Does Jeff Bezos Know What He's Doing With the Washington Post?
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The ramifications of Amazon (NASDAQ: AMZN) founder Jeff Bezos' out-of-nowhere decision to invest $250 million of his own money in the Washington Post Company's (NYSE: WPO) flagship newspaper extend far beyond the narrow world of newspaper publishing. Although Rupert Murdoch's 2007 purchase of the Wall Street Journal sent similar shockwaves through the industry, Bezos' foray into print represents the first time that a technology entrepreneur has "crossed over" and purchased a decidedly analog media property.
While Bezos has been coy about his intentions with the paper, most believe that he approaches this situation from a position of goodwill. However, good intentions alone will not produce a happy ending to this story. Bezos is known for his business acumen, but his ability to fix the Post's myriad problems remains in question. For investors with exposure to the Washington Post Company, a "Post-less" Washington Post will provide additional challenges as well.
The Post, The New York Times and Amazon
The Washington Post Company is actually one of the more successful U.S.-based "print media" firms. This might be because it has a rather diversified portfolio of non-print properties. In addition to its flagship daily, the company also operates several broadcasting stations as well as a cable and telephone provider with a built-in customer base in the Southern Tier of the United States. Further, it manages nearly five dozen charter schools and runs the highly visible Kaplan Test Prep service. This last property is regarded as its "moneymaker."
The Post Company competes with the New York Times Company (NYSE: NYT). The New York Times lacks a big-ticket "other business" like Kaplan, but it does manage a very successful online edition of its flagship paper. Despite the relative smoothness of its transition to the digital landscape, the New York Times has struggled with profitability issues and has dramatically shrunk its footprint. Meanwhile, Bezos's Amazon is a retailing behemoth that has been getting deeper and deeper into the world of online publishing. Although Mr. Bezos is purchasing the Washington Post independently of the company he founded, it never hurts to remember his origins.
Even without its flagship, the Washington Post Company would be several times larger than the New York Times. Its market cap of $4.4 billion compares to a valuation of $1.8 billion for the New York Times. By comparison, the market values Amazon at roughly $136 billion. Interestingly, Amazon actually lost money in 2012: Its loss of $100 million on $66.9 billion was not excessive, but it was certainly unexpected. The New York Times maintained a 10 percent profit margin on revenues of $2 billion, and Washington Post reported a 2.5 percent margin on a take of just over $4 billion. All three firms have manageable debt loads.
How the Deal Is Structured
According to reports, Bezos paid $250 million in cash for the Washington Post. Since he is not taking over the entire Washington Post Company, there will be no exchange of stock or arbitrage premium for the company's current investors. However, the loss of its flagship will force the Washington, D.C.-based company to drop its iconic name. Although Bezos will assume full control of the company, his day-to-day role remains unclear. Most market-watchers expect him to function as the company's chief executive.
Arguments for the Transaction
Bezos' reputation as a great executive is not up for debate. However, the man is not regarded as a traditional turnaround artist. As the Post struggles with falling ad revenues and declining readership, it will certainly need a deft hand at the helm. If its buyer can rise to the challenge, the paper's admittedly hefty price tag will seem quite reasonable in hindsight. In particular, the Post will need to work overtime to monetize and expand its digital offerings. It will also need to invest in a more robust and flexible news-gathering operation while continuing to burnish its signature political offerings. Given the slowly brightening outlook for digital media, these are not impossible hurdles.
The best argument against this deal takes the form of a similar deal that the New York Times Company closed shortly before Bezos's announcement. With the $70 million sale of the Boston Globe to a Boston-based businessman who is widely regarded to have purchased the paper for sentimental reasons, NYT tacitly admitted that it had no further use for a "second-tier" regional daily newspaper. Although the Washington Post functions as a primary arbiter of the American political conversation and has a much wider circulation than the Globe, it is not clear that it is worth three times as much as a paper that serves a large, wealthy metropolitan area like Boston. Many observers argue that Bezos overpaid for the Post by as much as 50 percent.
Where Do Bezos, the Washington Post and the Washington Post Company Go From Here?
For investors with exposure to the Washington Post Company, this could be a welcome development in the short term. Any post-transaction uncertainty will make the company look more attractive by comparison. As long as its test-prep and charter school operations continue to hum along, the firm will probably mirror the performance of the broader market.
The biggest question lies in the ultimate fate of the Washington Post. Although Bezos has not indicated that he intends to do so, it would not be unthinkable for him to pursue a "marriage" of sorts between Amazon and the paper. This might involve his own company's Kindle device as well as the burgeoning publishing database that it continues to amass. A total takeover of the Washington Post Company is also not outside the realm of possibility. Aggressive traders and investors may wish to preempt this move with hedged positions in the firm. Going forward, more cautious investors would do well to keep abreast of the situation as well.
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