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Gannett Buys Digital Future

Expansion of its digital marketing is the motive behind Gannett Co. Inc.’s decision to buy ReachLocal Inc. in Woodland Hills. Gannett, publisher of USA Today and more than 100 other newspapers in 34 states, will pay $156 million for ReachLocal, which handles online marketing for small businesses. Under the agreement announced June 27, Gannett will pay $4.60 a share in cash, a 188 percent premium over the closing price on June 24. Analysts who follow Gannett said that the media company wants to bring in house its digital marketing now outsourced to G/O Digital under an agreement that expires next year. “The company will probably keep ReachLocal as a separate entity until that relationship ends, which is over the next year,” said Michael Kupinski, director of research, digital media and technology, for Noble Financial Group, in Boca Raton, Fla. With newspaper publishers continuing to see dwindling revenue from print advertising, the industry is moving toward a digital future, and the ReachLocal acquisition reflects that trend. “A company like ReachLocal does digital marketing services, and so it is a natural extension for them (Gannett) to offer digital services,” said Kupinski. The State of the News Media 2016 report released last month from the Pew Research Center concluded that the financial realities of the Internet were not friendly for newspapers, whether in a print or digital format. “There is money being made on the web, just not by news organizations,” the report said. Digital ad revenue increased by 20 percent in 2015 to more than $60 billion, according to the study. Sixty-five percent of that money went to five technology companies, including Google Inc., Yahoo Inc. and Facebook Inc. all of which offer news among their content. ‘Attractive valuation’ ReachLocal, founded in 2004, has more than 1,300 employees serving 16,000 clients in North America, Europe, Asia-Pacific and Latin America. The company promotes small and medium-sized businesses on the Internet by selling a package of marketing services that includes website design, search engine optimization and advertising, live chat with customers, display ads, a Facebook page, reputation management and mobile apps. Under founder Zorik Gordon, ReachLocal grew into an international business, with global offices numbering 45 by 2010. Over time others would follow in Australia, Germany and Asia. Its headquarters is in the Warner Center complex. Until 2010, the company had been backed by venture capital firms, including VantagePoint Venture Partners, Rho Ventures and Galleon Special Opportunities Partners Fund LP. That year it went public with its stock selling at $13 a share. ReachLocal shares would peak at $25.51 in April 2011. Three years later, the price was below $10 a share and has decreased gradually since then. By 2015, the price hit its lowest point at less than $1. The company hasn’t been profitable in 6 years and its revenues have declined in the past two. Gordon left the company in September 2013 to run his next venture, Sherman Oaks-based Serviz, a provider of home repair and construction services. Sharon Rowlands was hired as CEO the following spring after having served as head of Altegrity Risk International, a global risk management firm based in New York. Rowlands inherited a company facing stiffer competition as the online world evolved. For example, Yelp Inc., a review site that allows businesses to tell their history and expertise, appeals to do-it-yourselfers. Groupon Inc. and other coupon sites often work directly with retailers, but don’t require any upfront investment. And Facebook ads are sometimes cheaper and more effective than search engine ads. In the most recent quarter ending March 31, ReachLocal reported a net loss of $6.2 million (-21 cents a share) and revenue of $78.7 million. Gannett earlier this year made an unsolicited buyout offer for Tribune Publishing, now named tronc, the parent of the Los Angeles Times, because it is buying up newspapers in hopes it can achieve economies of scale. Gannett has more than 18,000 employees and in the most recent quarter reported net income of $31.3 million (26 cents a share) and revenue of $659 million. Last year, Gannett spun off its digital and television business into Tegna Inc., which includes G/O Digital as well as online automotive classified site Cars.com and employment website CareerBuilder.com, jointly owned with two other media companies. G/O Digital operates in the same sector as ReachLocal with website design, search engine optimization, email marketing and search engine advertising among its services. Barry Lucas, an analyst with Gabelli & Co., in Rye, N.Y., wrote in a research note on June 28 that while the premium Gannett paid for ReachLocal is high and the Valley company’s revenues are in decline, the acquisition still adds considerably to Gannett’s digital business. “Gannett is acquiring online operations at about 50 cents on the revenue dollar, an attractive valuation if Reach can be successfully integrated next year,” Lucas stated in his note. Both ReachLocal and Gannett declined requests for interviews. However, in the release announcing the acquisition, Rowlands of ReachLocal said the company was excited about the opportunities to grow Gannett’s digital business. “We believe that this powerful combination will drive growth and allow us to accelerate innovation, enabling the best and most complete digital marketing solutions in the market today,” Rowlands said in her statement. Gannett Chief Executive Robert Dickey said that ReachLocal’s focus on small and medium-sized businesses aligns with Gannett’s strategy and extends its reach into new local markets. “This transaction represents an important step as we continue to transform our business to meet the changing needs of consumers and advertisers in today’s digital world,” Dickey said in a statement.

Mark Madler
Mark Madler
Mark R. Madler covers aviation & aerospace, manufacturing, technology, automotive & transportation, media & entertainment and the Antelope Valley. He joined the company in February 2006. Madler previously worked as a reporter for the Burbank Leader. Before that, he was a reporter for the City News Bureau of Chicago and several daily newspapers in the suburban Chicago area. He has a bachelor’s of science degree in journalism from the University of Illinois, Urbana-Champaign.
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