About a month and a half ago I
discussed my position in the Scripps/Journal transaction that ended up closing on Wednesday (4/1/15), as a Scripps shareholder I was about 90% exposed to the eventual TV/radio broadcasting company (keeping the Scripps name and SSP ticker) and 10% exposed to the new newspaper publishing company Journal Media Group (JMG). From the SSP side pre-transaction, I ended up about ~34% but that was heavily weighted towards SSP; I sold the new SSP position post-closing as it's trading for roughly fair value at 8.5-9.0x a blended '15/'16 EBITDA.
In contrast and classic small spinoff fashion, Journal Media Group was sold off indiscriminately yesterday - down over 10% on the day despite trading extremely cheaply based on EV/EBITDA and free cash flow metrics. To recap, Journal Media Group is a combination of the Milwaukee Journal Sentinel (formerly with Journal Communications) and Scripps' dozen or so smaller regional/community papers.
Unlike other publishing spinoffs (TPUB & TIME), Scripps was kind enough to leave JMG with no debt, no pension liability and roughly $10MM in cash. Only AH Belo is in a similar position among the remaining pure play newspaper companies:
In the Journal roadshow presentation, they updated their proforma financials (downward from the proxy statement) below:
Given its balance sheet and proforma financials, JMG is trading too cheaply, even for a newspaper publisher when compared to peers at
under 4x EBITDA:
I know many don't like the EBITDA metric, so on a free cash flow basis JMG should generate roughly $1.40/share unlevered in free cash or
~18% FCF yield (check my math on that). New Media's valuation is a clear outlier, the market seems to be paying up for the Fortress sponsorship and capital allocation acumen. Given JMG's lack of debt, and former Scripps CFO in the CEO spot, I could see JMG pursuing a similar community paper acquisition strategy that would tuck in nicely with the ex-Scripps newspaper assets. It's just too cheap after the post-transaction dump to sell.
[Another similar deal to take a close look at is Gannett's upcoming broadcast & digital/publishing split]
Disclosure: I own shares of JMG
Any view on revenue and margin trends? Problem with newspapers is that these tend to be melting ice cubes... Such businesses invariably look attractive on free cash flow metrics. Dex media, that was shamelessly hyped up by whatshisface at an investor conference is a case in point. While that is a yellow pages company, still analogous to local newspapers. I will say that JMG not having any debt is a big plus because in almost all these newspaper companies, I see their sole purpose as serving creditors rather than shareholders. Still, very uninspiring businesses no matter what valuation.
ReplyDeleteI view the newspaper market as a little bifurcated, I see the large dailies (basically everything TPUB owns) as being in the largest trouble. Populations in those cities tends to be younger and more transient, local news in those areas is more national in nature, easier to find online for free, or just not important to someone not from the area. Stable mid-sized like Milwaukee have a little more enclosed population to them, families typically stay in the area and there's less migration. Then community papers are the only sources of news in their towns. But overall I agree with the sentiment, revenue and margin trends aren't good, digital advertising is really beginning to disrupt the car advertising space, once a staple of newspapers and local television. If a recession is around the corner, could be the end for a few of the leveraged players. Thanks for the comment.
DeleteIt looks like they own a substantial amount of real estate too, all unencumbered.
DeleteYes they do, good point, mentioned it in the original post but worth stating again considering others like TPUB don't own their real estate. NEWM is also making a point out of doing sale-leasebacks with new acquisitions.
DeleteOff the topic but wondering if you looked at ATLS spin? Stub equity issued from Atlas/Targa merger and fell off the cliff post transaction.
ReplyDeleteI haven't looked closely other than casting aside initially for taking too much capital to put on the stub trade, its probably out of my strike zone, but thanks I'll take a closer look at it anyway.
DeleteHi there,
ReplyDeleteAre you sure they took all of the pension plans? The pro-forma only adjusts for a portion of the defined benefit expense
You're right, I shouldn't have said no pension liability, just relatively minimal exposure compared to others. Journal will still have a portion of the defined benefit expense going forward, but it looks manageable.
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