New York Times: A Proxy for the Newspaper Industry

Businessweek has an article presenting the situation at New York Times. NYT is a good proxy for the industry. Some comments to article bash the NYT for its liberal stance but obviously none of these commentators are stock market investors for they clearly must have missed how conserivative outlets like News Corporation (NWS) is also down around 50% in the last year. Anyway, the description provided in the article is quite similar to the Canadian Torstar.


(source: How Can The New York Times Be Worth So Little? by by Jay Yarow and Jon Fine. July 2008. BusinessWeek)

At its current $12.48 stock price—down 46.3% from a year ago—Times Co. has a $1.79 billion market cap. To put this in perspective, CBS recently acquired tech publisher CNET, a much weaker media brand, for $1.8 billion. Add in the company's $1.1 billion of debt, subtract $42 million for its cash on hand, and the company's total enterprise value—a valuation measure that totals up those items in such a fashion—is just $2.85 billion.

The CNET acquisition may be overpriced (not sure) but, nevertheless, it sort of provides an indication of the value disparity. CNET is a valuable and dominant brand in the online world but NYT is the #1 visited news site by a wide margin and about.com is a valuable online property.

In a research note published on July 9, Lehman Brothers (LEH) analyst Craig Huber estimated the Boston Globe and the 14 regional newspapers the company owns could be sold for $575 million after taxes. Huber valued the 17% stake in the Boston Red Sox, after taxes, at $152 million and the Times's portion of its new headquarters building in midtown Manhattan at $750 million after taxes. The company paid $410 million three years ago for Web property About.com; according to an estimate by tech blog Silicon Alley Insider, that could be sold for approximately $600 million today. That sounds low to us, since About has consistently reported increasing revenues. Let's conservatively kick that up to $700 million and assume a 20% tax bite on the Times's $290 million gains in that sale, which is $58 million. So $642 million, aftertax, for About.com.

Totaling up those figures gets you to just over $2.1 billion. Subtract that from the enterprise value, and you get $750 million for the company's remaining assets.

What is described there applies to many newspaper companies (although it varies.) If you back out strategic investments, property values, and the like, the actual papers are being valued at really low valuations. In one of my posts about Torstar I indicated similar results, where the newspaper seems to be valued as almost nothing (e.g. less than a junior gold mining company that is nowhere near finding gold.) In the case of Torstar, saleable assets consist of Harlequin book publishing, strategic investments in Black Press and CTVglobemedia, and workopolis. I don't think these companies should be broken up (it will be unlikely with the dual-share structure anyway); all I am doing here is to try to figure out what price the market is placing on the core newspaper business.


Does The Dual Class Share Structure Hinder Matters?

I have historically been totally against dual-class shares. In fact, I made up my mind never to invest in such an undemocratic structure. However, I have decided to make an exception for newspaper investments. One of the reasons is that I think everyone, including the families or trusts that own the voting shares in many newspapers, are in the same boat as common shareholders. We are talking about an industry fighting for its survival. Most of these companies are run by professionals and I think everyone's goal is to survive. The families and trusts that own these papers have a huge chunk of their wealth tied up in these companies so their interest will be similar to an outside shareholder. In contrast, a company like Hershey (HSY) is not in survival mode and I doubt my interests will ever align with the voting shareholders.

If some of these companies did not have dual class share structures, they would be broken up more easily or sold to private buyers quickly. But I really wonder if that does much for long term shareholders. There have been quite a few sales recently, with the Tribune takeover by Sam Zell being the most prominent recently. It's too early to say but how much as the privatization of Tribune helped? Very little. If you owned shares in the private Tribue right now, your returns will be no better than before in my opinion. As for asset sales, they seem like a short-term fix that does not improve the company's competitive position or revenue base.


Dividends May Be At Risk

One of the risks for newspaper investors is that their dividend may be cut. I suspect the NYT will keep its dividend (around 7% right now) since it can finance it from cash flow. But Torstar, whose dividend is also close to 7%, may have to use debt to finance the dividend depending on how things unfold as the economy slows down (I am generally against issuing dividends or buying back shares by issuing debt.)


Clearly the market is pricing newspaper companies--not just NYT but practically every one out there--at these prices because of losses in the future (i.e. further impairment that reduces value.) Like in most investing, it's difficult to know if this bearish scenario will play out in real life.