New Media holds interest, but not a buy yet

|By:, SA News Editor

"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.