Description

"Second verse, same as the first" -Herman's Hermits

"Are you not entertained? Is this not why you are here?" Russell Crowe in Gladiator

Recap of thesis:

We submitted AH Belo roughly one year ago at a slightly lower price but we think the risk/reward proposition is more favorable than it was then. AH Belo owns and publishes the Dallas Morning News and several small niche publications, having sold all of its other publishing titles over the past few years. They have taken some of the proceeds and expanded into digital marketing businesses focused on the Dallas metro area. These acquisitions are adjacent to the company's historical business but have much more favorable growth profiles.  We believe that the value of the legacy print business wan't reflected in the market price due to opaque financial reporting and that after adding in cash, non-core real estate, and what they paid for the digital acquisitions, the effective enterprise value of the company was hovering near zero.

 Where we stand

 The macro backdrop for print has largely done what we thought--somewhere between bleh and meh. The DMN has outperformed peers thanks in part to its digital initiatives, but also due to the DMN's strong local franchise as well as the relatively strong local economy.

 Real Estate Repositioning

Management has been public about the fact that their real estate footprint is too large for the size of the company as it's currently configured; and, several months ago, decided to assess the DMN headquarters in downtown Dallas and see whether the building had outgrown the company. This week the company signed a lease to be the tenant anchor of the refurbished library:

http://www.dallasnews.com/business/real-estate/2017/01/02/dallas-morning-news-parent-signs-lease-crosstown-move-statler

We have been closely monitoring Dallas real estate development and are of the opinion that 8 acres of land is potentially quite valuable-----the existing building is a bit trickier since it has an easement on it, and would be costly to repurpose given the architectural nuances.

The Dallas Central Appraisal District has the land at 14mm and the building at 4mm. The former strikes us as conservative given the land's proximity to surrounding hotels, and Union Station.

Value

alue

The Mosaic

We believe that the Gannett/Tronc pas de doh lends credence to the argument that there's still value in print under the right ownership; there are numerous synergies to be realized by a scale owner and Gannett, whom we consider a disciplined buyer, seemed willing to stretch on the numbers because of the cost-takeouts they believed they could achieve. There is simply a paucity of print assets in major metropolitan areas that haven't been consolidated; Dallas, with its robust economy and loyal readership strikes us a valuable asset. While the B shares owned by James Moroney and Robert Decherd mean the ball is in their court, there are some reasons to believe that they might be amenable to a sale under the right circumstances; James is currently building a commercially-zoned winery in California and Robert is spending his energies on civic activities in Dallas-building parks around the city and developing beautification projects.

Valuation

Market Cap: 137mm

Cash: 78 (on the call the CFO said the quarter end cash # adjusted for payroll timing was 83-84mm)

Dallas and Providence real estate not including DMN building and land: 20mm (they had an agreement to sell a parking lot that had a 2.6mm basis and we're waiting to hear if it closed, and what it sold for)

DMN building and land: 18mm-36mm (city appraised value and our guesstimate) 

Pension: 55mm-waiting to hear the year end figure but given asset performance and recent rate action we think flat to slightly down is likely

EV ex pension: 3-21mm

9mo EBITDA: 8.8mm (digital 4.1mm, publishing 4.7mm which carries a negative 3mm ebit contribution)

As we wrote in our last submission, we believe that the publishing segment is being saddled with the lion's share of corporate costs which explains the sub 3% ebitda margin for the DMN. Given our discussions with former employees and competitors we believe the true segment ebitda is north of 20mm which would imply a high single digit/low double digit margin---nothing heroic given the margin structure of the peer group. We continue to believe that the print property is worth north of 100mm and is simply not being reflected in the current stock price.

Target

Cash+All real estate+digital acquisitions at cost+100mm for DMN=$10-12/share

Summary

In a market that seems fraught with risk, we find AH Belo to be a safe haven of sorts. The company is essentially trading for the value of its cash and real estate, sports a 5% dividend yield, and retains a fair degree of optionality for an eventual sale. Management has been careful with the cash balance, foregoing acquisitions while they have integrated the previous tuck-ins. The CEO and Chairman of the board own a considerable amount of stock and have a vested interest in a happy outcome for all stakeholders.

Catalyst

• Announcement of the appraisal value for the company's headquarters
• Possible dividend or buyback with the proceeds
• Sale of the company