Yes, newspapers are in secular decline and they are not coming back. But at what point would you consider owning one (Bezos aside) or any business that generates decent cash flow and trades at a depressed valuation?
A.H.C Belo, despite the clear secular risks is an attractive opportunity at the current valuation of 2.9X EBITDA, particularly given the cash flow characteristics, ability to sell non-core assets, and return cash to shareholders. Terminal value is clearly a risk here and difficult to assess, but shareholders can take comfort in the cash flow, dividends, and potential return of cash from selling non-core assets.
The company is currently trading at $150MM of market value (or $87MM of enterprise value excluding non-newspaper investments). We expect the company to generate ~$30MM of EBITDA and spend $10MM of capex; hence the company is now trading at 2.9X EBITDA (4.3X EBITDA-Capex). On absolute terms and relative to peers this is cheap. Newspaper peers trade significantly higher (~6-7X EBITDA) and even if you conservatively include the $72MM underfunded pension (5.3X EBITDA) the company is still trading at a discount to these peers.
To be clear, AHC is a pure-play newspaper company (~56% of revenues are from advertising, 33% from circulation, ~10% from printing and distribution services) and the company’s largest media asset is major metropolitan newspaper (the Dallas Morning News) which generates 75% of revenue (25% is from the Providence Journal). This business and many newspapers have been written up previously, and the company filings have adequate disclosure to provide detail on the business and the newspaper business model, so we will not discuss them in this write up. However, all the obvious challenges of the newspaper industry (secular decline, high fixed cost structure) are still a relevant concern (since 2007 revenues and EBITDA have declined from a peak of $739MM and $79MM, respectively, to $430MM and $30MM, respectively, today). Revenues for the company continue to decline, albeit at a modest rate. Advertising revenues are declining 3% annually, with digital growth offsetting weakness in display and classified ad sales.
All that said, in the past several years, the company has done an adequate job of reducing costs (both labor and distribution) and despite revenue declining from $518MM in 2009 to $430MM today, EBITDA has effectively remained flat in the past 5 years. In addition, management has mitigated the impact of declining advertising revenues and circulation declines with subscription price increases. Importantly, management can continue to manage costs as, unlike most newspapers, AHC has a limited union workforce and the Dallas Morning News is not unionized.
The company, like many newspaper companies, has an underfunded pension. Though this $70MM liability has been diminishing (down from $132MM three years ago) any cash used to fund the pension could be alternatively distributed to shareholders. Required pension funding is a drag on cash flows however, it appears likely the company will be fully funded by 2015/2016.
Importantly, the company owns other assets which have modest incremental value (non-controlling investments in other media properties, i.e. they have 6% ownership in Classified Ventures, all of which have a book value of $10MM but are likely worth more (we estimate $15-$20MM), and which the company has been divesting off recently.
Earlier this year, the company sold the Press Enterprise, a third newspaper that the company owned. As many who have followed this name know, the stock price has appreciated materially as the company started to sell these assets. Management appears keen to monetize these assets, and any future divestitures would likely drive shares higher. With the Dallas Morning News as the core asset, we view any sales as a key driver of upside and potential return of cash to shareholders. It’s important to note, that many individual, local, newspapers and their supporting real estate continue to command "trophy" valuations, and the newspaper M&A market appears to have shown signs of life in this industry (which was necessary). A sale of any individual asset we think is likely to generate significant cash flows for the company, be accretive to AHC, and drive shares higher.
It’s important to note that management owns ~60% of the voting control but only ~15% of the economic. While that would normally raise red-flags, this management team has a consistent track record of managing operations adequately and returning cash to shareholders (most recently selling assets at accretive valuations). Specifically, the company pays a healthy 4% dividend yield (which they brought back), and which, based on our forecasts, could be increased materially.
Finally, management has been particularly conservative in its capital structure. The company is completely unlevered, and with $50MM of cash has ample capacity to return cash to shareholders. Even 1X of debt (at current financing rates) would easily allow for a significant distribution of cash back to shareholders soon without any interest coverage issues (arguably leverage could be increased up to 3X and still retain reasonable coverage ratios). We think that the company could easily raise $30MM in new leverage along with the $50MM of cash on the balance sheet, to distribute $50MM-$80MM back to shareholders (~50% of the market cap). In this scenario the company could still increase the dividend to maximize value.
More optimistically, any additional sale of non-core assets or the Providence Journal ($20MM+) and raising leverage of 2-3X ($40-$60MM), could easily return more cash to shareholders than the market values the entire equity today. The company would still have its core Dallas asset in tact and should still generate a reasonable enterprise multiple relative to peers. We believe that investors in this scenario could make 2X thier money.
All this said, the risks to this investments are pretty clear as the industry continues to face secular decline and earnings could be particularly impacted by an economic recession (as advertising revenues are notoriously cyclical). In addition, this is a small, thinly traded public company. However, at the current valuation, though this investment certainly still entails some risk, we believe investors are more than rewarded for taking on these risks.
I do not hold a position of employment, directorship, or consultancy with the issuer. Neither I nor others I advise hold a material investment in the issuer's securities.
- Sale of individual newspapers / non-core assets
- Dividend increase or a one-time dividend / leveraged recapitalization
- Acquisition of entire company by strategic or "trophy" buyer
- Continued cash flow generation from core business leading to a normalization of multiple with peers