GHC - Graham Holdings

[gfp]

The BRK shares that were swapped were not owned in the pension fund

[dwy000]

No, the BH shares and the swap was off of GHC balance sheet (not thru pension).  They still hold about $90M in Berkshire shares.  I'm not sure why they held onto those and instead included a big chunk of cash in the swap for the GHC shares. 

[Guest wellmont]

I don't know much about this one, so forgive me if the question has an obvious answer..

 

Don Graham is 68 (afaik). Why does he all of a sudden wants to create his own mini-Berkshire? He's been close to Buffett all these years. What changed now? Was it just that the WaPo was taking all of his time, so he wanted to do it before, but couldn't?

 

Good point Liberty.

 

I was scratching my head about the same thing. I would think that if he had this inclination we would have seen some portfolio activity even while Wash Post was in the fold.

 

Vinod

 

actually he is dismantling his empire. so I don't think the analogue to berkshire is the right one. to me it looks like a slow liquidation, or corporate bust up, like what Dun and Bradstreet did. but whatever it is, it's entirely rational and being done by a prudent steward of shareholder resources.

[RoadToUtopia]

Any idea why Don Graham has been consistently selling shares in the past few months?

[Grahamfan2]

Don Graham' selling has been on behalf of his siblings' trusts.  He has not sold share for himself or his descendants.  Adding that to the appointment of his son-law-law as President and the departure of his niece as part of the Wapo sale makes me see this as Don Graham's family company rather than Katherine Graham's family company.  BTW, the on-in-law seems very capable.

[bantrader]

Here, Mario Gabelli talking about the GHC value (since minute 3'15"):

 

http://on.wsj.com/1DgwqIm

 

 

[merkhet]

Does Coho Capital's valuation for Kaplan International seem a tad high? I mean 20x operating income is rather steep, no?

[usdtor05]

yeah thats high but its a quality business...more ESL type stuff etc in asia....grew ebitda at a 12% cagr over last 4 years. so its the non-mutt of the education group.

[Alex.N.B]

Anyone have any comps / precendent transactions for small/mid size cable companies ... trying to figure out where Cable ONE will trade post spin-off...

[dwy000]

Anyone have any comps / precendent transactions for small/mid size cable companies ... trying to figure out where Cable ONE will trade post spin-off...

 

There's not a whole lot of small players left out there.  The best comp would be the recent acquisition of Brighthouse by Charter.  Pretty much everyone in the business these days is at 7-8x EBITDA unless there are exceptional drivers.

 

This is obviously going to be snapped up by one of the big guys and the spin out is just a tax efficient way to maximize the value versus a straight sale.  Unfortunately, I think it can't happen for two years to avoid retroactive taxation of the spinout (somebody correct me on that if i mis-speak - this is my John Malone experience talking).

 

So there might be abut of a future acquisition premium on it but that would be offset by the business itself. Their penetration rates are not great and the network still needs a lot of upgrade spend.  Their actions over the past year or two have been milking the business at the cost of subscribers.  They dropped the Viacom channels last year and still raised prices.  Cable subs have fallen like 20%+ over the past two years as they have focused more on the broadband side (which now exceed cable subs).

[merkhet]

The rule for spin-offs is as follows, either:

 

(1) Be able to show that there have been no (substantial?) discussions of a transaction involving the spun off subsidiary for two years prior to the sale/acquisition, or

 

(2) Wait the two years post-spin.

 

Otherwise, the spin-off loses its tax-free status. Often times, it's hard to show (1), so, in practice, most people wait until (2).

[usdtor05]

i think its doubtful they wait the full two years, they should be able to prove they didn't know/actively pursue it. The stock should trade at a premium for that expectation.

