What Value Will ReachLocal Inc. (NASDAQ: RLOC) Add To Gannett (GCI)?

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ReachLocal Inc. (NASDAQ: RLOC) has agreed to be acquired by Gannett Co Inc. (NYSE: GCI) for $4.60 per share, which translates to an enterprise value of $156 million. Gannett is hoping that the deal will help it continue revenue diversification as it battles shrinking fortunes in traditional newspaper publishing business. RLOC is expected to be accretive to Gannett’s earnings in the second full-year after the deal is closed.

Premium offer

The $4.60 per share price that Gannett is offering to ReachLocal Inc. (NASDAQ: RLOC) indicates a significant premium over the stock’s closing price of $1.66 immediately before the deal was made public. Shareholders in ReachLocal celebrated the deal, sending shares up nearly 175%.

Impact on revenue

Besides the benefit of revenue diversification, Gannett projected that ReachLocal Inc. (NASDAQ: RLOC) would boost its digital revenue by as much as 50%. Additionally, Gannett said that it expected to extend its local market reach through the acquisition. But the impact on EPS is expected to be neutral in the first full-year but should rise to a modest positive impact in the second full-year following the closure of the transaction.

ReachLocal Inc. (NASDAQ: RLOC) posted EPS loss of $0.12 on revenue of $78.7 million in 1Q2016. The results were better than consensus expectation of EPS loss of $0.21 on revenue of $77.7 million.

ReachLocal renders digital marketing solutions to more than 16,000 customers in sectors such as automotive, professional services, home services and healthcare. As such, Gannett considers the asset a perfect fit for its local-to-national business strategy.

A string of acquisition

Gannett, which portfolio includes about 110 daily newspapers, has stepped up acquisition of digital assets as it seeks to kick overreliance on traditional print business. Legacy publishers such as Gannett are struggling to catch up in the Internet age as advertisers and readers increasingly migrate online.

As part of the efforts to unlock new revenue sources, Gannett brought 15 daily newspapers owned by Journal Media Group for $280 million. The company also attempted to swallow Tribune Publishing but failed to ink a deal even after sweetening its offer.

Closing the transaction – ReachLocal Inc. (NASDAQ: RLOC)

Gannett hopes to close the acquisition of ReachLocal Inc. (NASDAQ: RLOC) in 3Q2016.

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