Splitting Headaches for Belo, Hearst

Is the sum of the parts greater than the whole? In answering that question, big media companies are drawing different conclusions about how they structure their businesses.

Belo Corp. and Hearst Corp. are moving in different directions. Belo is separating its newspaper business from its television business, while Hearst was, until late Friday, trying to buy back the 48% of Hearst-Argyle Television (HTV) shares it doesn't already own.

At Belo, chairman and CEO Robert W. Decherd is trying to unlock shareholder value by allowing its broadcasting and newspaper businesses to trade independently by spinning off the papers into another company. Meanwhile, publisher Hearst is enviously eyeing the cash flow generated by HTV's broadcasting assets and has made a bid for outstanding shares it doesn't own.

The moves have sparked speculation about how businesses are valued within companies with similar blends of operations, such as Gannett, E.W. Scripps and Media General, all of them companies with newspapers—a business in trouble right now—and television properties that would seemingly have a steadier future.

Hearst's initial HTV bid at $23.50 per share was rejected by shareholders, and the company had until last Friday at 5 p.m. to either submit a new offer or extend the offer period. It surprisingly terminated the bid. Investors were banking on a revised offer based on the stock price trading in the $25 range for over a month.

Barry Lucas, of the asset management firm Gabelli & Co., speaking before the deadline, said he expected Hearst would extend the period, saying the ”initial bid was not fair value as we see it.” But he also suggested that as a major owner of Hearst-Argyle, its initial lowball offer means it might have meant they know something others don't. (Hearst could come back with another proposal, a Hearst-Argyle spokesman said.)

The privately held Hearst spun off the broadcasting assets in 1997 mainly to use the shares as currency for acquisitions, but the company doesn't see that strategy continuing, in part because of where the stock is trading. HTV shares slid 13% after the company announced in late July that its second-quarter earnings dropped 32%. A month later, Hearst popped the buyback bid on the market.

Hearst is mulling how best to optimize broadcasting assets, looking at big bucks from the 2008 election season and potentially lucrative retransmission rights deals with cable operators

Belo, meanwhile, announced on Oct. 1 it was spinning off its newspaper assets to shareholders in a move that will separate the publishing business from the television broadcasting assets and create two publicly traded companies: A.H. Belo would be the corporate entity with the papers, and Belo Corp. would hold the broadcast properties. Both are expected to generate about $750 million in revenue.

Both sides of Belo's business are better served by separate capital structures and equity investor bases, notes Leland Westerfield, an analyst with BMO Capital Markets.

“The newspaper business requires heavier investment in Internet skills and technology, and that company will benefit from an unencumbered balance sheet,” Westerfield says, “The television side meets new opportunities, such as retransmission consent, that enable more debt to be carried on the balance sheet.”

The moves by Belo and Hearst have drawn attention to similar companies such as Gannett, Scripps and Media General. Stocks for these companies rose moderately in the wake of the Belo announcement, but maybe not just because of Belo's actions. Moreover, analysts are quick to point out that the case for each company is different.

For example, the incentive behind separating Gannett's publishing and broadcasting assets may not be as meaningful as it is to Belo.

“Gannett has an excellent broadcasting group, very comparable to Hearst-Argyle in size and reach,” says Barrington Research analyst Jim Goss, “But it represents a much smaller contribution to the company's cash flow.”

Gannett's broadcasting business contributed 17% to the overall operating cash flow in the second quarter.

In contrast, Scripps' business is a mix of old and new media, making it a prime target for speculation.

“About 78% of Scripps' cash flow is derived from its cable and interactive businesses,” Wachovia analyst John Janedis says. He adds, however, that it trades more like newspaper companies do, which is to say, not as well as companies with “faster growing, targeted media assets.”