The Washington Post Company

7/29/2019 The Washington Post Company

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The Washington Post Company

Balkar Sivia


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The Washington Post Company (NYSE: WPO) is a conglomerate with assets in education,

cable, broadcasting and publishing businesses. The Company, under the leadership of

Katherine Graham went public in 1971, primarily with publishing and broadcasting assets. In

the 1980s the company diversified and entered the education and cable businesses, which

have grown and become a major part of the Company under the leadership of Donald

Graham, who became CEO of the Company in 1991. The Company is conservativelymanaged and has astute and accomplished members forming its Board of Directors.

Due to the severe decline in advertising and general pessimism about the future of

traditional media assets the stock price fell to a low of $322/share in March 2009. The

market is not giving much credence to the high growth education or stable and growing

cash flow cable assets. Although more than 60% of its revenues come from the education

business, the Company trades more like a newspaper Company than a for-profit education

business. At the current market price of $440/share, the Washington Post Company has a

market cap of $4.14 billion and an Enterprise Value (EV) of $3.42 billion.

Kaplan Inc.

Kaplan was founded by the legendary Stanley Kaplan, and bought by the Washington Post

Company in 1984 for $45 million. Kaplan was primarily engaged in the test prep business

but over the years it has entered and prospered in the for-profit education business.

Kaplan Higher Education

The higher education division, which is the biggest, now accounts for 38% of Washington

Posts revenues and 62% of its operating income. The company invested heavily in this

business during the late 1990s and finally turned a profit in 2002. On average, the division,

organically and through acquisitions, has since, grown revenues at 25%, and importantly,

increased operating margins.

The Good

Kaplans Higher Education division within the for-profit sector exists to serve the market

demand to educate individuals who the traditional schools have failed to satisfy. As the US

economy transitions more and more into a service economy, and new employment

opportunities require post-secondary schooling, higher education becomes essential for an

individual to maintain their living standards. Kaplan and others provide individuals with the

convenience of continuing with their present occupation while pursuing further education

to enhance their credentials. The option to take courses online has further lit a fire under

the growth engine and accelerated Kaplans growth. Their success is evident from the

increase in market share of for-profit institutions, measured by degrees granted, which has

gone from 2.3% in 1997 to nearly 6% in 2006 and rising. Furthermore, enrollments have

grown exponentially in 2009 due to unemployment and, consequently, an increased interest

in higher education. The growth in revenues in this division has mostly come from: (a)

growing enrollments, and (b) tuition increases. Below is a table documenting Kaplans

growth and margins when normalized on a per student basis.


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Higher Education per Student statistics

Year 2005 2006 2007 2008 2009E

Revenue 721,579 878,989 1,021,595 1,275,840 1,709,625

Students 70,800 75,800 80,000 96,400 123,392

Revenue/Student 10.19 11.60 12.77 13.23 13.86

Revenue/Student Growth 6% 14% 10% 4% 5%

Operating Income 82,660 103,938 125,629 168,774 261,599

Operating Income/Student 1.17 1.37 1.57 1.75 2.12

Operating Income/Student Growth -27% 17% 15% 11% 21%

Operating Income/Student Margin 11% 12% 12% 13% 15%

Kaplan Higher Education, through Kaplan University, Kaplan Colleges and Kaplan Career

Institute operates in a fragmented industry with many competitors. Kaplan itself has few, if

any, competitive advantages, but the industry as a whole is experiencing tailwinds due to

pent up demand from the non-traditional student and the convenience of online education.

Kaplan and others, however, have a few distinct advantages over traditional schools.

First, their marketing prowess is unmatched. They advertise extensively. Non-

traditional students are often not aware of the student aid available and

consequently, are not sure if they can enroll in higher education. Kaplan admissions

counselors help students with the paperwork and make the process effortless.

Second, traditional schools do not have an extensive online offering, while Kaplan

has a very advanced online education portal. Online education makes it very

convenient for a student to obtain a degree as students can study and attend classes

when they want and where they want. Importantly, it takes a lot of time and capital

to develop and offer comprehensive, trusted, high quality online curriculum.

Third, they are more responsive in academic program changes - their programofferings change as market conditions change. The bureaucracy and the public

nature of most traditional schools cannot match the agile nature of for-profits.

Fourth, because Kaplan is geared towards non-traditional students, they understand

their customers and their special requirements. If students require extra help in the

beginning or added counseling, it will be provided.

Fifth, although the costs of an online school are comparable to an out of state public

school, there can be many cost-saving advantages to attending an online school.

With an online education there are no room and board expenses, travel expenses or

other ancillary expenses.

