New York Times: Poised for Gain

In my opinion, the New York Times (NYT) represents an excellent investment opportunity with the shares having substantial upside potential over the next 12 to 24 months. I base my premise on three specific factors.

One, contrary to the prevailing wisdom among many investors, I believe the paradigm shift (and that’s exactly what it is) that is occurring today in the newspaper industry as a result of the growing acceptance of the Internet among consumers does not represent a threat but that offers instead a once-in-a-lifetime opportunity for a great brand like the New York Times.

Two, the dual-class share structure that is currently weighing down the shares will ultimately be abandoned as a result of shareholder pressure. Upon such a development, the shares would almost surely surge to levels not seen in a long time.

And three, at some point, whether or not the dual-class share structure is abandoned, the New York Times will be acquired, either by a strategic player willing to pay a substantial premium (think News Corp’s offer for Dow Jones) or by the controlling Ochs-Sulzberger family whose members I believe would move heaven and earth to remain at the company’s helm.

Business Opportunity

It is common knowledge that the newspaper industry as a whole has been experiencing a serious deterioration in financial performance as a result of ever increasing numbers of readers relying on the Internet to get their news. This migration of readers from the “tactile” world of paper and newsprint to the “virtual” world of online venues has caused there to be an equally noteworthy migration of advertisers to the Internet. The resulting dynamic is like a death spiral for the newspaper industry, in that as more and more consumers opt to get the news on the Web, more and more advertisers follow them there, leaving behind a shrinking revenue base for newspapers to pursue.

However, all is not lost, especially for a great brand like the New York Times. While the prospects for many participants in the industry may be bleak, I believe that business prospects for the New York Times, as well as that other iconic brand, the Wall Street Journal (Murdoch is a smart man, you know), are outstanding. The way I see it, although there are practically an infinite number of news outlets on the Web from which consumers can choose, most people would prefer to have to visit just one or two sites to get the day’s stories. That is where brand name recognition is critical. And when it comes to the news, the New York Times brand is in a league of its own – and not just domestically, but worldwide. It is the “Coke” of journalism.

I believe Murdoch understands that an extraordinary opportunity exists to take a leading brand like the Wall Street Journal (it could just as easily be The New York Times) and create online a hybrid web site that melds the best characteristics of a newspaper with that of television. I can envision a day not long from now when a person can go to a leading news web site, like the New York Times, and not just read about a story, but then get a video clip on the topic as well, followed by another video clip of a point-counterpoint discussion among experts in the field in question, be it politics, world events, business, the arts, etc.

It would be like combining the in-depth coverage traditionally offered by the New York Times with a typical “coffee table” discussion on the Charlie Rose show and an expose from 60 Minutes – a very powerful and exciting combination that will permanently alter the way most of us get the news. For the few sites like the New York Times with sufficient brand recognition and credibility to capitalize on this once-in-a-lifetime paradigm shift, business prospects, present-day problems aside, are excellent – as is the potential for share price appreciation.

Dual-Class Share Structure

In this new era of corporate governance, companies like the New York Times with dual-class share structures are coming under increasing pressure to do away with such structures given that they are inherently unfair to the majority of shareholders. While a company like Google can resist this pressure fairly easily given its stellar share price performance, those struggling financially are far less immune to such pressure. Nowhere is this pressure greater than in the newspaper industry where major companies like the New York Times, Dow Jones and Tribune have all reported disappointing results quarter after quarter for a very long time.

At the New York Times, the Ochs-Sulzberger family, which owns less than 20% of the company, has iron-grasp control due to the family trust’s ownership of super-voting Class B shares. The remaining “outside” shareholders, those holding only Class A shares, own approximately 81% of the equity but have little ability to influence the direction of the company. However, there are now powerful constituencies lining up against this dual-class structure at the New York Times, including Institutional Shareholder Services, the influential proxy advisory firm, and Morgan Stanley fund manager Hassan Elmasry, whose fund holds about a 7% stake. At the last annual meeting in April of this year, a whopping 42% of shareholders withheld their votes for Class A directors as both a sign of protest against the dual-class structure, as well as a vote of no-confidence in the Board.

The rationale for a dual-class structure among newspaper companies has always been to ensure “editorial independence” from the whims of Wall Street. But with the explosion of viable news outlets on cable TV and the Internet, the need to protect the New York Times’ editorial independence for the sake of the “Nation” rings hollow and, as evidenced by the recent sale of Tribune and the impending sale of Dow Jones, the days of the dual-class structure at the New York Times appear numbered. The elimination of this structure will open strategic and operating possibilities for the company that heretofore did not exist, and the share price will almost surely respond accordingly.

Potential Sale

Just as Rupert Murdoch understands the substantial value inherent in Dow Jones, I have little doubt that another well-capitalized strategic player will see similar value in the New York Times. As illustrated by the sale of Tribune and the forthcoming sale of Dow Jones, a dual-class structure cannot prevent the sale of a company when an overwhelming number of shareholders are in favor of it. Put another way, as in the case of Dow Jones, it doesn’t matter what a company’s bylaws are. If a substantial offer is on the table, there is no way a small minority of shareholders, regardless of the class of shares they hold, can keep the overwhelming majority from reaping a windfall.

Moreover, in the event of such an offer, I believe the Ochs-Sulzberger family, led by Arthur Sulzberger Jr., will do anything and everything within their power to retain control of the New York Times. For unlike members of the Bancroft family who are not involved in the day-to-day operations of Dow Jones, Mr. Sulzberger is very much involved in such operations at the New York Times. The only real alternative available to him in the event of such an offer would be to pursue a buyout which, at the least, will ensure that a deal occurs and, better still, may even result in a bidding war.

In summary, contrary to the general perception on Wall Street, I believe the New York Times represents an excellent investment opportunity. While many people feel that the company’s shares are facing a stiff “headwind,” there are actually a number of factors at work which will serve to produce a “tailwind” that can take the price to levels not seen in a very long time.

NYT 1-yr chart

Disclosure: Neither Richard Dorfman nor Richard Alan Incorporated currently owns any shares or other securities of New York Times.

Comments

[hankscott:]

Agree that The Times is an unparalleled media brand. But Dorfman's whole case rests on the presumed willingness of the Sulzberger/Ochs family to eventually pack it in and yield the great institution that is The New York Times to someone with a very big wallet. It ain't gonna happen. This is a family whose name is synonymous with its newspaper (not the case with the Bancrofts). This is a family with members actually working at the newspaper (not the case with the Bancrofts).

And finally, why do people who buy shares in companies with two classes of stock later complain about the unfairness of it all? I recently bought a Subaru and am bummed that it doesn't have the pickup of a Porsche Boxster. Should I go back to the dealer and complain?

2007 Jun 28 10:45 AM