[Lowlight]

I've been reviewing GHC for a few months now and was glad to snap up a few more shares last week as it got back to ~$1,000.  Both Coho's write up and the comments on VIC are interesting.  I have a little trouble with getting to a similar value for Kaplan but if I assume that they were to sell to a strategic buyer, I think it is fair to assume ~$105k in operating income by backing out $30k in corporate overhead and adding back the $12k in losses on the KHE campus business sold to ECA.  At these levels, and given the growth of Kaplan International, I can see a path to $1.5 billion with ease.  Add that to ~$2.2 billion for Cable and Broadcasting each and add the cash of $1 billion and you get to $6.9 billion or ~$700 million more than EV today.  This valuation excludes the pension asset (which definitely has a lot of value) and SocialCode.  I hate trying to value anything to do with technology (as I come up with a laughably small value so I give it a value of $300 million.  So, it appears to me there is a near zero chance that GHC is worth less than $1,000/share.  The question becomes whether this is a buy one get one free (as Coho, Gabelli and VIC writer state) or a buy one get 15 - 25% free (a la Manual of Ideas)? I am inclined to think the former is more likely correct (and I have invested that way).  But would love to hear someone make the case that the upside is very limited.  Thanks.

[cameronfen]

Anyone have any comps / precendent transactions for small/mid size cable companies ... trying to figure out where Cable ONE will trade post spin-off...

 

There's not a whole lot of small players left out there.  The best comp would be the recent acquisition of Brighthouse by Charter.  Pretty much everyone in the business these days is at 7-8x EBITDA unless there are exceptional drivers.

 

This is obviously going to be snapped up by one of the big guys and the spin out is just a tax efficient way to maximize the value versus a straight sale.  Unfortunately, I think it can't happen for two years to avoid retroactive taxation of the spinout (somebody correct me on that if i mis-speak - this is my John Malone experience talking).

 

So there might be a bit of a future acquisition premium on it but that would be offset by the business itself. Their penetration rates are not great and the network still needs a lot of upgrade spend.  Their actions over the past year or two have been milking the business at the cost of subscribers.  They dropped the Viacom channels last year and still raised prices.  Cable subs have fallen like 20%+ over the past two years as they have focused more on the broadband side (which now exceed cable subs).

 

I'm not really an expert on cable companies, but CableOne's 10-12B (most recent one) it said they face competition in fiber to the home on less than 1% of their coverage area (pg 2.) and almost 50% of homes passed use there service (pg 51 it gives the actual numbers 687k customers versus 1470 homes passed).  Are those low/bad numbers for a cable company (especially the penetration obviously the 1% number is very good).  I would assume that is very good and high pricing power and that shows because they can reduce service and still raise prices very effectively. 

[dwy000]

I've been reviewing GHC for a few months now and was glad to snap up a few more shares last week as it got back to ~$1,000.  Both Coho's write up and the comments on VIC are interesting.  I have a little trouble with getting to a similar value for Kaplan but if I assume that they were to sell to a strategic buyer, I think it is fair to assume ~$105k in operating income by backing out $30k in corporate overhead and adding back the $12k in losses on the KHE campus business sold to ECA.  At these levels, and given the growth of Kaplan International, I can see a path to $1.5 billion with ease.  Add that to ~$2.2 billion for Cable and Broadcasting each and add the cash of $1 billion and you get to $6.9 billion or ~$700 million more than EV today.  This valuation excludes the pension asset (which definitely has a lot of value) and SocialCode.  I hate trying to value anything to do with technology (as I come up with a laughably small value so I give it a value of $300 million.  So, it appears to me there is a near zero chance that GHC is worth less than $1,000/share.  The question becomes whether this is a buy one get one free (as Coho, Gabelli and VIC writer state) or a buy one get 15 - 25% free (a la Manual of Ideas)? I am inclined to think the former is more likely correct (and I have invested that way).  But would love to hear someone make the case that the upside is very limited.  Thanks.

 

My calculations are pretty similar to yours:

  - Higher education:  $124M op income x 6 (for the noise in the business) = $744M

  - International:  $68M op income x 12 (good growth) = $816M

  - Test:  no real income but a good brand.  SWAG = $50M

  - Other businesses (SocialCode + homes, etc.) at cost = $400M

  - Cable:  $340 op income x 7 (low end of industry avg) = $2400M

  - TV Stations:  $170M 2-yr avg op income x 12 = $2000M

  - Cash:  $1000M

 

Total = $7410

Less debt = $450

Equity value = $6960

 

That's about $1200/share.  I've been very conservative on the Kaplan and multiples.  Also completely ignored the pension assets.

