Wednesday, March 2, 2011

WPO: Buffett's Next Target?

Warren Buffett is on a roll lately. All the investments he made during the 2008-2009 market panic are paying off, he collected a Presidential Medal of Freedom, and all the fear about his derivative positions are a distant memory. Remember those?   If that wasn't enough, there's another Buffett annual letter in circulation, capping off a record year for Berkshire Hathaway (BRK.a - BRK.b).  And the Oracle is making the media rounds again- it's a victory tour!

But the inevitable question on everyone's mind is: What's next?

After all, Berkshire Hathaway is awash in cash and Buffett keeps talking about his "itchy trigger finger". Nearly everybody is running screens looking for the next Buffett target.  The web is full of speculation, so why not add to the madness?  Especially when I'm pretty sure nobody has mentioned this possibility.

The last elephant to step in front of Warren's gun was Burlington Northern. It was a deal I didn't like. And I still don't, believing that Buffett overpaid and wishing he'd stayed with his minority stakes in several railroads, thus avoiding the premium. Regardless, the acquisition is now deemed a complete success. But I digress.

As uncharacteristic as the Burlington deal appeared to this observer, the Goldman Sachs (GS), General Electric (GE), and Dow Chemical (DOW) deals were quintessential Buffett. Special situations open to only one man at one company. And the cash is flowing...

Something similar is going on right now. In the search for Buffett's next "big deal", investors may be overlooking the obvious. In short, Warren Buffett is tying up loose ends.

First came the announcement that Berkshire is buying the remaining 19.9% of Wesco Financial (WSC) it doesn't already own.  It is a tragedy for investors who have one less opportunity to interact with Charlie Munger, but the rationale is clear. Bring Wesco completely into the fold and end the "historical accident" that created this dual structure in the first place. Munger himself has long held that Wesco should be merged into Berkshire.  The move lowers costs, addresses succession (Munger is 86), and allocates some capital. At $500 million, this is not a huge acquisition, but it may have started a trend.

And just like old times, this is a special situation available to only one man at one company.

In his most recent annual letter, Buffett said the following about his creeping acquisition of Marmon from the Pritzker family:
The largest earner in our manufacturing, service and retailing sector is Marmon, a collection of 130 businesses. We will soon increase our ownership in this company to 80% by carrying out our scheduled purchase of 17% of its stock from the Pritzker family. The cost will be about $1.5 billion. We will then purchase the remaining Pritzker holdings in 2013 or 2014, whichever date is selected by the family. Frank Ptak runs Marmon wonderfully, and we look forward to 100% ownership.
Another $1.5 billion allocated in a deal open to just to one man at one company.

Two transactions may not make a trend, but if there is a pattern here, the next target is pretty obvious (even for those who missed the title of this article). While Berkshire Hathaway owns minority stakes in numerous companies, the Washington Post Company (WPO) seems the most likely to become a wholly-owned Berkshire subsidiary.

Buffett has been personally involved with the Washington Post Company for decades, certainly more than any other company in his public company portfolio. In fact, just 2 months ago Buffett announced plans to step down from the WPO board when his term ends in May. Buffett's first WPO board term started in 1974.

Is Buffett just trimming his responsibilities? Or is this a logical prerequisite to a buyout offer?

Is it really crazy to think that Buffett would want WPO completely under the Berkshire tent?  It is a business he understands, with brands he likes.  And Berkshire already owns 21 percent of the company.  Yes, this is a man who has said he will never buy another newspaper, but then again, this is not another newspaper company.  And even if it was, didn't Buffett have a similar rule about stock splits?

Recall here that one reason cited for Buffett buying railroads was his love of trains as a boy. There was even the story that his dad denied him a train set as a kid. Well, Buffett remembers his newspaper delivery days with fondness too. Buffett's close personal relationship with the Graham family (WPO's controlling shareholder) doesn't hurt either.

You might even say that buying the Washington Post Company is a deal open to just one man and just one company, if it's open to anyone.

In terms of corporate governance and transparency, becoming a part of Berkshire would be a step up for the Washington Post.  Faint praise perhaps for Berkshire, but then again CEO Donald Graham's supervoting shares have unlimited voting power!  And it seems that WPO dribbles out information to shareholders just to prove that they can.  Good luck finding a balance sheet or a cash flow statement on their earnings releases.

