New Media holds interest, but not a buy yet

"Papers delivering comprehensive and reliable information to tightly-bound communities and having a sensible Internet strategy will remain viable for a long time," Warren Buffett said in his 2012 annual letter. The Oracle has purchased 28 local newspapers of late for $344M.

So leads off Clark Street Value's examination of Newcastle Investment's (NCT -1.1%) recent spinoff of New Media (NEWM +5.5%), which owns 435 community papers and related mobile sites, and six yellow page directories (just a start as New Media's manager has identified $1B in potential acquisitions that can be purchased for between 2x-5x EBITDA).

New Media sounds like a Joel Greenblatt special because 1) To Newcastle's investment base, it's an unwanted spinoff likely to be sold for uneconomic reasons 2) It operates in an out-of-favor industry 3) It's run by a capital allocation expert (Fortress Investment FIG).

Leaning against making the stock a buy today: 1) The stock hasn't sold off after the spinoff, and it's now offered for a bit over 5.2x EBITDA - cheap, but not exceedingly so 2) External management incentivizes the manager to rack up assets irrespective of their price, and the incentive fee could lead the manager to take unnecessary risks.

Bottom line: New Media has plenty to like as a potential investment, but it's not cheap enough yet given the discount it should trade at thanks to external management.

Comments (5)
  • Michael Bryant
    , contributor
    Comments (7205) | Send Message
    If you take (428/28)*$344M = $5.344 billion. So does (NEWM) have a valuation of $5.4 billion?
    26 Feb 2014, 09:39 AM Reply Like
  • ToKnowToday
    , contributor
    Comments (42) | Send Message
    Not quite sure what you just said...
    Here is my evaluation:
    According to the presentation on the spin off found on NCT's website, there is $534 million of equity in NEWM (for the record I did not like the presentation but this was a "hard" fact and I doubt they would tweak it so blatantly; it is also in the ball park of what I thought the number would be based on Gatehouse financials and the price for the Dow Jones local group).


    Let's say there are 30 million shares.


    $534 million / 30 million shares = $17.8/share.


    The price right now is $13.3/share.


    Either I am totally missing something or the Mr. Market did not take his anti-psychotic medication.


    At this price you would be getting $4.5/share of equity for free. IE before taking into account any price multiple you are getting a 25% discount.


    Can someone agree or disagree with me? This appears to be such a bargain that something must be wrong...
    27 Feb 2014, 08:13 PM Reply Like
  • aretailguy
    , contributor
    Comments (2016) | Send Message
    Toknow, your math is right. It would seem that Mr Market today also realized possible divys in the 15% range as well.
    28 Feb 2014, 03:56 PM Reply Like
  • mj346
    , contributor
    Comments (18) | Send Message
    well done report , however the stock traded over 14 on a when issued basis..up from around 12. so it did in fact trade down..the odd lot holders and pure real estate investors moved out, in my opinion that was dip you missed... at that point the hedge funds and others investors who are seeing value jumped in and continue to do so.. My view and that of my other associates believe newm should continue higher..
    Large dividend income and capital gains as the company grows. seems like you liked this one ,but missed the boat and did not get on..
    2 Mar 2014, 09:53 PM Reply Like
  • ToKnowToday
    , contributor
    Comments (42) | Send Message
    it is still a buy at the current price
    3 Mar 2014, 05:14 PM Reply Like
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