August 22, 2012

Alden Global Capital clearly likes something about the newspaper industry as evidenced by its controlling interest in two companies — Journal Register and MediaNews — and substantial investment in half a dozen more, including Gannett, still the nation’s largest newspaper company.

But like most hedge fund and private equity investors who have become an ownership force in recent years, Alden has been mum on why exactly it finds newspaper investments attractive and what turnaround scenario it sees. In fact, when I profiled Alden principal Randall Smith a year ago, I noted that he appeared not to have given an interview in 30 years.

However, Smith did speak last October to an investors’ group in New York. A blogger from Distressed Debt Investing in the audience gave a full account of his remarks. And Smith indicated that he is indeed a huge fan of the industry in general and Gannett in particular.

In fact, he told the group that Gannett is the most undervalued publicly traded stock.

When asked why he was so bullish on newspapers, Smith replied (this and other quotations are the blogger’s paraphrase, not a direct transcription):

The first thing you need to accept is that print is declining. What’s good though is the digital migration. The decline in print revenues is being offset by the increase in digital. In addition, newspaper companies have a lot of assets that probably aren’t being fully utilized and could be sold off. Across the board, newspapers are cutting costs very rapidly and most have positive free cash flow due to the low (capital) requirement of the business.

As for Gannett, Smith said he liked that the company consistently earns 30 percent on a cash flow basis (net earnings margin is considerably lower) and that the company is carrying a manageable $2 billion in debt. He continued:

It has a newspaper operation, for which it is unfortunately known, which attaches a stigma to the company.

Still, Smith thinks the newspapers have a value of $4 billion, Gannett’s 20-plus TV stations another $4 billion, and digital ventures like CareerBuilder and Classified Ventures another $2 billion. Subtracting out the $2 billion in debt, that leaves a total value of $8 billion.

The market capitalization of Gannett when Smith spoke was $2.5 billion, leading him to conclude “if you look at it that way, [shares] are very cheap.”

Smith said Gannett should consider big changes like paying a much higher dividend, buying back a third of the company’s shares each year, spinning off the television stations or selling USA Today.  But he said that “management has made only small moves in this direction.”

In the 10 months since Smith’s talk, Gannett has raised its dividend and started a new stock buyback program, though not on the scale he had suggested. The company’s stock price is up roughly 40 percent, its market capitalization now $3.6 billion.

Alden sold some of its Gannett stock earlier this year, but Gannett remains one of its top three holdings among public companies (its stakes in private companies are not disclosed). According to a March 30 filing, it ranked 10th among institutional holders of Gannett, with about 2.5 percent of the company. Since then it has dropped out of the top 10, according to the latest filing.

A recent New York Post story reports that Alden lost money when the Philadelphia newspapers were sold in April to a local investors group, and its various newspaper investments have so far been a net negative.

Smith is not alone among prominent investors in his enthusiasm for newspaper organizations. Warren Buffett’s Berkshire Hathaway bought nearly all Media General’s newspapers and several other titles earlier this year and has increased its holdings of Gannett and Lee.

John Rogers of Ariel Investments, a longtime investor in newspaper companies, owns a substantial 5 percent stake in Gannett and has touted the stock in interviews.

I would agree with him and Smith that Gannett is further along in building digital and marketing services businesses than most of its peers. Even so, digital growth does not come close to equaling continued print losses.

Also Gannett is in process of putting metered digital subscriptions in place at all 80 of its community newspapers while at the same time raising print subscription rates aggressively. With progressively skinnier newspapers, staffed by progressively smaller newsrooms, some subscribers may balk.

Gannett’s prospects look a bit more problematic currently than the broad-brush long-term strategy would indicate. But credit Gannett management for putting forward a case that makes sense to several savvy and prominent value investors.

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Rick Edmonds is media business analyst for the Poynter Institute where he has done research and writing for the last fifteen years. His commentary on…
Rick Edmonds

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