Description

Belo Corp is a company that owns TV and newspaper assets.  It recently announced that it would split into two companies.  It has an enterprise value of 3.25 billion and a market cap of 2 billion.  I believe that at current prices, you are getting the newspaper assets essentially for free, and that with the split, upside may be about 30 percent from here.

Family controlled, Belo has a long history as the publisher of the Dallas Morning News.  As with most newspapers, circulation is declining and with declinging circulation comes declining advertising rates.  Along the way the company has managed to amass 20 television stations, most of which are #1 or #2 in their markets, and three cable news networks. 

These stations comprise the vast bulk of Belo’s value but the minority of its attention from the analyst community.

In the spinoff, the television company will take the entire 1.25 billion dollars of debt that the company has.

Television stations tend to follow a two year cycle, with election years driving higher ebitda.

In 2006, the TV stations had $326 million of segment ebitda before corporate allocation, in 2005 they had $273 million in 2004 they had $310 million.  The difference can be mostly attributed to levels of political advertising (of about $50 million in the even years).  Interestingly, this year, even though we are not in an election year, revenue at the television stations is up this year and EBITDA is roughly flat with last year, which management attributes mostly to better station performance and to cable retransmission fees (which are going to increase again).

In the past couple of years corporate overhead was about 100 million dollars for the entire enterprise but according to management a fair amount of this overhead was going towards projects that were one time in nature and management is comfortable that this number is going to fall.  It was less than 60 million on effectively the same assets in 2004. Attributing half of the 06 corporate expense to the TV stations suggests, they had about 276 million in ebitda after corporate allocation and that the number should be similar this year. 

In 2008, we may have the first contested presidential election in Texas in quite some time (which is wher several of the stations are), which suggests the possibility of significantly more than 50 million dollars in additional political spending, but even using that number, EBITDA in 08 with fully allocated corporate overhead should be about 330 million.  Ebitda less maintenance capex (of about 30 million) should be about 300 million dollars.  This number could be better because of either political spending exceeding my projections or retransmission rights fees are higher (Comcast is up for negotiation for the first time in 7 years) or because the strength in the core business carries into next year or because corporate overhead comes in lower.

While private market valuations for these sorts of streams may run as high as 14 times station operating income, an 11 times multiple on ebitda less maintenance capex including corporate would yield an enterprise value for the television asset of 3.3 billion and a market cap of just over 2 billion, which is effectively where the stock – TV and newspaper assets –  trades today.

The newspaper assets are what they are. 

Last year they threw off 159 million in segment ebitda.  This year that number will certainly be less. Although because of the curtailment of the pension plan and falling newsprint prices, ebitda hasn’t fallen off a cliff.  Analysts have newspaper ebitda for this year at around 140 million or about 90 million after corporate allocation if corporate spending does not fall. Also, apparently 8 percent of Dallas Morning News revenue is now online advertising and it is growing at a 30 percent clip.  Management in general has been more innovative than most, giving its reporters portable cameras to boost the success of the online venture, teaming up with Yahoo!, and lowering the radius in which the newspaper is delivered to save on costs.  They have also localized the news as much as possible and targeted advertising to localized zones

It is worth mentioning that the newspaper owns its own buildings, including its headquarters in downtown Dallas and some adjacent parking lots as well as other real estate.  The CEO of Belo is going with the newspaper assets, suggesting that he sees more there than most people do.  Seven times ebitda less corporate allocation on the 07 number would suggest a valuation of around $630 million, which would be about $6 a share.  It is entirely possible that the family would choose to take these assets private, although any such plan probably couldn’t be enacted for 2 years.

If in fact the television assets do trade at about 11 times ebitda less maintenance capex and the newspapers trade at 7 times ebitda, the two combined should trade at about $26.

I believe that to date the progress being made by the television assets has been obscured by the deterioration of the newspaper assets and that the spinoff will lead to higher valuations.  Obviously risks include a weakening of television ad spend caused either by migration to the internet or economic weakness or (to a lesser extent) a more serious dropoff than I anticipate in the newspaper assets.  However, at current prices, it is hard to see how the two assets once separated will trade meaningfully below today’s price.

Catalyst