A very smart friend of mine shared with me the following thoughts on why A.H. Belo could potentially be a value trap....
He thinks it’s a value trap for three reasons =>
He thinks it’s a value trap for three reasons =>
- The value is found in non-operating assets,
- Management has no incentive to realize non-operating value and
- Management controls the vote, so no potential for activist situation.
He spoke to management a couple of times and get the feeling that they have no interest in monetizing real estate at any point. He initially thought that management should take this company private given the balance sheet strength (plus it’ll be easier to go through business transformation out of the public eye). But then he realized that they cannot do that for 1-2 years due to tax repercussions of the spin. And if they want to take the company private, they will want to do so at the lowest price possible. So why not try to turn the business around in the public, if the stock stays here or lower (lower is likely given direction of newspaper businesses) they take the company private in 3-years at much lower valuation.
Poor operating business + no hard catalyst + no potential for activism = value trap.
What is your thoughts on A.H. Belo? If you have feedbacks, please shoot me an email.
Poor operating business + no hard catalyst + no potential for activism = value trap.
What is your thoughts on A.H. Belo? If you have feedbacks, please shoot me an email.
2 comments:
I've been looking at newspapers (primarily interested in Torstar (Canada) and The New York Times)... my feeling is as follows... before I say anything, I will note that I'm a total newbie and investing has been a disaster so far this year :| ...
Newspapers may indeed be a classic value trap. There is almost no point talking about valuations because they are so cheap. The real question is whether sales and profits will decline forever. I don't know much about AH Belo, but just speaking in general, I think there are two rough strategies that may work.
One strategy is to concentrate on providing local content. This is not easily replicated by the bloggers, general interenet sites, etc. I think this is what you see happening with AH Belo.
The other strategy is to leverage the brand name to the online world. This is probably the only hope for papers like NYT, WSJ, and Globe & Mail (Canada).
I think if they don't execute using one of thse strategies (or a more advanced strategy,) things could fall apart easily. I don't think these companies are asset plays. A lot of the plant & equipment is probably worthless (who the hell wants printing machines?) The land may be worth something as you mention but that depends on the company and I wouldn't bank on that (how many invested in Sears Holdings a few years for the real estate only to see a slow decline that may last for years.) These companies have to show steady revenue--and that's why I touched on the two types of strategies above.
As for the point raised by your friend about shareholder activism, I don't think it matters much. Practically every single newspaper is struggling. I mean, companies like Media General seem to have a lot of shareholder activism but how much has that helped? Washington Post has implicit activism from Buffett and has it done any better?
I also don't think privatizing would do anything. Tribune is privatized but there is zero evidence of it outperforming the industry. I mean, the privatized Tribune seems to be more in the news than the public one ever wa (I will admit that we need to wait a lot longer than 6 months but I personally don't see much good happening there even an year from now.) Furthermore, credit is tight so chances of an LBO is probably zero (if banks don't want to lend for a cash cow like BCE, forget trying to lend for a newspaper.)
The other problem with privatization is that there is a possibility of take-unders. This certainly isn't good for any long-term investor who purchased the shares a while ago. The only people who may want to buy out these companies are vultures or distressed private equity funds (someone rich may buy for reputation but that only applies to a few properties.) Those will want to pay a very low price.
Hi Sivaram,
Thank you very much for your comments. I agree with you what said.
AH Belo's strategy is to focus on local news, but advertising revenue has dropped significantly due to current environment.
As in regards to property values, I have put no emphasis on printing equipments as such. The land and property are worth at least $150 million.
I don't know how to handicap the future of newspapers. I do know it is bad....
My overall thesis lies in the property value and my belief that the newspapers are worth something.
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