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Capturing The Internet Component of The New York Times Company
I posted several weeks ago that newyorktimes.com is the largest globals news brand. I think there is tremendous value in that property that is not being recognized by wall street. But on top of that, there is about.com which The New York Times Company purchased for $410 million in February 2005. I said at the time that the $410 million was going to look like a bargain in a very short time. Well it certainly does now.
NBC paid $600 million for iVillage recently and About.com has more parenting content and more parenting page views than iVillage. But you can keep going in that direction. About.com may have more health content and traffic than WebMD which is worth $2.3bn. It may have more cooking/homemaking content and traffic than anyone else. Etc. Etc. I would not be surprised if About.com is worth over $1bn today and I expect that value to keep increasing.
So inside the New York Times Company, you have two valuable Internet properties, the kind that ought to be worth 20x EBITDA or more. The kind that have incredible cash flow and growth. The kind you want to own stock in.
But The New York Times Company trades at a $3.6bn market cap which is about 6x cash flow. The stock has been in decline for the past couple years. What gives?
Well it seems that Wall Street thinks the "offline" businesses such as newspapers and TV stations are going to eat up the Internet cash flow.
So how do you capture this value inside of the New York Times Company as an investor?
I suggest this simple "hedged trade". Go long New York Times Company. But 1000 shares at $25/share. Go short The Tribune Company which does not have these two exciting Internet properties. Sell 8500 shares at $29/share.
Net out of pocket costs of this trade is zero. In theory, you have hedged out of the newspaper and TV station risk and you are now long the New York TImes' Internet properties.
It is certainly not a perfect hedge and there are risks that are specific to each company that could cause this trade to fail, but I think its a pretty nice trade.
Thoughts?
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Posted May 12, 2006 in Venture Capital and TechnologyComments
Might want to add in Dow Jones while you are at it.
I wouldn't short the Tribune co because of it's larger market cap and diversified operations. I don't think you'll see the correlation you expect.
Still hard to believe that USA today is the nations #1 newspaper. How many people actually pay for that McPaper? What is their PAID circulation which is what really matters.
The Dow Jones (aka WSJ and many other info services) are the most profitable paid web papers on the net. That says something about their quality.
Posted by: Andrew Schmitt | May 12, 2006 8:56:39 AM
You're missing the jewel of the newspaper industry, CareerBuilder. Tribune owns 33% of it, so I don't think it is a perfect hedge.
Go and look at the stock price of Monster over the past year - http://finance.yahoo.com/q/bc?s=MNST&t=1y
It is the best performing Internet stock there is (Google included).
And then factor in that Careerbuilder is rapidly building market share (given it was embarassing low in recent years).
Posted by: Niki Scevak | May 12, 2006 9:18:56 AM
Of all the properties they could have purchased that are somehow in the blogging space, About.com is by far the one with least potential to help remake the Times.
And seriously, how can you put the content with the greatest number of inbound links behind the subscription wall? Isn't that like putting blinds on the storewindow?
Having potential and realizing are 2 different things. It takes a lot to get shaerholders to revolt as they did at the Times, withholding 28% of votes for directors, as drolly reported in this story which misspelled the names of the Times's royal family (note the correction).
http://www.nytimes.com/2006/04/19/business/media/19times.html?ex=1303099200&en=e8c7efe2bf72ba71&ei=5090&partner=rssuserland&emc=rss
Why not go long a pureplay Internet content like CNET and short similar pureplay dead-tree media?
Posted by: curmudgeonly troll | May 12, 2006 9:24:51 AM
Here's another thought on the same track -- why doesn't the NYTimes completely spin off the digital business into a separate entity, with its own stock, etc.? For all these newspaper businesses, where all the trends for the offline version are so negative, why wouldn't these guys consolidate all the print stuff into one business that they can then bk if necessary to get their union drivers to renegotiate, and really decide what to do with that dog? Then get the digital side of the business and really show what it's doing from a financial perspective. Also, if you're then running the digital business you maybe can finally break free of the old paradigms that are killing these guys (like, "I can't actually link to a competitor")?
Is this just too naive?
Posted by: alfromchicago | May 12, 2006 10:05:55 AM
DJ Co is a much better play, with much better net assets, and much better management. You want to see the companies that WILL go the way of Thomson, hiving off the physical assets and focusing on electronic businesses.
I restate my past comments about the low quality of NYT assets online. Their only unique content is in the magazine/lifestyle aspects of the paper. They syndicate too much and are followed by too many others for the actual news to be a differentiator.
Where's the value in their coverage that keeps the readers? Can management and talent accept what their strengths actually are and what business they should actually be in? Their egos and self-delusions doom the business.
As to your hedge... outside of my suspicions about the value of the assets, we all acknowledge that they have management problems. Further, their mgmt problems are WORSE than everyone else's. To extract value, you're betting that Sulzbergers will manage the net assets better than Tribune Co will, so that they don't destroy all the cash. The better bet is that Pinch et al are most talented at DESTROYING value that comes from the non-legacy business.