Kaplan competitively differentiates itself with: (a) a trusted brand name (which is due to test

prep), (b) extensive offering, which is illustrated by its ranking as 4th

among online

universities in the number of degrees offered, (c) quality, where it is ranked in the top 10

among online for-profit universities by various sources, and (d) regional accreditation, which

is superior to national accreditation as credits are transferable. Furthermore, Kaplan can

and does raise tuition rates along with the budget constrained public schools, which have to

raise rates to remain feasible. Psychologically, an expensive education is considered


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superior and this also helps Kaplan raise rates, but the rates will have to remain competitive

with public institutions.

The Bad

The for-profit higher education industry, in which Kaplan Higher Education operates, has

little to no barriers to entry. Accreditation, while difficult to obtain organically, can bebought, as evidenced by the sale of Waldorf College in May 2009. It is today a segregated

industry. There are many other struggling colleges in the US which, as they capitulate, can

be bought to expand or obtain accreditation by for-profits. In addition, the non-profit public

and private universities are entering the online education market. Arizona State University

(ASU), for example, has lenient admission standards and an extensive offering of online

courses; the degree obtained by the online students is not distinguished from students who

attend the brick and mortar school. Long term, as more and more traditional schools enter

the fray the only students who attend non-profits will be the ones who are unable to get

into a traditional school. Then given the admissions standards, how does a degree from

Kaplan university fare compared to a degree from an online traditional school?

Comparatively, what is the customers ROI on education? After talking to two admissionsadvisors from Kaplan, and after repeated attempts, I could not get any information on

placement rates. Kaplan tuition rates are already at the high end of a public out-of-state

college rates. Having said that, public schools, being public, will be slow to respond, will

probably not be adept at dealing with non-traditional students, and will probably take a

long time to widely enter the online education market. Moreover, there will always be a

sect of students, those moving up in a small company for example, who will benefit from an

education provided by for-profits. So, although there is a place for for-profit institutions, but

long term, it is not a place that harbors 25% growth and 15% margins. For-profit institutions

in this environment will only prosper based on the quality of their curriculum, placement

rates and marketing. They will nevertheless, retain their distinct advantages in vocational

programs. However, Kaplans presence is mostly in the non-vocational degree programs.

In addition to the increased competition from public and for-profits alike, Kaplan had a

weighted average retention rate of less than 70% and a weight average graduation rate of

42% in 2007. This means that in order to just maintain the revenue levels these students

have to be replaced, while even more students need to be added to grow. The story is

similar among other non-profit institutions. Although the non-traditional student

demographic is large, it is still finite. One has to question the long term sustainability of this

business model.

And The Ugly

Kaplan and most other for-profit universities exist on the back of government funding. In2008, Kaplan University derived 85% of its receipts from the Title IV programs. An institution

with revenues exceeding 90% for a single fiscal year is subject to enforcement, which leads

to ineligibility in participating in Title IV funding. Kaplan has hired additional personnel to

manage these risks, and I believe it is a risk they can manage as they can filter students with

a very high proportion of Title IV funding.


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Also, during 2008, funds received under the Title IV programs accounted for approximately

$904 million, or approximately 71%, of total Kaplan Higher Education revenues, and 39% of

Kaplan, Inc. revenues. The business overwhelmingly depends on Title IV funding. Starting in

2009, in order to remain eligible for Title IV funding Kaplan has to maintain 3 year cohort

default rates (CDR) below 30% (increased from 25% and 2 year) for three consecutive and

below 40% for one year. Below is a table presenting the cohort default rate for variousKaplan institutions in 2007.

Name CityRetention

Rate (FT)Graduation Rate Enrollment

2 Year

Default

Rate

Trial 3

Year

Default

Rate

Kaplan University Davenport 66.0 35.0 53,212 13.3 23.2%

Kaplan College Phoenix 77.0 49.0 587 18.0 25.7%

Kaplan College Stockton 97.0 67.0 1,043 14.4 27.5%

Kaplan College Hollywood 92.0 85.0 1,328 17.0 12.2%

Kaplan College San Diego 89.0 74.0 2,239 8.1 15.3%

Kaplan College Salida 86.0 66.0 1,364 14.8 27.7%

Kaplan College Sacramento 79.0 52.0 861 18.8 33.5%

Kaplan College Vista 92.0 69.0 1,686 13.2 23.1%

Kaplan College Panorama 94.0 74.0 520 17.6 28.7%

Kaplan College Merrillville 57.0 20.0 676 17.3 28.6%

Kaplan College Indianapolis 75.0 60.0 1,702 12.5 22.1%

Kaplan College Las Vegas 69.0 48.0 832 21.2 31.5%

Kaplan College Columbus 61.0 30.0 931 22.8 32.8%

Kaplan C. Institute Boston 37.0 68.0 792 15.3 31.6%

Kaplan C. Institute Brooklyn 65.0 65.0 1,105 16.8 37.7%

Kaplan C. Institute Harrisburg 73.0 58.0 916 20.4 35.3%

Kaplan C. Institute Harrisburg 73.0 59.0 916 20.4 35.3%

Kaplan C. Institute Pittsburgh 86.0 34.0 1,827 21.9 37.9%

Kaplan C. Institute Nashville 57.0 47.0 616 7.9 22.2%

Kaplan C. Institute San Antonio 68.0 67.0 1,986 16.4 29.8%Source: Department of Education and NCES

