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The Long Case For New Media And Potential Merger Opportunity

|Includes: GCI, New Media (NEWM)

Elevator Pitch

New Media's cash flow and dividend are not respected by the market at least partially, if not mostly, due to poor messaging. A change in tone from management/investor relations and/or a merger with a national brand like USA Today (owned by Gannett Co Inc.) would provide significant upside for the stock.

Company Description

New Media owns, operates, and invests in local media assets. It focuses on owning and acquiring local media assets in small to mid-size markets. It is a publisher of local newspapers and related publications. As of December 25, 2016, its portfolio of media assets spanned across 538 markets and 36 states. As of December 25, 2016, its products included 631 community print publications, 538 Websites and two yellow page directories. Its new Propel platform is a means of providing scale to these local wide-moat assets.

Thesis & Catalyst For New Media (NYSE:NEWM)

Value Proposition:

•Primary:

oStrong emphasis on capital return to shareholders as evidenced by generous dividend payment

oWide-moat assets with high quality brand recognition at local level

•Secondary:

oAchieving additional scale across fragmented asset base via centralized digital marketing platform (Propel)

oGrowth via acquisitions at a reasonable price (<4.5x EBITDA)

The market is significantly undervaluing the Primary Value Propositions and a change in narrative from management/investor relations can significantly change the optics of the firm.

Valuation

Fundamental Snapshot (2016 Year-end):

•Recent Price $13.28

•Shares Outstanding 53,600,000

•Market Cap: $711,000,000

•Dividend 0.35/share quarterly (raised from 0.33 in 2016)

•Dividend Yield ~10.5%

•Dividend Cost $75,040,000

•2015 Cash from Operations $115,000,000

•2016 Cash from Operations $98,000,000

•LTM Free Cash Flow $117 million vs dividend payments of $75 million

•Common Equity $755,000,000

•Of which, Goodwill plus Intangibles $579,000,000

•Tangible Book Value / Share ~$3.28

•Long-term Debt ~$330m @ 7.25% due June 2020

Benefits of fixing the problem:

oWith a rigid focus on Primary Value Proposition Variables (LTM free cash flow, cash flow from operations, expense management, etc.) management can focus the street's attention on the safety of the dividend, and, secondarily, potential dividend growth.

oAn investor base that treats the dividend as relatively safe would imply a dividend yield of 5% in the current market environment

oGiven today's dividend yield of 10.5% a reduction in the yield to 5% necessitates a ~100% rise in the price of the stock (from ~$13 to ~$26)

oIt is possible that current dividend levels are a bit aggressive at 64% of LTM Free Cash Flow

oIf we reduce that to 50% of LTM Free Cash Flow, that would imply a current dividend yield of 8.22%

oAssuming the street is convinced of its safety, a reaction in the price resulting in a 5% dividend yield would require a 64% increase in the current price from $13.28 to $21.82

Company Management

Problem Summary:

•The problem is largely not with management's stewardship of company assets and the use of resources to maintain strong cash flows from operations. Acquisitions thus far have seemed prudent, and management's focus on Propel rollout seems warranted given its growth profile. If there is any place where management could use some additional focus it would be on the long-term debt profile where there seems to be opportunity to tap the high-yield debt markets given the current level of credit spreads. This would allow it to potentially reduce the cost and risk profile if the long-term debt.

•The problem is with the company's communications to the marketplace. The lack of focus on the company's ability to maintain the dividend over the long haul and instead focus on its growth profile (targeted levels of acquisitions, growth of new Propel platform) is causing the market to discount the quality of the dividend.

oNo stable, wide-moat company has a dividend yield of 10%.

oGiven current market rates, dividend yields greater than 6% typically reflect a view from the marketplace that cash flows in the future will not be sufficient to maintain the dividend over the long term.

oCompanies one typically finds in that category are REITs who may have significant risks to certain tenants or significant interest rate risk, or relatively untested or fragile MLPs in the energy space

Illustrative Evidence of Problem:

o "Q1 2017 Highlights" focused on Secondary Value Proposition variables (acquisitions, Propel rollout, liquidity available for more acquisitions)

oPaid mild lip-service to Primary Value Proposition variables (declared dividend, minimal leverage reduction)

oSignificant discussion of dividend stability and return of capital to shareholders did not occur until Slide 9 (!) of the quarterly presentation

o Provide no expense details for Propel (a main investment/growth area for them) which is not how a company that values operating cash flows and support of the divided would behave.

oTop mutual fund holders are split between Growth and Value, when value should be the heavy favorite

Alternative Path for Improvement

Gannett Co Inc. (parent company of USA Today) and New Media should explore a merger.

Both companies could benefit from overhead reductions through the merger (e.g. SG&A).

Both companies are pursuing shareholder-friendly capital return policies.

Both companies have strong cash flows from operations and bring complimentary assets.

Gannett Co Inc. via its USA Today portal would bring brand name recognition.

New Media would bring a new growth catalyst (Propel platform) and a linkfrom National to Local assets (picture a "Local" tab on the main USA Today landing page that would act as a portal to all New Media websites).

Disclosure: I am/we are long NEWM.