The concept of your hedge is great (apparently the MBA took somewhat) but it doesn't map to the real world well. With non-media companies, it would be great, but we have the evil dynamics of family controlled media firms, and especially the Sulzbergers, to deal with. This will tend to scupper any trade, as the emotions and family dynamics swamp all the technical issues that would come to the fore in a regular stock. DJ Co has much more professional, bottom line focused management but still has had performance problems thanks to media personalities and some family issues. The only media company that you can trust is one that is owned by ruthless shareholders who don't want to make friends or influence, but rather want to make money (thanks to Cramer). The Thomsons are the best example of that focus on the bottom line (it does help that they can afford to play and indulge their interests and egos with their personal cash and do the right thing for shareholders).
Posted by: hey | May 12, 2006 10:47:03 AM
I would further be cautious in comparing them to WebMD solely on the basis of content. WebMD does a lot of other stuff to generate revenue (e.g. the process/adjudicate millions of medical claims) and are in fact to some extent a competitor to companies like EDS and ACS and others in the Business Process Outsourcing space.
Posted by: Ryan Thrash | May 12, 2006 11:10:01 AM
New York Times, the biggest global news brand?
Someone had better tell the BBC.
And CNN.
Posted by: nicholas | May 12, 2006 1:26:56 PM
6x Cash flow? Are you sure Fred? I am not getting that number
Posted by: PlanMaestro | May 12, 2006 6:12:37 PM
About.com? Do you use About.com as the source of any information online? I don't, and I'm doubting you do either.
There are better sources of information, across the wide spectrum of topics, than about.com is able to offer. As more vertical search engines appear (google or otherwise), we will find them more easily.
Posted by: Juan | May 13, 2006 12:35:01 AM
Fred:
I like your contrarian investment idea, but it is too early and with the wrong partners, i.e. the Sulzbergers:
What Wall St. is struggling with is how to value businesses with a 5% annual decline in OCF or EBIT for as far as the eye can see, and with a deteriorating margins and competitive position – and that includes the NYT, Tribune and every other newspaper. Until this issue gets settled, no serious investor is interested in the jewels inside a declining empire. What newspaper managements should be doing to attract serious investors is swearing off any further investments in the old businesses and leveraging to the max (like 8-10x cash flow). Investors would love it, but most management teams don’t have the ability or willingness to manage a business in decline with lots of debt, certainly not the Sulzberger family which has the additional problem of serious emotional attachment to a fast sinking ship. Anyone from the upper echelons of NYC knows that these people live only off the reputation and wealth created by their forefathers, creating nothing of value, in fact destroying serious value at every chance. I believe the NYT’s problems go much deeper than just losing their monopoly on the eyeballs of the intellectual elite to new technologies and sources of information: management believes the NYT has the best investigative journalists, but it was the NYT monopoly position which attracted those wanting to leak important information – and with that monopoly deteriorated, it is no surprise that leaks occur through many other mediums. The answer would be of course to fire most of the journalists, and replace them with college kids, greatly improving margins. Never going to happen as long as the Sulzbergers derive their self worth from associating with the intellectual elite like serious journalists. So, the conclusion is that old business will deteriorate faster than you think, and 0 is too high a current valuation for it. (I realize this is probably consensus thinking, but for now the consensus is right.)
As to the new jewels, like About.com. Right now, there is an overheated M&A market fueled by cheap money, CEO optimism and high stock prices. Google driven valuations pervade the internet space, especially in internet search & internet advertising. But one has to seriously question the height and durability of the moats around these businesses. Take Google: 10 years of history in this industry has produced 5 different market leaders: Netscape, Compuserve, AltaVista, AOL & Google. This is not the toothpaste business with stable market shares for 50yrs. This is an industry where technological changes every few years put customers up for grabs, and the incumbent has a bad track record of capturing even a small portion of share. And that should be no surprise, as customer switching costs between search engines are minimal. I am sure many entrepreneurs come to doorstep with various ways to kill Google, creating vertical as opposed to horizontal search categories. What is more likely – that we will be using MSFT’s Windows O/S, office suite (Excel, Word and Office) and the Xbox 10 years from now, or the about.com portal? MSFT trades at 15x eps, with serious room to cut expense and leverage the balance sheet. Isn’t that a better investment than about.com at 20x EBITDA?
My conclusion is that these newspaper businesses will be turnarounds for many years to come, and will get crushed in the next market correction which is happening as we speak as liquidity around the world gets soaked up by rising rates. That is the time to look – and maybe by then it will be also easier to pick the media winners in the internet age.
Posted by: AG | May 13, 2006 7:40:26 AM
Last week in Omaha, Warren Buffett posed a question aloud and then proceeded to answer it when he was asked about the newspaper business (Berkshire Hathaway owns the Buffalo News and a chunk of the Washington Post Company):
"What multiple should you pay for a business earning $100M pre-tax but that will erode at around 5% per year?"
