Thesis

The current effective enterprise value of the company, when factoring in excess real estate, is hovering near zero. This is a curious phenomenon in light of a flurry of newspaper deals that has occurred in the past 18-24 months; offering an interested observer numerous deal ‘comps,’ and evidence that print is an asset class that is still in select favor. It is our contention that The Dallas Morning News is a 100mm+ property whose value is being obscured by the company’s financial reporting. At current trading levels we believe investors are making a strong statement about management’s stewardship of capital and are, in essence, assuming that the 80mm of cash on the balance sheet will deplete more than 80mm of value.

Company Description

 A. H. Belo Corporation and subsidiaries (“A. H. Belo” or the “Company”), headquartered in Dallas, Texas, is a leading local news and information publishing company with commercial printing, distribution and direct mail capabilities, as well as expertise in emerging media and marketing services. With a continued focus on extending the Company’s media platform, A. H. Belo is able to deliver news and information in innovative ways to a broad spectrum of audiences with diverse interests and lifestyles.

The Company publishes The Dallas Morning News (www.dallasnews.com), Texas’ leading newspaper and winner of nine Pulitzer Prizes; the Denton Record-Chronicle (www.dentonrc.com), a daily newspaper operating in Denton, Texas, and various niche publications targeting specific audiences. A. H. Belo also offers digital and other business marketing solutions as well as event marketing.  (from recent 10Q)

The Dallas Morning News

The DMN is the dominant publication in Dallas, Texas. Circulation figures are published annually, so we’re still awaiting 2015 numbers. The previous years’ figures are:

The company generates revenue through: circulation, display, classified, preprint, and digital advertising, and also does some outsourced printing and distribution for competitors (to leverage fixed costs). Predictably, advertising is under secular, and arguably cyclical pressures, and while volume has held up reasonably well, pricing is challenged, as clients have a bevy of alternatives for their fixed advertising dollars.

Management’s Strategy Going Forward

Jim Moroney is a newsman through and through. We find him to be honorable, pragmatic, and level-headed. He has reached the conclusion that cutting operating expenses year in and year out in the face of inexorable topline pressure is much like the old saw about rearranging furniture on the deck of the Titanic. His envisions the DMN (print and digital) as the hub with numerous digital spokes supplementing and adding to the consumer experience of the paper. He has made it clear that m&a activity is front and center and has called out advertising and marketing service companies that are currently profitable as his preference for acquisition dollars.

As dyed in the wool value investors we are still to be sold on the digital strategy. Our trepidation resides in paying digital multiples for businesses that we (and the company) aren’t familiar with, rather than increasing our ownership in a business that we are vis-à-vis aggressive share repurchases.

Timeline of Corporate Actions

10/10/13:  Sold The Press-Enterprise for 27mm

5/23/14:   $1.50 special dividend

9/3/14:   Sold the Providence Journal for 46mm

10/1/14:  Sold Classified Ventures (as part of joint venture)

12/26/14: $2.25 special dividend

1/5/15: Acquisition of digital assets for 15.3mm (DMV mentioned below)

I’m including the above because I think it’s important to understand that even though their digital strategy is, in some ways, unproven, the management team isn’t a bunch of gunslingers. They have been quite deliberate and disciplined thus far and have done an admirable job of protecting the balance sheet. While their choice of strategy might differ from ours, they are going about it in a thoughtful fashion-----we are drawn to management teams that haven’t been buying these past couple of years.

Marketing and Event Marketing Services (MEMS)

This segment houses DMV (digital marketing), Speakeasy, and 508 Digital. This is really a nascent effort at diversifying away from print and, as such, we are unable to get a handle on how the business is performing. This is partially a function of the segment accounting that we will discuss below. At the time of the acquisition they forecast that DMV would generate between .8-1.3mm in EBITDA. At the current price, we believe investors are acting as if the company spent the 15mm and received nothing in return; we believe that, at a minimum, the DMV asset is worth what the company paid for it last year.

