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Money for Nothing and an Old Newspaper for Free – A. H. Belo

February 04, 2013 | About:
The investment thesis for A. H. Belo is simple. The company has no debt, $70 million of excess real estate and $40 million of cash in the bank.

In addition, the company owns a number of profitable newspapers (profitability has recently been obscured by the way the company deals with its legacy pension liabilities) and a stake in a fast-growing and extremely profitable company called Classified Ventures LLC.

A. H. Belo (AHC) has 22 million shares trading on the NYSE at $5.35 for a market cap of $115 million.

I believe each share of A. H. Belo represents a collection of assets worth more than $10.

Business and History

In 1842, George H. French began printing the "Daily News" in Galveston. At the time, Samuel Houston was president of the Republic of Texas. Galveston was its largest port and primary city.

Alfred Horatio Belo joined the Daily News, and became majority owner of the company in 1865. The next year he sends George Bannerman Dealey north to select a location for a sister newspaper. Dealey chooses Dallas and founds the Dallas Morning News.

Dealey's prominence grows along with Dallas and its newspaper. In 1920 he becomes president of the company. He takes advantage of a new medium that is sweeping the world: radio. In 1922, WFAA goes on the air as the Dallas Morning News' radio service.

1923 - the company sells its interest in the original Galveston Daily News, focusing its operations entirely on the Dallas Morning News. Today, the Daily News is owned by the Carmage B. Walls family.

1926 - Dealey acquires a majority interest in the company from Belo's heirs with his partner John F. Lubben. The company is renamed A.H. Belo Corporation after Dealey’s late mentor.

1950 - Belo acquires KBTV, and becomes one of the first television broadcasting companies.

A.H. Belo Corporation becomes a public company in 1981 with James M. "Jimmy" Moroney Jr. at the helm. Moroney played a critical role in converting Belo from the privately held company founded by his grandfather, George Bannerman Dealey, into a publicly traded media company.

Moroney joined The Dallas Morning News in 1946 as a reporter. Upon his retirement in 1986, he hands the reins to Robert W. Decherd who heads the company today.

Decherd, a great-grandson of Dealey, finally settles war between Dallas’ two main Newspapers. During the worst recession in decades, the Dallas Morning News boosts its circulation. In due course, circulation doubles that the Times-Herald. On Dec. 9, 1991, after 112 years in operation, the Dallas Times-Herald published its last issue.

1997 - Belo acquires The Providence Journal Company. The deal includes nine television stations along with the Providence Journal, the oldest newspaper in the U.S.

2001 - The newspaper and television websites of Belo Corp. join Classified Ventures LLC. Classified Ventures is a partnership to help newspapers expand their position - using internet technologies - as the nation's leading suppliers of classified advertising.

2008 - The company's board of directors agree to split the business. The newspaper business is spun out. CEO Decherd, becomes CEO of the “new” company (AHC). Belo Corp. (BLC) becomes a pure-play television company.

Management

Buffett tells the CEOs of each company he buys to run the business as if:

• They owned 100% of it

• It is the only asset their family owns or will ever own

• It can’t be sold or merge for at least a hundred years

Robert Decherd has been CEO for as long as anyone cares to rememeber. Decherd is also a director of Kimberly-Clark Corporation and serves on the Advisory Council for the Center for Ethics at Harvard University. Decherd manages the company with James M. Moroney III. Moroney currently serves as publisher and chief executive officer of The Dallas Morning News.

Moroney began his career with Belo as a sales trainee. In 1997, Moroney assumed responsibility for the operations of all of Belo's television stations in 15 markets across the U.S. He was later named executive vice president of Belo (BLC), with responsibility for finance, treasury and investor relations.

Since the split of the company in 2008, Decherd has been selling his Belo Corp. stock (BLC). He has been buying A. H. Belo (AHC) stock. That’s remarkable given that he and his family already have most of their net worth tied up in the company. Decherd and his sister, together, own some $ 20 million worth of stock. This is many multiples of Decherd's annual salary. He's buying more!

In short, if I owned this company outright, I would want these people to run it for me.

Pension Accounting

In 2010, A. H. Belo came to an agreement with Belo Corp. to split the shared retirement pension plan into separately sponsored plans. The company ended up with a pension plan that was underfunded to the tune of $145 million. Since then, the company has paid significant discretionary contributions to the fund of $30 million in 2011 and roughly $20 million in 2012. These contributions were in addition to the regular pension expenditures.

