Journal Media Group: Quick Update

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

E.W. Scripps & Journal Media Group: Double Spin, Double Merger

Another interesting yet complicated transaction that was announced in 2014 and closing soon is the "double spin, double merger" of The E.W. Scripps Company (SSP, "Scripps") and Journal Communications (JRN) that will create one pure play broadcasting company and one pure play newspaper company from two mixed local media companies.

Scripps is the larger of the two and owns 21 local television stations as well as mid-size and community newspapers in 13 markets.  Journal Communications owns 14 television stations and 35 radio stations in 11 states, along with the Milwaukee Journal Sentinel and several community newspapers in Wisconsin.  Following the completion of the transaction, both companies will have strong balance sheets compared to peers and will be in a position to continue consolidating their respective industries.  The new Scripps (the broadcast company) will be the fifth largest independent TV broadcasting company and will have dual tailwinds of increasing retransmission fees and 2016 political ad revenue in key swing states.  The new Journal Media Group (the newspaper company) will have a net cash position, strong free cash flow, and will be in a position to make accretive acquisitions.

Neither industry is incredibly exciting, I hate the local TV news, but there's a demo that still watches it regularly and it's the best medium for politicians to sling attack ads at each other.  Warren Buffett has made investments in both industries in recent years and with the increased deal and spinoff activity, it's a natural place to look for ideas.

Transaction Details
On the closing date (early Q2), Scripps will spinoff their newspapers into the Scripps SpinCo entity, and Journal will spinoff its newspaper business into Journal SpinCo.  Following the consummation of the spinoffs, the two newspaper spinoffs will merge to form Journal Media Group (JMG).  All on the same day, Scripps will pay a $60MM special dividend to their shareholders and then merge the remaining Scripps and Journal broadcasting businesses to form the new Scripps as a standalone television and radio broadcasting company.  Both companies will be free of cross-media ownership rules and could therefore pursue acquisitions in markets they were restricted from as combined broadcast and print companies.

E.W. Scripps (new)
The new E.W. Scripps Company will own 34 television stations reaching 18% of households (well below the 39% FCC maximum), 34 radio stations, a few digital properties, and the Scripps National Spelling Bee.  The Scripps family will maintain control over the new Scripps with 93% of the vote via the Class B shares.  Scripps has shown prudent capital allocation in the past, they sold their cable business, spun-off the wildly successful Scripps Networks Interactive and bought back shares following the great recession.  Controlling families aren't ideal, but part of the media landscape, there are worse families to be attached to than the Scripps.

The local news seems to exist just to run political ads, Scripps GAAP profit alternates between windfall and breakeven every other year based on the election cycle.  With no incumbent president and both parties moving more and more to the extremes, expect another big spending year in 2016.  The new Scripps will have a strong political footprint with television stations in important swing states Florida, Ohio, Michigan, Wisconsin, and Colorado.

Scripps will also have the tailwind of the controversial increasing retransmission fees, currently their fees are well below industry averages and will step up drastically in 2015 to $165MM.  Cable companies, broadcast companies, and content companies are all in a race to consolidate in order to increase their leverage at the bargaining table.  At some point the consumer is going to push back on rising cable bills, over-the-top options like Netflix and HBO-Go are already disrupting the industry to a certain extent.  All things to keep in mind when considering retransmission revenue trends.

Another advantage Scripps will have is a strong balance sheet with just 2x EBITDA in debt, whereas others in the space (Sinclair or Nexstar) are in the 3.5-5x EBITDA range.  The company highlights their 18% market share and how it's well below the FCC maximum of 39%, I wouldn't be surprised to see Scripps add stations to its portfolio.

Below is a table of comparables for the new Scripps, both television and radio broadcasting companies:

For the new Scripps revenue is highly cyclical based on the election cycle, so it makes sense to take a blend of expected 2015 and 2016 EBITDA, I'm coming up with $263MM based on the joint proxy statement.  Using a 8.5x multiple (average of the above comparables is 9.2) and ~$365MM in net debt, I come up with an expected market cap of $1.87B for the new Scripps.

Journal Media Group
JMG will be a fairly simple business to analyze, it will have the flagship Milwaukee Journal Sentinel, roughly a dozen other smaller newspapers, no debt or pension shortfalls, and it will own its facilities and real estate.  Basically the exactly opposite start that was granted a similar spinoff in Tribune Publishing (TPUB).  It will be led by Timothy Stautberg, currently the head of the newspaper business at Scripps but who has a background in finance and was formerly the Scripps CFO.  With the trend of newspaper consolidations and spinoffs (will likely lead to another round of mergers) it's a benefit to have a finance guy in the CEO role.  JMG will be in a position to implement a similar strategy to New Media who have been successful at rolling up smaller weaker players at 2-4x EBITDA and having the market re-rate them higher.

