I bought a stake in a newspaper...?
A real estate sale, an equity stub with upside, a hefty dividend likely, and no one cares about it.
This isn’t the first time I’ve invested in a newspaper. I’ve owned shares of a $3mm market cap company called FP Newspapers (technically what I own is a piece of 49% of the distributable cash of a limited partnership, not the business itself) for a number of years. I should probably stop spending time on melting ice cubes and just buy Nvidia or whatever, but I like to do things the hard way. Today we’ll review a special situation that continues to trend in the right direction, despite investors treating every positive signal like elevator music.
What’s the scoop?
The Dallas Morning News (DALN) showed up on my radar last summer after they announced they were exploring the sale of a 29 acre property located in Plano, Texas on which they operated a ~630,000 printing facility. One need not be a newspaper expert to know that’s a lot of square footage for an industry in terminal decline. One need not be a real estate expert to know that people have been moving to the Dallas metro area in droves and the market has been hot for a while, either. That, and the AI capex rush has led hyperscalers in search of prime locations for new datacenters. A big plot of land backing up to a rail yard could fit the bill for such a development (or any number of other uses for that matter).
The company is comprised of two segments:
· TDMN is comprised of the Company’s traditional print business that includes operating The Dallas Morning News. These operations generate revenue from subscriptions and retail sales of the Company’s newspaper, as well as commercial printing and distribution services primarily related to national newspapers. In addition, Medium Giant’s cross-functional sales team generates revenue from sales of display and classified advertising within The Dallas Morning News and on related digital platforms to local, regional or national businesses with local operations, affiliates or resellers.
· Agency is comprised of the Company’s full-service agency, Medium Giant. These operations generate revenue from strategic and creative services, website management and content services, media services consisting of paid search, social and targeted digital advertising on third-party platforms (programmatic), as well as traditional media including direct mail, promotional products, out of market print inserts, and over-the-top advertising on streaming platforms. The revenue also includes subscriptions to the Company’s multi-channel marketing solutions cloud-based software and services.
As a business, DALN is about what you’d expect for a newpaper in the digital age. It hasn’t been profitable for a while, management enjoys big salaries but holds few shares, and the pivot to digital media and agency work has been fits and starts. But they’re cleaning up their act. They executed an ~85 head reduction in force, downsized to a smaller print facility, and divested from unsustainable operations. They turned a small profit in Q2 2024. They made changes to pricing and promotions to increase digital circulation. Then the news of selling the Plano facility, a sale which even the biggest pessimist would be hard-pressed to see closing at a price under $20 per square foot. At 29 acres, you’d be looking at a floor of about $25mm, which was greater than the company’s market cap at the time. Realistically, the sale price would likely be higher.
The company had about $17mm in pension liabilities, a few million in capex related to the move to the smaller facility, and a few million in severance costs. They also had ~$54mm in NOL carryforwards that would offset the bulk of any taxes incurred should the Plano property sell. If they could eek out even the slightest profit going forward, we’d be looking at a low single-digit EV/EBITDA with upside should the property sell for a reasonable price and/or the digital business take off. To sweeten the pot, management has paid special dividends in the past -- having returned $1.50/share after selling their headquarters in 2022 -- and have indicated they’ll do so this time around, too:
In terms of how the company thinks about the future use of any potential proceeds. We view this through three distinct lenses. First, the investments in the company, we need to build a sustainably profitable media company. Second, continuing to be responsible stewards of the company's pension plan, and third, returning capital to our shareholders.
Source: Q3 2024 earnings call transcript
An imminent real estate sale potentially worth a multiple of the market cap (and minimal tax liability), a leaner, lower cost business, a digital circulation segment showing hints of profitability, and a propensity to return capital to shareholders? A mispriced gamble too interesting to pass up. I started building position in July at a cost basis of just under $4 per share, figuring there wasn’t much downside and a favorable range of outcomes to the upside.
In mid-December DALN put out an 8-K to report they had found a buyer for the Plano property at a price of $43.5 million with a close date of February 1st, 2025. Within a couple weeks the stock price had climbed to the high $7s, and when the company put out another 8-K stating they’d extended the buyer’s diligence period and delayed the close date to end of February, I decided to take the money and run. I think this was a mistake. C'est la vie.
Bueller? Bueller? Anyone?
Last week the company announced the buyer gave notice to proceed with the transaction by the end of this month. The probability this transaction will close rounds to one, yet nobody cares! The stock price dropped to under $6.20 per share the day after the 8-K came out. I started buying shares again.
With ~5.3mm shares outstanding, DALN has a ~$33mm market cap as of this writing. Let’s say they net $40mm from the Plano sales after it’s all said and done. As of November they have $12mm in cash, and maybe $15mm expenses related to severance, capex at the new facility, and pension contributions. There’s at least a few bucks per share of excess cash. The enterprise value is teetering on negative, here.
What’s the business worth? The Dallas Morning News boasts over 60,000 digital subscribers. Comps have traded at hundreds of dollars per subscriber in the recent past. They’ve made tweaks to their pricing that -- according to the last conference call -- are showing promising subscriber growth. They have a digital ads business that they’re working to improve. They have a legitimate chance of generating a couple million of EBITDA this year. A media firm that owns over 20 different newspapers is now the fourth largest shareholder and has tapped a strategic advisor for the investment, to boot. I’m not sure what the equity stub is worth, but it’s worth something. And it’s not hard to conjure up a scenario where shareholders get $3 or $4 back in the form of a special dividend. If the cost-cutting and subscriber growth initiatives bear fruit this ends up being a bargain, and it could be a home run. If it doesn’t work out, the downside is capped.
Disclosure: I am long DALN at a cost basis of ~$6.20. This is not investment advice. Please do your own work to understand this business.