Putting the legacy pension liabilities to rest is both tax-efficient and ethical from an owner's perspective. Having said that, it does temporarily depress (operating) income.

Management has described three uses of excess cash:

1) Pension contributions

2) Dividends

3) Buybacks

In conjunction with the dividend policy announced in 2011, the company amended their revolving credit facility to allow for dividends and share repurchases without restriction. The board has recently approved stock buybacks.

Financial Strength

AHC competes with McClatchy, Lee and E. W. Scripps. Unlike its peers, the company isn’t leveraged to the hilt.

35024_1360005677yq7j.png

Specific Risk

1) Dual Class Share Structure: Management holds approximately 52 percent of the voting power through Series B stock which has 10 votes per share.

2) Circulation is plummeting. This is unlikely to change anytime soon given the plethora of "news" offered for free all over the Internet.

As it is, roughly half of earnings on a look-through basis come from Internet advertising. From an owners perspective, any further decline of newspaper advertising revenues has been hedged by the part ownership of Classified Ventures LLC. The quality of the business and the stability of future cash flows is better than one would assume just by looking at the income statement.


Fair Value

A. H. Belo owns a significant real estate portfolio which it is currently monetizing. All of the properties are owned outright, without any mortgages. Management has commented that it will not sell the assets at fire sale prices. The assets currently for sale are estimated to have market values of $70 million => $3 per share.

The company has $40 million of cold cash and no debt => $2 per share

In 2011, Classified Ventures LLC paid $50 million in dividends. Of this, AHC received $2.5 million. This means AHC’s economic interest in Classified Ventures is roughly 5%.

-EDIT- Based on now released 2012 10-k, I've adjusted my estimate of AHC's stake down to 3.3%. In my original analysis I failed to adjust for the fact that CV retained some of the dividends to one of its owners at the request of that owner.

As discussed here, I believe Classified ventures LLC is worth at least $1 billion => $1.65 per share.

35024_1360002438ZH2I.png

I add back the voluntary pension contributions and look-through earnings of Classified Ventures LLC to FCF as reported to get an estimate of owner earnings. As always, I check for sanity by looking at what the IRS says.

From an owner's perspective, the company generates earnings of $11 million => EPS of $0.50.

On average, A. H. Belo pays about $3 million of income tax. This implies the IRS sees earnings of roughly $12 million after otherwise taxable voluntary pension fund contributions. => EPS of at least $0.50

I would pay $150 million to own A. H. Belo in a heartbeat. A private buyer could saddle the company with $200 million in debt and pay himself a dividend of $10 per share in weeks. This would still leave the company better capitalized than many of its publicly traded peers.

In short, if you back out the value of the real estate and Classified Ventures LLC, you get the money for nothing and the oldest newspaper in the U.S. for free.


Why is this cheap?

  • It’s a newspaper.
  • The company is closely held.
  • Former shareholders may be ridding themselves of shares they got “for free” after the split.
  • The stock doesn't screen well. The income statement is a red mess.


Catalysts

  • At some point, the pension funds won't require further funding causing a step change in reported income.
  • The company may be taken private.
  • The company may be acquired.
  • Tribune sells or IPOs its stake in Classified Ventures LLC.
  • The company simply refuses to die.

  • Some of the Real Estate is sold.


Read more

recent 10k

Company History

Presentation with value of Real Estate

Disclosure

This is not a recommendation to buy or sell anything. At the time of writing, I owned stock of Washington Post Company (WPO). I had no position in any of the other stocks mentioned.

About the author:

batbeer2
I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

Visit batbeer2's Website


Rating: 3.7/5 (24 votes)

Comments

Adib Motiwala
Adib Motiwala - 1 year ago
Why Is This cheap? section, you can add history of losses on the income statement.
batbeer2
Batbeer2 premium member - 1 year ago
@ Adib

Yes, done.
AlbertaSunwapta
AlbertaSunwapta - 1 year ago
What problems/opportunities would it face in monetizing CV? Can it be broken up? Or are their synergies created through its ownership of C.V. meaning that it would need to, or want to contract services with CV into the future?

