The U.S. Department of Justice (DOJ) appears to be heading toward a win in its landmark antitrust case against the technology and search giant Alphabet (GOOG +2.77%)(GOOGL +2.70%), which owns Google.
The DOJ alleged that Google essentially used illegal practices to dominate the search engine business and ensure that it is the default search engine for advertisers. In early August, a judge sided with the DOJ and a group of 38 state attorneys general, declaring that Google is a monopoly and did indeed break antitrust law.
The ruling has big ramifications for the online advertising space and could even potentially lead to a breakup of Google. While things could still take awhile to play out, here is one stock that could benefit tremendously from this ruling.
A strong case for the largest newspaper publisher in the country
Google's alleged antitrust tactics might have taken money out of the pockets of scores of different businesses, including newspaper publishers, which have been disrupted significantly by the internet. Gannett (GCI +2.36%) is the largest newspaper publisher in the country and has filed a lawsuit against Alphabet that piggybacks on the DOJ's suit.
Gannett's suit says in part:
Because of its unlawful monopolization, Google controls the "shelf space" on publishers' pages where ads appear. It exploits that control to defeat competition from rival exchanges. The lack of competition for publishers' ad space depresses prices and reduces the amount and quality of news content available to readers. Only Google ends up ahead because it controls a growing share of the shrinking ad space that remains.
I'm not a legal expert, but this case looks extremely compelling for Gannett for several reasons. For one, there has already been significant discovery work because of the DOJ's case, which Gannett can now access.
Management also anticipates that its lawsuit against Alphabet can move more expeditiously because of the DOJ's suit and pending outcomes, which could still take a year or two to hammer out because of appeals. But the Gannett case now has precedent to work off of.
The other interesting component of the case is the law firm representing Gannett: the antitrust firm Kellogg Hansen. It is representing Gannett on a contingency basis, meaning its pay only comes out of potential damages.
Kellogg Hansen obtained the largest and second-largest payouts from antitrust cases, both of which yielded more than $1 billion. If the firm is taking the case on a contingency basis, it suggests that its lawyers think they have a good chance of winning.
NYSE: GCI
Key Data Points
The potential to transform the balance sheet
Gannett says it anticipates "substantial damages" even before the automatic trebling provided by U.S. antitrust law. The legendary value investor Bill Miller, who is a shareholder in Gannett, previously wrote in a letter to shareholders that a payout could yield well more than $1 billion.
New Media Investment acquired Gannett in 2019 (keeping the Gannett name), taking on massive debt. Since then, it has done a good job of paying down that debt, lowering it from roughly $1.76 billion to $1.09 billion at the end of the 2024 second quarter.
So in a best-case scenario, a big payout from the lawsuit could potentially wipe out all of the debt for Gannett, transforming the balance sheet and sending the stock much higher.
But even a few hundred million dollars in damages would move the needle dramatically. Currently, Gannett trades at a forward enterprise-value-to-EBITDA ratio of just under 6. Cutting $300 million worth of debt would bring that multiple under 5. Reducing all of the debt in a best-case scenario would bring the forward EV-to-EBITDA below 2.3.
Consider that The New York Times, which is a much better-performing company than Gannett, currently trades at close to 19 times forward EV-to-EBITDA. Gannett has shown signs of improving its fundamental business as well and ramping up digital revenue. A re-rating of the stock to, say, even 9 times forward EV-to-EBITDA, in addition to lower debt, would lead to a significantly higher share price.