It is, of course, super-easy to value that cash flow stream as long as you have partners who are willing to manage the business in a run-off mode.
Buffett's answer gets to that issue, which is also the "struggle" AG cites above (and I apologize, this is a little bit paraphrased):
"Well, most owners still have not gotten to the point where they are projecting forward declining earnings. Plus there may be a perception lag where they (meaning, control owners of newspapers cos.) may continue to buy other newspapers (meaning, for example, McClatchy/Knight Ridder) at prices that are too high (still)."
Great comments, right? He foresees continued mis-allocation of capital in a belief that consolidation or some kind of ingenious new capital investments will change the economics of the industry back to the way they used to be. But it won't. And frankly I have a hard time seeing how NYTimes buying About.com will change anything about the newspaper business. It makes the NYT Company less about "dead-tree," yes, but it makes the NYT Company more about second-tier internet properties as opposed to increasing the distribution of their (limited but still significant amount of) first-rate content.
And the money ;-) quote from Buffett:
"I don't think that present prices compensate for the likely decline."
-Ben
Posted by: Ben Tanen | May 13, 2006 4:45:28 PM
Remember stocks are sold and not bought. Those analysts and their stock salesmen are still selling dead tree media. Even the Washington Post which has probably done the best job of dead tree media companies buying other media companies is still, in those eyes of those covering the sector, a dead tree media company. They will get some additional value for non dead tree cash flow but still the overiding concern on Wall St, growth, is not happening from Newspaper companies and that is the majority perceived investment criteria in the attractiveness of those companies. Its still a newspaper culture. On the other hand if they embraced the information business, no paper, no printing, no deliveries, no unions, well, fewer of them, and a virtually no cost to deliver additional content along with changing their advertising model from well advertising CPM or CPC to a lead generation business, translate into the world's five top languages, then you really have a global power. Its as much cultural and how you sell it which affects stock price. When "the grey lady" goes digital in concept, action and culture, it will truly be a growth stock and be rewarded greater value by the markets. Regarding the Tribune stock play, I think the Tribune sports teams and their values may act as some sort of a placeholder in value for the internet assets of the Times.
Posted by: Miles Rose | May 14, 2006 12:11:32 PM
Lots of comments above on the value of these companies (that I'm not qualified to comment on). But I will say that the hedge doesn't make sense to me because the interactive assets of Tribune are pretty strong, i.e. Tribune stock is not a newspaper stock.
Beyond CareerBuilder they also have Cars.com, Apartments.com, ShopLocal, Topix and others. I don't know the success of many of the assets but I have heard anectodotally that CareerBuilder is a total cash-generating MACHINE and ShopLocal has an incredibly strong strategic position in distributing local in-store advertising on the web (more than 80% of offline retailers in-store ads/sales circulars info is distributed out to the web via Shoplocal). As local search heats up (especially on mobile devices) ShopLocal is in a great position. Tribune has long been in the interactive media...at one point they owned something like 10% of AOL. Don't know if they still do but they pretty sure they held it through until at least when AOL had a mega market cap in the late 90's.
And as others have said Tribune has a lotta-lotta other assets in broadcast TV and radio, not to mention owning the Cubbies. I have no direct knowledge but I'd hazard a guess that Tribune market cap is 50% at best generated by newspaper assets. The interactive assets might not be that valuable yet but the TV and radio assets probably are.
Posted by: Dan Malven | May 14, 2006 4:49:14 PM
The NYT is way over-exposed in two very risky, non-growth sectors of media:
1- Daily newspapers-- All are going to see major issues over the next five years due to circulation woes they all are facing. Paid circulation-- and thus the inflated ad rates predicated upon it-- is never going to grow again. Right now, these big daily owners are all using hocus pocus to keep their circs from sinking-- but the gig will be up eventually.
2- TV affiliates-- 85% of network TV viewers already get their signal not from towers but over cable lines. Now People are downloading full shows on iTunes and Brightcove is going to let you put internet video on your Tivo, and we need local broadast affiliates for what? That the networks are struggling themselves doesn't help. They aren't exactly dying to share their revenue.
Now, the NYT web site is the best around, and About.com is promising. But by buying their stock you are assuming their core businesses will grow, and I see no way this can happen in the long run.
Problem is, in media these days there aren't many value options. Outdoor- which I like-- is way overvalued while radio, TV, and print are all overvalued and headed for disaster.
Posted by: Timpone | May 15, 2006 11:26:58 PM
I like the approach, and it does seem like an aggregated version of this hedge strategy (buying multiple strong internet-enabled media companies; shorting multiple dead-tree ones) could smooth out some of the local anomolies.
But as bullish as we all may be on the value of the internet properties, I don't think you meant to have 10X on the short side. . . .
Posted by: Greg Cohn | May 16, 2006 5:14:52 PM
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