Personally, I do think the majority of newspapers are on the verge smartening up their business models to charge for their R&D and story production (aka reporting). I can't imagine news sourced from blogs, news releases and random individuals would hold much on-going credibility in the world and so paid subscriptions are again inevitable if quality news is desired. Outside of 'following' individuals with narrow specialities on your specialized sites (Gurufocus, SeekingAlpha, or whatever) look at Facebook, Twitter, any forum and the majority of the time discussions of any broad interest are initiated by some news story - rarely the other way around because posting and twitting individuals simply don't have the established credibility of having 'reported' news of any broad community level relevancy.
batbeer2
Batbeer2 premium member - 1 year ago
Hi AlbertaSunwapta, thanks for your questions.

>> What problems/opportunities would it face in monetizing CV? Can it be broken up? Or are their synergies created through its ownership of C.V. meaning that it would need to, or want to contract services with CV into the future?

I don't think they would have any problems monetizing CV. They wont, but they could.

I think of A. H. Belo as both a supplier and an owner of CV. They supply some of the classifieds from the markets they serve. If they sold out, they would end up being just a supplier. That would not be a particularly smart thing to do but IMO it could be done quite easily.

One fly in the ointment may be that CV has some bylaws that prohibit its owners from transferring their ownership without approval of the other owners (right of first refusal maybe). This is probably why AHC still reports joint ownership of CV with BLC. This issue is the reason I counted the dividends to find out just how much of CV AHC really owns. Interestingly, BLC doesn't report any stake in CV. I believe AHC and BLC have an agreement about this asset, it just can't be formalized.... yet. Like with the split of the pension liabilities, it takes time.

If I had to place a bet on the most likely scenario, I guess CV will lever up (current owners extract some cash) and then one of the owners IPOs their stake. That would bring even more cash to AHC. They don't need it but some of the other owners do.

On a more general note, My sum-of-the-parts approach doesn't mean I think the company is liquidating. I think it's highly likely management does exactly what they say. Sell the excess RE and return the cash to shareholders after taking care of the legacy pension liabilities.

>> Personally, I do think the majority of newspapers are on the verge smartening up their business models to charge for their R&D and story production (aka reporting).

I think they will. I wouldn't say they're on the verge though. These things take longer than one would hope.

vgm
Vgm - 1 year ago
Batbeer -- thanks for the stimulating piece.

A few questions come to mind:

1. Buffett talks about how, in order to be viable, newspapers in the electronic age need to fill a local niche with information which is not available elsewhere. Is this the case for AHC? Does it give anything away for free online?

2. Why do you think it has taken shareholders from 2008 until now to shed the shares they got "for free" after the split?

3. Have you looked to see how this spin-off stacks up against some of Joel Greenblatt's criteria for attractive spin-offs in his book?

Again, thanks.
batbeer2
Batbeer2 premium member - 1 year ago
Hi vgm,

1) Subscribers get access to online content. AHC says it's proud of its local network of journalists. I personally have no way of finding out how this stacks up against other newspapers. Management has been saying for many years what Buffett has been saying more recently.

.... Belo's philosophy is that these managers know more about the community and the newspaper than some hotshot sent from corporate headquarters to show the locals how to run things for a couple of years before moving on to a better job ..... "Run it as if it were your own paper," they are told.

From: http://www.ajr.org/article.asp?id=3282

2) I don't know. It's just a possibility I thought was worth mentioning. Maybe they left in 2009 already. AHC was a penny stock then.

3) I'm no expert on Greenblatt's strategies by any measure. From what I gather, Greenblatt's research shows spin-offs outperform within 2-3 years. That's certainly not the case here.

Thanks for the kind words.
batbeer2
Batbeer2 premium member - 1 year ago
A. H. Belo is now buying back shares and pays a $ 0.06 quarterly dividend. They collected another dividend from CV.

Fourth Quarter and Full-Year 2012 A. H. Belo Corporation Financial Results Conference Call - Transcript

>> The efficient deployment of capital is the top priority for the board of directors and management committee. On November 9, 2012 the board declared a first quarter 2013 cash dividend of $0.06 per share, which was paid on February 1, 2013 to shareholders of record at the close of business on January 11, 2013. We expect to pay three additional quarterly dividends this year.

During the last two months of 2012 we began repurchasing shares at a modest pace. Approximately 74,000 shares were purchased for a cost of $350,000. We will continue these repurchases at modest levels throughout 2013.
batbeer2
Batbeer2 premium member - 1 year ago
The 10-k is out.

1) Long term pension liabilities are down by about $ 20m in the face of lower discount rates. In 2012, contributions of $33m were made, of which $10m were voluntary.

2) Daily circulation is..... up! 10%

Sunday circulation is up 15%

From the 10-k: Year over year increases in reported daily circulation for 2012 and 2011 and reported Sunday circulation for 2011 are attributable to an increase in reported digital subscribers for each of these periods.