As we can see from the above, the 3 year CDRs for some of the institutions are already

higher than 30% and many are very close to the 30% mark. Please note that these statistics

are from 2007. Here is a table showing the trend in Kaplan CDRs:

Kaplan University 2 year CDR

Fiscal Year 2005 2,006 2,007

Default rate 5.90% 9.20% 13.30%Source: NCES

The trend, in this case, is clearly not favorable. With increasing unemployment and general

economic malaise, I would expect the CDRs for 2008 and 2009 to be much higher. Kaplan is


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in serious risk of loosing its Title IV funding under the new rules. Kaplan will have to change

its enrollment strategies in the immediate term to recruit students at a lower risk of default.

This again shows that growth will (should) taper, there are no signs however, that it is.

Moreover, there is only so much Kaplan can do to stem the rise of CDRs, Kaplan cannot, for

example, control the macroeconomic environment. The Department of Education will not

impose sanctions based on rates calculated under this new methodology until threeconsecutive years of rates have been calculated, which is expected to occur in 2014.

Furthermore, the company is facing three separate lawsuits related to Title IV funding.

Valuation

Kaplan Higher Education

2005 2006 2007 2008 2009E*

Revenue 721,579 878,989 1,021,595 1,275,840 1,709,625

Growth (%) 29% 22% 16% 25% 34%


AddD&A 24,100 30,778 32,608 43,602 -

SubtractCapex 51,406 41,079 47,598 50,990 -

SubtractShare of Corp Overhead 15,222 27,236 23,646 27,299 -

adj EBIT' 40,132 66,401 86,993 134,087 200,500

adj EBIT' Margin 6% 8% 9% 11% 12%

Subtractshare of cash stock option 14,080 15,650 5,130 59,570 5,155

adj EBIT 26,052 50,751 81,863 74,517 195,345

Given the conundrum between the short term, long term and the CDRs, it is very difficult to

value Kaplan Higher Education. Among the competitors Corinthian Colleges, Inc. and Lincoln

Education Services had CDRs above 25% for the 3-year CDRs and are trading at 4-7x

EBITDA. On the other hand, DeVry, Strayer Education and University of Phoenix all had 3-

year CDRs well below 20% and are trading at 9-16x EBITDA. Kaplan had a weighted average

3-year default rate of 24% and can then be, comparatively, valued at 6-8x adj EBIT. Although

this is not an ideal way as we are comparing the peers on only one dimension CDRs, it is

the most conservative as it takes into account the core risk. In a worst case scenario (really

only a bad case), where Kaplan higher education is not compliant with Title IV rules, the

operating income will be deep in the negative.

The results have been lumpy because the Kaplan stock options are paid in cash by the

company and in 2008 the CEO of Kaplan abruptly resigned, triggering a big payout. The

recession has forced a lot of people out of employment. This has directly benefited

institutions like Kaplan who have seen a large jump in enrollment, but this is only

temporary. Valuing the business at 7x adj EBIT an enterprise value of $1,368 million is

obtained for the higher education division. Also, in January 2009, the company placed a

value of $2,550 on each share of Kaplan. Furthermore, there were 2000 options remaining

constituting 0.2% of stock outstanding. We can reverse engineer this data and obtain a

value of $2,550 million that the compensation committee placed on the entire Kaplan

business (higher education and test prep) in January 2009.


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Kaplan Other

Kaplan Other consists of Kaplan Test Prep, Kaplan Professional, Kaplan International, and

Kaplan Ventures. Test Prep is the original business of Kaplan Inc. and has been a steady cash

generator for the Washington Post Company. Over the years, the Company has grown by

increasing offerings and through bolt on acquisitions. Lately, the business has expanded

internationally. This is a division made up if many small and large businesses providing thesame basic service - prep. The Company has some inherent competitive advantages.

Kaplans materials and coaching are trusted mainly because of its brand name and years in

the business, and over and over again, it has been proven that it works. Kaplan has a

leading market share in most categories. Kaplan has a formidable presence with test centers

scattered all over the country. This is all because Kaplan invested in the right people and

over time has developed comprehensive, trusted material that can benefit the customer

and that is difficult for competitors to duplicate. Kaplan has a duopoly of kinds in many

segments with Princeton Review with many other competitors holding a small market

share.