 

So pretty good margin of safety plus one of the best Board of Directors anywhere.  Talk about people you want to be invested with.  Add in a quality and shareholder friendly management team and you have the very definition of "great company at a fair price".

[Munger_Disciple]

Multiple of 12 times operating income for TV broadcast business? Seems pretty rich, given the threat from internet.

[usdtor05]

Broadcasting is still a good business at 54% ebitda margins at ghc (there could be some issues with retrans fees as GHC has older contracts)...are they worth 12x....maybe not but with those margins its not likely to be materially wrong.

[dwy000]

Plus there is the hidden potential of the spectrum assets held by local broadcasters if they get their act together and agree to sell in the 2016 auction. 

[Munger_Disciple]

How much do you think the spectrum is worth?

[dwy000]

How much do you think the spectrum is worth?

As an auction, there's no wrong guess.  Somewhere between $5M and $500M?  It's very desirable spectrum.  Of course the trade off is that they could have to be moved to another channel in the area so it would require rebranding. I figure it's net upside but have no idea how much.

[Lowlight]

The last few day's price decline in GHC make no sense to me.  Instead of harping on my past song and dance as to why this makes sense, I think it is easier to show how punitive the market is treating the company.  Below are their assets in approximate order of liquidity.  Per share amounts based on 5.8 million shares.  For comparison, go back through the thread and read Coho's SOTP valuation.  If you have access to VIC, read the comments on the WPO (old Washington Post) thread.  After doing that, if you have any interest in GHC, today's price of ~$985/share looks like a great entry point.

 

Company/Asset - Metric - Implied Value by Market

- Cash/Mar. Sec. - $865M ($150/share) - Value: $150/share

- Cable One - EBITDA - $300M - Value: 6x or $310/share (Cable One spinoff occurring in 2015)

- Broadcasting Stations - Blended EBITDA - $175M - Value: 8x or $244/share

- Kaplan Division (Higher Ed, Test Prep and International) - EBITDA - $126M - Value: 4x or $87/share (note EBITDA improves significantly with sale of campuses to ECA)

- Preferred Equity stake in Education Corp of America (in exchange for Corp Campuses of KHE) - Value: $0

- SocialCode - $300M Revenue - Value: 1x Rev. or $52/share (revenue growth rate of 300% in 2014 and estimated gross margins of 25%)

- $1.15 Billion overfunded pension plan ($198/share) - $112/share

- A collection of smaller businesses - Book Value of $400M+ ($69/share) - Value: $30/share

- A management team with > 22% ownership in the company who aggressively repurchased GHC stock over the last 5 years - Value: $0

 

I'm still not sold on the exact upside here, but I am dead certain there is zero downside at today's prices. 

[Lowlight]

The last few day's price decline in GHC make no sense to me.  Instead of harping on my past song and dance as to why this makes sense, I think it is easier to show how punitive the market is treating the company.  Below are their assets in approximate order of liquidity.  Per share amounts based on 5.8 million shares.  For comparison, go back through the thread and read Coho's SOTP valuation.  If you have access to VIC, read the comments on the WPO (old Washington Post) thread.  After doing that, if you have any interest in GHC, today's price of ~$985/share looks like a great entry point.

 

Company/Asset - Metric - Implied Value by Market

- Cash/Mar. Sec. - $865M ($150/share) - Value: $150/share

- Cable One - EBITDA - $300M - Value: 6x or $310/share (Cable One spinoff occurring in 2015)

- Broadcasting Stations - Blended EBITDA - $175M - Value: 8x or $244/share

- Kaplan Division (Higher Ed, Test Prep and International) - EBITDA - $126M - Value: 4x or $87/share (note EBITDA improves significantly with sale of campuses to ECA)

- Preferred Equity stake in Education Corp of America (in exchange for Corp Campuses of KHE) - Value: $0

- SocialCode - $300M Revenue - Value: 1x Rev. or $52/share (revenue growth rate of 300% in 2014 and estimated gross margins of 25%)

- $1.15 Billion overfunded pension plan ($198/share) - $112/share

- A collection of smaller businesses - Book Value of $400M+ ($69/share) - Value: $30/share

- A management team with > 22% ownership in the company who aggressively repurchased GHC stock over the last 5 years - Value: $0

 

I'm still not sold on the exact upside here, but I am dead certain there is zero downside at today's prices.