Below is a table of comparables for the new Journal Media Group:

New Media likely gets a higher multiple due to the dividend retail crowd, I would anticipate JMG initially trading more inline with Lee Enterprises and McClatchy, but for conservatisms sake let's put a 5.5x EBITDA multiple on the company.  Using 2015 projected EBITDA from the joint prospectus of $57MM, and a net cash position of $10MM, the projected market cap would be $326MM.

Valuation Pieced Out Between SSP & JRN

Current Scripps shareholders will receive 69% of the new broadcast company and 59% of the newspaper company, plus a $60MM special dividend at closing.  Using the valuations above, both JRN and SSP are modestly undervalued at this point.  While there's not a ton of upside, there doesn't seem to be a lot of downside either considering both companies will be in a strong financial position compared to peers.  I picked up some shares of SSP recently, I'm mostly indifferent between the two but it might be initially safer to hold proportionally more of the new SSP versus JMG which could be sold off after the transaction (possible opportunity) as newspapers continue to be out of favor.

Disclosure: I own shares of SSP

Newspaper Spinoffs

I did another lunch investment pitch roundtable today, this time the topic was "Impact of Technology on Communication and Stocks".  I was already looking into the recent news/print spinoffs, so I decided to squeeze them into the topic and pitch the whole basket.

Below is my deck with some commentary, outside of News Corp and New Media Investment Group, I've only looked into these spins at a surface level, so some numbers might be completely wrong.  But the sector seems attractive as its bottoming and figuring out the correct corporate structure, digital strategy and industry dynamics to survive.

The first quote from David Carr of the New York Times came from his column "Print Is Down, and Now Out" published on 8/10/14 after the announcement of Gannett's newspaper spin.  His column and this quote sum up the consensus view of the newspaper industry, it's ugly, unwanted, and destined for red ink in the digital age.  However, news and content is still valuable, it just needs to be more tailored to its audience.  A (digital) subscription to The Wall Street Journal is virtually a requirement for anyone in finance or a senior management position in corporate America.  On the other end of the spectrum, community newspapers are the only news source for many small cities and can provide valuable targeted advertising.

As for the spinoff dynamics, most newspapers have been essentially hiding within otherwise growing media conglomerates, by exposing the print business, management will be forced/incentivized to adapt their product to the current marketplace.

There's nothing really new in this slide compared to my post on News Corp nearly a year ago, but REA Group's market value continues to rise, Harlequin was added, and hopefully Amplify is closer to wider acceptance.  One minor complaint, the quarterly conference calls sound like management is telling a story rather than a business update, makes the lack of a clear capital allocation plan even more of a concern.  But it's clearly cheap.

This is another update slide for blog readers, I'm still on the fence about New Media, like the strategy but I remain concerned about the third party management agreement and how that might be bought out or internalized.  Fortress is a savvy shop, and they've executed on the plans they've laid out.  Their quarterly presentations are transparent, a little promotional, but it clearly presents the investment thesis and should net investors high teen returns as they buy local papers cheap and they're rerated in the public markets.

Now we get to recent spins, Tribune Publishing is the riskiest of the bunch, its leveraged and doesn't have the benefit of its real estate assets.  Its papers are primarily large metropolitan newspapers, a segment that's similar to a JCPenney's in the retail space, stuck in the middle without a loyal customer base.  However, its very cheap and has a lot of upside if turned around, parent Tribune Media emerged from bankruptcy about 2 years ago and former creditors (unnatural holders) might be taking advantage of the liquidity of an NYSE listing and selling.

The newspaper spins really picked up in the last two weeks, Gannett announced they were going to spin off the publishing business earlier in the week.  I don't know the exact timing of the filings, but Carl Icahn curiously filed a 13D after the spin was announced, suggesting the spin.  There might be some upside left, but this transaction is well publicized and pretty straightforward.

E.W. Scripps & Journal Communications
The more interesting transaction is the "double spin/double merger" of E.W. Scripps and Journal Communications, where both will combined their TV/radio broadcast divisions and then spinoff their newspaper segments into a new company to be named Journal Media Group.  Both companies would be free of cross-media ownership rules and could therefore pursue acquisitions in markets they were restricted from as combined broadcast and print companies. 

Today the two companies have a combined $1.5B market cap, if you take management's guidance of $200MM EBITDA and use a 9x multiple (low end of comparable broadcast companies due to radio exposure) the "new Scripps" is worth roughly the current market cap and you get the Journal Media Group newspaper business "for free".  It's a complicated transaction that won't close until sometime in 2015, and there are more merger details including a $60MM special dividend to Scripps shareholders, but with more consolidation in both industries likely, it initially appears to be an attractive deal for both future companies.

Each of the recent spins are a little different, but as a group they should outperform the broad market over a 2-3 year time.  I could also see regulations relaxing in this space, newspapers/radio/local TV entities aren't as influential as they once were, encouraging more consolidation.

Disclosure: I own shares of NWSA