Washington Post: Not Just a Newspaper Company
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Monday's announcement that Jeff Bezos would buy the Washington Post (the newspaper, not the whole company) for $250 million came as a surprise to most observers, who could not imagine the Washington Post (NYSE: WPO) without the Washington Post. But what appears to be a lack of respect for tradition -- the Graham family has controlled the Post for nearly 80 years -- may have been the best move for shareholders.
Not just a newspaper company
Although the holding company gets its name from the newspaper, Washington Post's profits are primarily derived from broadcast television and cable TV. In fact, its publishing segment makes up only 13% of revenue -- and is bleeding cash. In addition to the Post, Bezos purchased a slew of local newspapers, while allowing the company to retain its more profitable publications such as Slate and Foreign Policy.
In 2012, the cable television and television broadcasting segments generated $346 million in operating profits -- about 8% of the company's market capitalization. However, the losses in its newspaper-publishing division brought the overall operating income down by $53 million. For a division that will likely only get worse, it was in shareholders' best interest to divest the unprofitable segment that was dragging down the company's most valuable assets.
In addition to its television and newspaper assets, Washington Post also maintains an education segment that is primarily composed of Kaplan -- a for-profit education business. Kaplan has became a major drag on profitability in 2012, losing over $100 million for the year, due to increased government scrutiny of the businesses.
Although Kaplan has had to restructure in order to comply with new government regulations, its sharp decline was far more brutal than many other for-profit education businesses. For instance, Apollo Group (NASDAQ: APOL) has maintained profitability -- albeit with lower margins -- despite the hostile environment.
Like Kaplan, Apollo targets older adults that would not normally seek or gain admission from a traditional university -- either because of age, education history, or work status. Both Kaplan and Apollo have instituted "orientation" programs -- essentially trial periods where students can take classes without making a financial commitment. This policy is costly, but necessary to meet new regulations.
Apollo is in a much better position than Kaplan to succeed in the new regulatory environment. In a business with no durable competitive advantages, Apollo's larger size gives it a crucial advantage in scale that enables it to withstand pricing pressure better than smaller firms like Kaplan. Although its margins may never recover to the pre-scrutiny era, Apollo will remain profitable for years to come.
Kaplan, meanwhile, is barely generating an operating profit -- $19.7 million in the first half of 2013, compared to $360 million in all of 2010. The operating environment is unlikely to get any better, so a sale or spin-off of Kaplan would add significant value for shareholders, who could then be sure that management would only invest in the company's most profitable segments.
The television assets
Washington Post's value is clearly derived from its television assets. The broadcast television assets are virtually immune to competition, except in the form of online substitutes. However, the company's cable TV assets, which serve smaller markets that have traditionally had only moderate competition, are coming under increased competition from companies like DirecTV (NASDAQ: DTV).
DirecTV's satellite offering is a major competitor to traditional cable. The company's NFL Sunday Ticket, ability to stream live TV through an iPad App, and other unique features make it an appealing substitute to cable. Moreover, DirecTV attracts people willing to spend more on their television lineup, which takes away a crucial customer base from cable companies.
However, competition from DirecTV and other satellite providers is unlikely to materially increase in the coming decade, as many satellite providers are looking elsewhere for growth. DirecTV's focus is on Latin America, where it is investing heavily and appears to have a strong first-mover advantage that will allow it to build a wide moat in the region. As a result of DirecTV's focus overseas, Washington Post's cable assets will likely continue to generate strong cash flow for years to come.
The sale of the Post ends a long tradition of ownership by the Graham family, but it is a step toward unlocking shareholder value. The real value is in the company's television assets, and a sale or spin of its education segment will turn Washington Post into a cash cow worthy of a 15 earnings multiple.
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