Real Estate

As we’ve witnessed across the industry, print media is a cumbersome, asset-heavy business whose footprint is no longer appropriate for the current size of the business. Companies like Gannett, Journal, Tribune, etc have all made a point of monetizing non-essential real estate-much of which has more value to a developer than to a strategic. AH Belo is no exception. They currently own four parking lots in Dallas, Texas that are self-funding from a carrying cost perspective. Management has estimated that the combined value is 13-14mm. There also is residual real estate in Providence that they believe is worth 4-6mm. They are actively marketing the Providence land but feel that Dallas real estate is only appreciating, so are content to own and operate the lots. In sum, there is 17-20mm of real estate value that is non-core.

Pension Stuff

I both find pension accounting as dry as Texas toast and, ultimately, fairly illusory in nature. Our view is that the pension shortfall shouldn’t really be viewed as a dollar for dollar liability. I don’t know where we come out on the matter but it’s probably right to dock them something---being aware that there are also assets (like owned real estate underlying the DMN) that are offsets. The deficit at 9/30 was about 61mm: asset performance probably hurt, the discount rate probably helped so we’re calling it a wash and hoping we’re being a bit conservative. We don’t think the underfunded status would be an impediment to a deal, should they be approached (witness the San Diego deal below).

Recent Newspaper Deals for Select Markets

12/12/15 News & Media Capital Group (ahem, Adelson) acquires the Las Vegas review for 140mm

5/7/15 Tribune Publishing acquires San Diego Union-Tribune for 85mm + 100mm of pension liabilities

6/3/15 New Media acquires the Columbus Dispatch for 47mm

7/22/14 New Media acquires The Providence Journal (from AHC) for 46mm

Accounting Choices

We have had several parties contact us having reached almost the exact same conclusion about the company’s value; you take the cash, the real estate, capitalize DMN’s 10mm of EBITDA at 4x and get something that isn’t that exciting. From our diligence, our parsing of financials, and our gut feel, we believe the 10mm number is far too low. On the second quarter earnings call, Jim Moroney had this to say about the trading level of the stock

So we really ourselves are a little bit of a quandary about exactly why this stock is down to where it's basically trading almost at the cash value of the Company. When you consider the real estate we have for sale, the lack of any debt and the up to $90 million we have on the balance sheet it's almost the cash value of the Company. We still have a very valuable franchise in the Dallas Morning News that we believe in that has been consistently profitable every year that it's operated with margins in if not very high-single digit, low double-digit range. And we're still expecting something similar this year as we said in the guidance. (7/28/15)

The math behind this statement would suggest that true newspaper property EBITDA is closer to 20mm than 10mm.  Here is how the company reports their segment financials:

This glance doesn’t engender a whole lot of confidence in the businesses and, we think, that the only way to square the presented financials with Jim’s statement is to assume the corporate expenses, that would go away in a sale, are disproportionately allocated to publishing. A single property printing business surely enjoys efficiencies that other publicly traded comparables don’t: back office, distribution, printing, etc. We don’t see any reason to believe that the DMN shouldn’t operate at an average peer margin.

Miscellaneous

The dual share class is a non-starter for many investors who look at the name.  It certainly is a deterrent for any kind of hostile bid or activist campaign. That said, management has indicated that as fiduciaries they are willing to contemplate any offers that are in the best interests of shareholders. While one shouldn’t expect a different response, we think highly enough of management to believe that this isn’t merely lip service. Dallas is a wonderful market and there are several strategics (Hearst who’s geographically proximate) and no shortage of big egos with big wallets who would be interested in owning the DMN.

Conclusion

We seem to be getting a lot for ‘free’ at this price level. Reasonable people can differ as to whether they want any of the free stuff but we think the DMN remains a valuable franchise in a consolidating industry. At these levels we don’t see much downside and believe that we retain optionality should the company demonstrate its proficiency in the digital business segment.