In Connie Bruck's New Yorker profile the Rough Rider, Sam Zell told told her:
“I’m a great believer in maximization. That’s my whole life, and it has always been my life.”
In case you didn't know, this is the guy who soon will close the deal on the Tribune Company (NYSE: TRB). Though Ms. Bruck's profile provides few clues on what Mr. Zell might actually do with the Tribune, she does reports that:
… Maggie Wilderotter, who … has sat on the boards of three of Zell’s firms, said that she had spoken with him many times about Tribune Company before he made his bid, and that high-minded considerations played no part in his thinking. … “His thought process throughout this whole thing has always been about the business proposition. I never, ever heard Sam say, ‘I’m doing this because I love the Chicago Tribune,’ or ‘I’m committed to the city of Chicago.’ It would have been totally out of character.”
So, why does it matter to The New York Times Co (NYSE: NYT) what Sam Zell is likely to do with the Tribune? That question is the focus of this analysis, which is based on my book Competing for Customers and Capital.
In the first post of this series, "The New York Times Co: Public Trust vs. Maximum Earnings," I found that over the ten years from 1997 through 2006 The Times managed to move toward maximum earnings and at the same time preserve its public trust as the newspaper of record. In the second post, "The New York Times Company: Enterprise Marketing and The Bottom Line," I concluded that Mr. Sulzberger could have it both ways. He could monetize the editorial content of the newspaper by charging for The Times Reader while keeping an even more interactive nytimes.com free of charge. I predicted that this strategy likely would double the company's EBITDA as a percent of sales by 2010 . Furthermore, applying the 2006 earnings multiple suggested a 2010 price of $87. But I cautioned the reader that this price was contingent on two outcomes: that The Times management maximized earnings and correctly anticipated the enterprise marketing expenses of its peers.
The risk-adjusted differential [RAD] is a well behaved measure of a company's performance that captures the interaction between the demand for its products and the demand for its stock. For an overview of this measure see my Marketing Science Institute report "Marketing's Impact on Firm Value: The Value-Sales Differential."
What makes the RAD well behaved? It's a standard normal variable with mean zero and standard deviation one. So, any given company can be compared "apples-to-apples" with its peers if they serve similar customers and have comparably deep pockets. In my book I argue that you can't assess market performance without running the RADs.
The following chart shows risk-adjusted differentials on the vertical axis for The New York Times Company in a strategic group with The Tribune Company, the Gannett Co. (NYSE: GCI) and Dow Jones (NYSE: DJ). On the vertical axis in this chart RADs range from +5 to -5. The series begins with the 1st quarter of 1997 (designated 7.1 on the horizontal axis) and runs through the 4th quarter of 2006. It is not a happy picture. NYT is in the red the entire time.
Throughout the 40 quarters investors discounted the market cap of the NYT relative to its market power. In all but 12 quarters the company's RADs were less that -2. This means investor discounts are statistically significant at the 95% confidence level.
WHO HURT THE GRAY LADY?
Which of the three competitors did the most damage to the Gray Lady? The following table of correlation coefficients provides an answer. Surprisingly it's not Dow Jones.
DJ and NYT risk-adjusted differentials are positively correlated at the 0.5 level (in green). It was TRB, soon to be owned by the "Rough Rider," that did most of the damage with a negative correlation coefficent of -0.6 (in red). The following chart shows the association.
In the first quarter of 1999 (designated 9.1 on the horizontal axis) the Tribune was instrumental in driving the NYT risk-adjusted differential down to -5. This is why what Sam Zell does with the Tribune should matter as much to The Times management as what Rupert Murdoch does with Dow Jones. But TRB had some help from GCI as this following chart reveals.
ARE DJ AND NYT COMPLEMENTS?
The associations between NYT and TRB are even more dramatic when the underlying variables are examined. These variables are share of revenue [SOR] and share of value [SOV] in the strategic group.
The NYT's share of revenue correlation with TRB's over the forty quarters is -0.9. When TRB's share of revenues goes up, NYT's goes down. The NYT-GCI share of revenue coefficient is -0.5 while against DJ it's +0.8 (note that + sign).
The NYT's share of value correlations over the same period exhibit a similar pattern: the correlation between NYT's and TRB's share of value is -0.5; against GCI it's -0.3; against DJ the share of value coefficient is +0.6.
In the minds of advertisers and investors The New York Times and Dow Jones appear to be complements ... not substitutes.
PENNIES FOR DOLLARS?
There are two additional steps in the competitive pricing of NYT: (1) forecasting the strategic group's market cap in 2010 and (2) forecasting the company's share of that market cap.
The forecast of market value for this strategic group, caught in the midst of a tectonic shift in the competitive landscape, cannot be a time-series exercise. Time is of the essence, but not as an independent variable in a regression equation. Rather the 2010 market cap of these companies depends on the business proposition each one executes in their effort to reinvent the market.
Currently investors are not too hopeful: the combined value of the group plunged 62.4% from $52.5 billion in December 2003 to $19.7 billion on November 30, 2007. And the opinions from management are mixed. In her November 24, 2007 post Dianne See Morrison asked this question: "Are US Media Owners Substituting 'Pennies for Dollars' Online?"
That was the woeful conclusion of Mort Zuckerman, publisher of the New York Daily News and US News and World Report, according to the detailed minutes of a recent inquiry into media ownership by the UK House of Lord's Communications Committee released Friday. In September, the committee visited the U.S. and the offices of its major media owners, regulators, and media groups looking at the state of newspapers, broadcasters, radio and online. The minutes show an industry at a turning point, with media owners both hopeful and despondent of the future. One theme that consistently arose was whether or not the Internet represented a boon or bane for media owners and if the Web could ever be channeled for profit.
FORECASTING STOCK PRICE
The equation to forecast share of value is simple: [SOV] equals the NYT's risk-adjusted differential [RAD] multiplied by its Risk, then added to its maximum earnings market share [SOR hat]. For an explanation of this equation you might what to review my audio slide show "Competitive Stock Valuation:"
Let's take a first cut at re-pricing NYT by using the forecast (from my last post) of its maximum earnings market share in 2010 – that was 26.7%; its enterprise marketing risk over the previous forty quarters (2.0 not reported earlier); its risk-adjusted differential in the 4th quarter of 2006 (-3.0 from the chart above); and the combined market cap on November 30, 2007 ($19.7 Billion from above). The following table reports the results for risk-adjusted differentials ranging from -5 to +5 . NYT's market cap is SOV times group market cap. Price is Market Cap divided by the number of shares outstanding (143.85 M).
If Mort Zukerman is correct concluding that he and other media owners like Arthur Sulzberger and Sam Zell are substituting pennies for dollars -- their combined market cap won't appreciate at all. In that case it looks like NYT will trade at around $28 in 2010. The other three owners in this group could manage to maximize earnings like the NYT did in 2006. Together they could jump start growth in group revenues so that its members become profitable new media companies with increasing market caps. Got any ideas on how they might do that?
Thanks for visiting,