3) Classified ventures LLC has performed magnificently.

4) I made a mistake in calculating the economic interest AHC has in CV. For 2012, CV paid a dividend of $74m. AHC collected $2.5m which amounts to 3.3%. This is less than my original estimate of 5%. In my original analysis I failed to adjust for the fact that CV retained some of its 2011 dividends at the request of one owner.
batbeer2
Batbeer2 premium member - 1 year ago
Here's a link to a very good article on AHC.

EDIT April 30 - SA has now hidden that link behind a paywall.

The author basically agrees on the value but points out the value may not be "unlocked" anytime soon.

Personally, I don't care much about the rapid unlocking/realizing/selling of assets if I believe (as in this case I do) a company is well managed. There's either excess value in the assets or there it is not. Converting assets to cash only serves to remove uncertainty. While that usually has an effect on a stock's price, it has zero effect on the stock's value.

A sufficient margin of safety means you can take any amount of volatility (including upside!) with equanimity. That's enough for me.

One more thing:

The 3.3% stake in CV didn't just happen. Some smart people invested in that business a decade ago. It worked out brilliantly. Those people are still at the helm today.
batbeer2
Batbeer2 premium member - 1 year ago
A.H. Belo announces an agreement to sell one of its buildings (Riverside) for $30m. That's in line with the company's previous estimate of the market value of that building.

Updated disclosure: Long AHC.
batbeer2
Batbeer2 premium member - 1 year ago
Robert W. Decherd (CEO):

"We are very pleased to increase our quarterly dividend beginning in the third quarter . . . . .

The increased dividend will be funded through operating cash flow, enabled by reduced voluntary pension contributions. We recognize that in a stabilizing interest rate environment the need to shore up the funding status of the pension plans through large voluntary contributions has lessened.”


http://investor.ahbelo.com/phoenix.zhtml?c=219524&p=irol-newsArticle&ID=1821303&highlight=

swnyc2
Swnyc2 - 1 year ago
Batbeer2,

Good call on AHC. The stock is up substantially (up 28%) since you first published your article.

FYI, the other spin off, BLC, has done even better (up 55%)

It just got bought out today.

There's probably a bit of a lesson here: to look closely at both companies when there is a spin off....

That reminds me. You had published a very nice article on PostNL and said you were going to look more closely at TNTE. Any thoughts on that one?

batbeer2
Batbeer2 premium member - 1 year ago
>> you were going to look more closely at TNTE. Any thoughts on that one?

Working on it.

>> It just got bought out today.

I wonder if that will have consequences for CV.
batbeer2
Batbeer2 premium member - 1 year ago
Decherd retires. Moroney takes over.
batbeer2
Batbeer2 premium member - 11 months ago
Some bits from the 10-q of AHC

The Company and its former parent equally share a 6.6 percent interest in Classified Ventures, in which the other owners are Gannett Co., Inc., The McClatchy Company, Tribune Company and The Washington Post Company.

So, it's now confirmed. AHC owns 3.3% of classified ventures LLC.

Revenue, operating income and net income of Classified Ventures were $370,818, $77,450 and $81,604, respectively, for the nine months ended September 30, 2013, and $325,288, $62,295 and $63,031, respectively, for the nine months ended September 30,2012.

My initial estimate of $1B as a value for Classified Ventures may be a bit low. That's less than 10x earnings for a fast-growing high-margin (20%) business with no debt.

Since I wrote the article, AHC has divested some (not all) of its real-estate at decent prices and Classified Ventures has grown stronger. Though the shares have come up a bit, the thesis is stronger today.
batbeer2
Batbeer2 premium member - 7 months ago

CoStar Group (CSGP), agrees to acquire Apartments.com, a unit of Classified Ventures, LLC, for $585 million cash. Gannett Co., Inc (CGI), with a 27% stake in Classified Ventures, says its portion of the purchase price is anticipated to be around $155 million, that is to be distributed at closing.

Read more: http://www.nasdaq.com/article/costar-group-to-buy-apartmentscom-for-585-mln-cash-20140303-00449#ixzz2uvqIs364

In my estimation, AHC stands to collect roughly $20 from this partial sale of CV.

>> I believe each share of A. H. Belo represents a collection of assets worth more than $10.

The stock is now north of $11 which renders the thesis invalid. AHC is flying off my radar now.

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