 

I left out that Cable One is being spun out with $450 million in debt and using that to pay a dividend to the parent, which more than offsets the debt of ~$400 million at GHC.  That pushes the multiple to 7.5x EBITDA for Cable One but I'm being so draconian elsewhere I don't think it matters much how you slice it (no value given to real estate under contract to sell, NYC property, etc.).  Just wanted to make sure I clarified that in the event it looked odd that the debt wasn't included.

[dwy000]

The last few day's price decline in GHC make no sense to me.  Instead of harping on my past song and dance as to why this makes sense, I think it is easier to show how punitive the market is treating the company.  Below are their assets in approximate order of liquidity.  Per share amounts based on 5.8 million shares.  For comparison, go back through the thread and read Coho's SOTP valuation.  If you have access to VIC, read the comments on the WPO (old Washington Post) thread.  After doing that, if you have any interest in GHC, today's price of ~$985/share looks like a great entry point.

 

Company/Asset - Metric - Implied Value by Market

- Cash/Mar. Sec. - $865M ($150/share) - Value: $150/share

- Cable One - EBITDA - $300M - Value: 6x or $310/share (Cable One spinoff occurring in 2015)

- Broadcasting Stations - Blended EBITDA - $175M - Value: 8x or $244/share

- Kaplan Division (Higher Ed, Test Prep and International) - EBITDA - $126M - Value: 4x or $87/share (note EBITDA improves significantly with sale of campuses to ECA)

- Preferred Equity stake in Education Corp of America (in exchange for Corp Campuses of KHE) - Value: $0

- SocialCode - $300M Revenue - Value: 1x Rev. or $52/share (revenue growth rate of 300% in 2014 and estimated gross margins of 25%)

- $1.15 Billion overfunded pension plan ($198/share) - $112/share

- A collection of smaller businesses - Book Value of $400M+ ($69/share) - Value: $30/share

- A management team with > 22% ownership in the company who aggressively repurchased GHC stock over the last 5 years - Value: $0

 

I'm still not sold on the exact upside here, but I am dead certain there is zero downside at today's prices.

 

I left out that Cable One is being spun out with $450 million in debt and using that to pay a dividend to the parent, which more than offsets the debt of ~$400 million at GHC.  That pushes the multiple to 7.5x EBITDA for Cable One but I'm being so draconian elsewhere I don't think it matters much how you slice it (no value given to real estate under contract to sell, NYC property, etc.).  Just wanted to make sure I clarified that in the event it looked odd that the debt wasn't included.

 

Lowlight - where did you find the $300M revenue number and growth rate for SocialCode?  The 10K showed that revenues from all "Other" businesses, including all the acquisitions done during 2014 totaled $213M.  I think the $400M book value for Other includes SocialCode.  Doesn't make much of a difference to the overall valuation and discount.

[merkhet]

The $300 million is a run rate revenue.

[Lowlight]

dey000 - good question regarding revenues.

For SocialCode they report revenue on a net revenue basis.  Per the 10-K, "In certain cases, the Company is considered the agent, and the Company records revenue equal to the net amount retained when the fee is earned."  While they don't explicity cite SocialCode here, I believe everyone reads this as relating to SocialCode.  Also, the Washington Post article on December 7, 2014 states "the company has gross billings of more than $300 million, according to several sources familiar with the finances."  In his 2013 annual letter Don Graham mentions they are a leader in a market where firms often are valued in the hundreds of millions.  So even if the revenues are off, I think it is fair to say that the value of SocialCode isn't materially lower than $300 million.  Thanks.