculated leverage declines below 3.5x;
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:
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.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: As of June 30, 2022, the company had $87 million in cash and cash equivalents. Because the company has consistently generated FCF, and is expected to grow annual FCF over the rating horizon due to the consistent reduction in annual cash interest expense, it does not have a revolving credit.
Maturities are manageable as the current first lien term loan matures in October 2026 ($485 million outstanding at June 30, 2022), the secured bonds mature in November 2026 ($400 million) and the second lien convertible notes mature in December 2027 ($85 million). The term loan also amortizes at 10% annually, stepping down to 5% when first lien net leverage is 1.0x below closing leverage and includes mandatory prepayments from excess cash over $100 million as of each Dec. 31 and asset sale proceeds.
Gannett is the largest U.S. newspaper publisher, serving over 600 communities with more than 260 daily newspapers, including USA Today, 302 weekly newspapers, 383 websites, 74 business publications and 143 daily and weekly newspapers and 32 magazines in the U.K.
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.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.