One wonders if controlling shareholders will ever realize that their special shares and other "unfriendly" actions are always self defeating.  Shareholders notice and valuations suffer.  So the biggest shareholder always "pays" the most.  Some more than others. 

As a small piece of the much larger Berkshire whole, Washington Post would not get penalized for all the negative images it conjurs.  In short, the gap between market and intrinsic value would close.

Being part of the Berkshire family has obvious benefits for Washington Post, but what would Berkshire gain?

This is a newspaper company, right?  A dying company?  Fortunately for investors, news of this company's death are very premature.  Unfortunately for investors, management doesn't seem to care if anybody knows.  Selective reporting, perhaps?

No matter.  I'm pretty sure more people read this blog post than that other Post... or not. 

Nonetheless, despite being a well-known company with flagship newspaper, this is a very overlooked and misunderstood company.  In fact, most investors would be shocked tho hear that this so-called "newspaper" company generated $450 million in free cash flow in 2010.  This was higher than 2009, which was higher than 2008.  So Washington Post is a growth company?

Use whatever label you want.  It's impressive for a company with a market value of just $3.5 billion.

It gets better. 

Washington Post has $850 million in cash and securities, including a stake in Berkshire and Corinthian Colleges (COCO), against just $400 million in debt (as of year-end 2010).  In short, 12 percent of WPO's market value is right on the balance sheet in NET cash and stock.  And we haven't even counted the company's pension plan that is overfunded by at least $400 million.  Buyers of WPO shares at the current quote don't have to go beyond the balance sheet to justify a third of their purchase price.

Growth or not, beautiful balance sheet or not, most investors look no further than the name Washington Post and move on, wanting nothing to do with a newspaper publisher.  But that's the point.  Talk about a misnomer.  Publishing represents less than 20% of the company's annual revenue. And it generates little if any of the free cash flow!

In addition to its newspaper assets, the Washington Post Company owns television stations, cable properties, and the Kaplan education business.  All suffer from greater or lesser degrees of investor angst, but the cash flow generating properties are clear.  And so is the undervaluation.

Well, at least to me...and Washington Post's management.  They've been repurchasing stock like crazy.  Shares outstanding have dropped 12 percent in the last year!  At that rate, WPO may be a private Graham-Buffett partnership sooner than I think.

So severe is the value gap that this analyst believes the cable business plus the balance sheet justifies the current market value of Washington Post.  If true, investors get Kaplan, the television assets, and the the entire publishing division free.  You will have those who say that a for-profit education company, some broadcast TV stations, and a newspaper publishing business are worth zero.  But the free cash flow coming from these businesses (in aggregate) says otherwise.  Whatever the issues, these businesses are worth far more than zero.

You can be assured that Warren Buffett knows it too!

Buying Washington Post would be a cheap stock repurchase (horror of horrors) for Berkshire.  It's also a way for Buffett to earn excellent returns on a few billion dollars, thus relieving that itch!

But perhaps the best perk? 

Warren can have any paper route he wants.  And free cable!

Disclosure:  Long WPO and COCO


  1. Interesting take, what about wellpoint(wlp)? I remember him owned it couple years ago. it's about 25 Bil company. Seems to be a good size and the company bought back tons and i mean tons of stocks(like over 10 Bil) in the last few years. What do you think?

    On a separate note, very nice callon WTW, i am assuming you are looking for an exit on that. And NTRI took a tumble, what do you think of NTRI at this point?


  2. Wellpoint is not a company I follow... the industry is outside my area of expertise.

    I have sold WTW (thanks for remembering) and I am out of NTRI too... I should write an article about NTRI, but have not had the time.

    Stay away from both companies.

  3. Well no one else probably thought that was worth responding to but I'll humor you. Obviously you have an agenda, "penny stocks", or you are simply misinformed. Assuming the latter I'll explain. The previous price performance should not be an input to an investment decision whether it be great or poor. Your argument contradicts itself in that point. Poor price performance coupled with good business performance is what creates value opportunities. Also Buffett's comments are taken out of context with a huge capital base it is impossible to create his previous returns which would quickly make BRK's holdings worth more than the entire market and given a decade and half more the entire world. That doesn't imply that investing in Berkshire is not a good investment. The implication that an average investor is better off picking penny stocks or choosing any of their own stocks is entirely misguided.