Another Reason WaPo Investors Should Be Glad 'The Post' Was Shed

| About: Graham Holdings (GHC)

Though it's been nearly a month since (NASDAQ:AMZN) CEO Jeff Bezos acquired - himself, not on behalf of Amazon - the Washington Post newspaper from The Washington Post Company (WPO), the dust from the deal is still settling. Translation: I've had time to scour the related SEC filings, and gather some of the post-offer details. The key question from here is, are WaPo shareholders any better off now that the namesake division is no longer part of the corporation?

The answer is a resounding "yes."

The Other Shoe Drops

How was it Woody Allen phrased it? "I'd never join a club that would allow a person like me to become a member." By Allen's same line of reasoning, I can't help but wonder if Jeff Bezos ever asked himself "Why should I be willing to buy what someone else is willing to let go of?" Indeed, it's a question he may be asking himself eventually if he hasn't yet.

Close followers of The Washington Post Company will likely know the organization has offered early retirement to many of its newspaper staff. The buyouts didn't come cheap either, costing the organization an extra $8.4 million in the second quarter of this year, and $12.0 million in the first quarter, payable from the pension fund. The company also spent another $5.2 million on related matters during the first half of this year, bringing the 2013 total cost of the voluntary retirement incentive program to a little more than $25 million so far this year.

Truth be told, the amount's not that big of a deal. WaPo's newspaper publishing division alone generated $582 million in sales last year, and the $2.07 billion pension plan is overfunded by $604 million - it can afford an early retirement buyout.

So what? This is where it pays to really dive deep into a company's SEC filings.

Just for the sake of clarity, WaPo's pension plan isn't just to fund retirees from its newspaper business. The organization's biggest division is actually the for-profit education name Kaplan, which generated $785 million in revenue last year. Its cable television arm drove $787 million in sales in 2012. All of the employees of the other business lines also participate in the same pension plan, though they don't do so equitably.

While its newspaper business (which is almost entirely the Washington Post publication) drives a little less than one-third of the whole company's revenue in a typical year, the newspapers' pension plan obligations habitually incur the lion's share of WaPo's annual net pension spending. In 2012, the newspaper division cost the organization $41.5 million ($42.3 million counting unusual expenses) of the total $60.6 million it spent on pensions. In 2011, $22.8 million ($25.3 counting unusual expenditures) was spent on the newspapers' portion of pension spending ... about 69% of the $32.7 allocated toward pension expenses for the entire organization. In 2010, the company dropped $21.9 million in regular pension expenses ($42.3 million counting the one-time cost) for the newspaper division alone, and only had to pony up $8.7 million for ever other business unit combined.

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To give credit where it's due, The Washington Post Company has reined in some of the pension burden of its print business; it's actually now lighter than it was in 2008 and 2009 thanks to some skillful handling (and hefty severance fees) of three union-represented employee groups and their multi-employer pension plans. Still, the unusually large burden of the newspaper division's retirement obligation lingers, and despite recent progress on that front has thus far proven tough to contain.

The Math Doesn't Add Up

With one pension plan now in use by a handful of distinct employment models, it's tough to pinpoint exactly how much of the $2.07 billion pension fund could theoretically be earmarked for the newspapers' current and eventually-former employees. We do now know how much of that pension plan The Washington Post is handing over to Bezos to cover his pension liabilities though ... $333 million, which is reportedly $50 million more than he actually needs to cover his end of the deal. WaPo will continue to service and provide a pension for current retirees, while Bezos will handle the same for all the current/active employees when they retire.

Will that $333 million actually be enough to do the job? That's a great question. The problem is, there's no answer yet. We do know this, however: Bezos has only been given 16% of the entire pension fund, while the annual pension liabilities for the newspaper division have been running anywhere from half to two-thirds of the company's total net pension expense.

It's possible the current newspaper employees won't cost as much to service in retirement as the former employees do. But, they'll have to cost much, much less - which isn't likely - for the math to make sense for Bezos. Otherwise, the acquisition could prove quite costly not because The Washington Post is bleeding circulation and advertising revenue, but because it can't afford to take care of its future retirees the way it initially agreed.

In that light, the fact that The Washington Post Company was eager to let go of the newspaper at a great price - and then sweetened the pot with an extra $50 million - starts to make some sense ... the metaphorical "why Woody Allen was encouraged to join the club."

WaPo has taken measures to work past nagging pension challenges; the recent voluntary retirement incentive plan is evidence to that end. After years of that headache, however, those measures never appeared to be enough. Rather than continue to deal with it, one has to wonder if somehow the organization passed most of that buck on to Jeff Bezos. We won't really know for sure until we get the first post-acquisition SEC filings and the pension expense details are made public, but it's an idea that has merit

You also have to believe if The Washington Post Company's pension plan was overfunded by $604 million before, the company wouldn't deliberately take a step back there now. Indeed, I can't help but wonder if the fund will end up being even more overfunded when it's all said and done. If so, WPO just became a much more attractive investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.