Inside Wall Street: More value in Washington Post
There's more to the parent company than the premier newspaper, and it is likely to sell other valuable assets.
Now that billionaire Jeff Bezos of Amazon.com (AMZN) fame has scooped up the highly respected Washington Post newspaper for a tidy $250 million, what's to become of its parent Washington Post Co. (WPO)? Plenty, to be sure.
Yes, there's more than just the newspaper within the company, which is a diversified media and education enterprise that owns and operates several television stations and cable systems. In fact, Washington Post Co. has become, according to Wall Street and several savvy investors, an even more compelling investment bet after the sale of its publishing "trophy asset."
The reason: Investor focus has now shifted to the company's other valuable assets that some analysts expect will also be put on the auction block. In other words, the idea of breaking up the company, as many big shareholders had been proposing in recent years, is no longer an impossible dream.
The sale of the Washington Post, "from a strategic perspective, has far more implications for WPO shareholders," says Bradley Safalow, analyst at PAA Research. With the sale of its "sacred cow" to Amazon.com founder and CEO Bezos, it now appears that Washington Post Chairman and CEO Don Graham might consider breaking up the company to unlock shareholder value after years of repeatedly rejecting calls for him to do so, according to Safalow.
"Prospectively, we expect the sum-of-the-parts analysis will become the primary method used to value WPO shares," says the analyst. He doesn't expect management to sell all of its assets, largely because of tax implications.
The major assets include cable and broadcast television, the most important operating units in terms of earnings before interest, taxes, depreciation and amortization (EBITDA), and cash flow generation. In 2012, cable accounted for 47% of EBITDA and 34% of free cash flow, and broadcast TV generated 34% of EBITDA and 51% of free cash flow. WPO's Kaplan Inc. unit, its profitable provider of prep and higher education services, is the largest sales contributor, accounting for 55% of WPO's total revenues and 28% of EBITDA. WPO has recently acquired several hospice properties and industrial companies.
Currently trading at $579 share, the stock based on a sum-of-the-parts valuation is worth $760 a share, figures Safalow. He estimates the value of WPO's broadcasting assets at $2.29 billion, the cable operations at $2.24 billion, and Kaplan at $2.5 million. Prior to the sale of the Washington Post newspaper, Safalow had been mostly bearish on WPO's stock, largely because management wouldn't consider asset sales or other strategies that would unlock shareholder value. But the recent sale of the once-sacred publishing unit, he says, suggests a willingness to re-evaluate the strategic positioning of WPO.
"When the facts change, so do we," says the analyst. Right now, there's great enthusiasm surrounding cable, and many industry operators and experts speculate that "we are on the cusp of another round of consolidation in the sector," says Safalow. In this kind of environment, it's not incredibly hard to paint a scenario in which WPO can dispose of its broadcasting and cable assets for higher multiples than the analyst had outlined in his base case scenario, says Safalow.
Analyst Liang Feng of Morningstar says the majority of the valuation of Washington Post comes from the attractive cable and television broadcasting businesses. He notes that the conglomerate structure of the company frequently obfuscates its hidden values, which has caused the stock to trade at a discount to its sum-of-the-parts valuation. The sale of the publishing operations, says Feng, should help investors' better evaluation of WPO's core operating businesses, which would significantly reduce the discount in the price of the stock.
WPO's cable and broadcast TV operations are performing at near-record levels, in part fueled by the elevated investor interest in those industries.
S&P Capital IQ upgraded its recommendation on WPO to a "buy" from "hold" on Aug. 20, 2013, when Bezos announced the acquisition deal, based on the solid long-term prospects of the company's remaining operating segments, particularly the cable and TV broadcast operations. The sale of the newspaper unit removes a margin drag and major negative sentiment overhang, and "allow other assets to gain prominence," says S&P analyst Westcott Rochette.
The analyst has a 12-month price target of $640 a share for the stock based on a sum-of-the-parts valuation, after applying a 10% discount to its value because of its structure as a conglomerate. The company's healthy balance sheet, with a net cash position and a $750 million to-$800 million overfunded pension plan provides WPO with capital flexibility, says Rochette.
Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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