Newspapers' struggles are well known in this era of Internet advertising. However, television stations, once powerful outlets for advertising revenue, also face pressure from increasing alternatives, including cable companies, satellite TV, and now the Internet. Juicy profits, once a given, are still attainable, but only with an increasingly diligent management.
New York Times (NYSE: NYT ) must have decided that its television stations weren't worth the effort. The publishing company has sold its nine TV stations to Oak Hill Capital Partners, a private equity firm. The deal, which calls for $575 million in cash, will help the Times pay down its debt and continue the development of its digital asset portfolio.
The stations that formed the Times' broadcast group were profitable enough to earn a reasonable valuation of 13.4 times estimated 2006 cash flow of $43 million. The company's SEC disclosures hint that gross of all corporate expenses and non-cash charges, cash flows for 2006 will be closer to $52 million. So it's a win-win situation for both parties: The stations are profitable, but operating margins have room for improvement.
Washington Post (NYSE: WPO ) generates substantially greater margins with its six stations, and even Gray Television (NYSE: GTN ) , while it has other profitability issues, still manages 24% operating margins. Furthermore, the Times is selling the stations into a strong advertising revenue cycle, with the 2008 presidential election and 2008 Olympic Games on the horizon. Oak Hill should be able to use the cyclical upturn to help pay down the presumed debt it took on to make the acquisition.
As for the Times, management has traded in the diversification of cash flows so that it can increase its focus on monetizing its content in a digital world. It's an interesting contrast to Washington Post's path. Not only does Washington Post run six stations, but it also has diversification with its Cable One cable company and its Kaplan educational division. However, I believe that along with Dow Jones' (NYSE: DJ ) Wall Street Journal, The New York Times is one of the few media companies able to generate significant profits from providing its content on the Web.
However as a Foolish investor, I think this is one case where the road less traveled might not make for a good investment thesis.
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