This business has experienced losses in 2009 due to a decline in all categories, but especiallyin the professional business which caters to the real estate and finance sectors. In addition,

many competitors have penetrated in less specialized categories like the GMAT, SAT and

others. Kaplan still provides structured course offerings in the test centers, but is relatively

expensive; and in a recessionary environment, customers are perhaps choosing to make do

with less. Furthermore, Kaplan has faced heavy losses with its Score business, where

management has admitted that the model does not work; and Kaplan Ventures, where

various businesses have negative operating earnings as they are still mostly in development

phase. Another risk - the worst case for this division - is that there have been talks of

abolishing SAT for many years. If this occurs, this division will be hit with a material loss of

revenue. The company has priced some of its offerings very high, where there is now room

for new competitors in a new digital sphere. It also makes customers seek alternatives withmore vigor. In addition, due to the increasing digitization of course material, losing revenues

to piracy is also a big problem.

Valuation

Kaplan Test Prep & Professional

2005 2006 2007 2008 Normalized

Revenue 690,815 805,152 1,009,036 1,055,071 950,000

Growth (%) 20% 17% 25% 5% -

Operating Income* 117,075 109,887 129,589 105,568 -

AddD&A 20,073 24,826 36,701 38,605 -Subtractshare of Corp. overhead 20,983 26,363 14,126 11,800 -

SubtractShare cash stock option 21,120 15,650 2,997 25,530 -

EBITDA 95,045 92,700 149,167 106,843 95,000

EBITDA Margin 14% 12% 15% 10% 10%

SubtractCapex 32,134 31,952 48,544 47,834 40,000

adj EBIT 62,911 60,748 100,623 59,009 55,000


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Revenues of $950 million, operating income of $15 million (after reversing non-cash/one

time charges), and a negative adj EBIT can be estimated for 2009. Going forward however,

as the newer businesses stabilize, and economy improves, even with lower contribution

from Kaplan Professional as compared to the bubble years, Kaplan Other should

conservatively be able to make $950 million in revenues. Again, conservatively, assuming

10% EBITDA margins and $40 million in capital expenditures, this division can produce adjEBIT in the $55 million neighborhood. Princeton Review (REVU), Kaplans main competitor,

is smaller than Kaplan, has 5-8% EBITDA margins and has had negative adj EBIT numbers for

many years. Taking all of the above into consideration and valuing this business at 11x

normalized adj EBIT gives us a value of $605 million for Kaplan Other.

Cable ONE

Cable ONE began in 1986 as a small cable television company and has now grown to be the

10th largest cable company in the US. It is an operator of cable systems that serves 19 states

with cable television, telephone and high-speed Internet service. As far as cable systems are

concerned, Cable ONE essentially has a monopoly over most of the areas its system covers.This is primarily due to franchise agreements with local governments. It is a regulated

industry, where the capital expenditures required in building the essential infrastructure are

substantial. It must also be noted that, these agreements are not exclusive; however there

has been little precedent of newcomers (overbuilders) upsetting the incumbent. In most

cases, Cable ONE has carved a niche in serving small communities, and competing for these

limited revenues is difficult for another cable company to justify. In an industry notorious

for bad customer service, Cable ONE has scored high in customer satisfaction. Cable ONE

differentiates itself by designating a local office, local personnel and a local phone number

for each of its systems. Cable ONE compares as follows with other cable companies:

Peer Comparison

CableONE CableVision Time Warner Comcast

Homes Passed 1,391 4,803 26,918 51,078

Basic Video 678 3,066 13,048 23,757

% of Homes Passed 49% 64% 48% 47%

Digital Video 222 2,888 8,802 18,005

% of Homes Passed 16% 60% 33% 35%

High Speed Data 389 2,522 9,046 15,684

% of Homes Passed 28% 53% 34% 31%

Telephony 105 2,001 4,064 7,377

% of Homes Passed 8% 42% 15% 14%

RGU's 1,393 10,477 34,960 64,826

EV ($ thousands) - 20,070 36,778 77,188

EV/RGU - 1.92 1.05 1.19

Revenue (TTM) 755 7,670 17,740 34,340

Revenue/RGU 0.54 0.73 0.51 0.53Source: Company Reports


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Cable ONE has plenty of growth opportunities left in the Digital Video and Telephony

segments. CableVision has been ahead of all its peers in penetrating its customer base with

digital and telephony services. On a qualitative basis, when compared to other cable

companies, Cable ONE offers fewer channels, fewer digital channels and low caps on the

internet service for the same price. The cable industry, which is notorious for large capital

expenditures, where economies of scale matter, smaller cable companies face challengeswith infrastructure investments. Cable ONE has been slow, and behind industry behemoths,

in rolling out newer services as evidenced by the low penetration in digital and telephony.

This gives Cable ONE an opportunity to observe industry leaders and invest prudently, but it

also makes them susceptible to competition. It must be noted that, the capital

requirements in this business keep increasing and dont die down because there is always

some new technology on the horizon. Cable ONE bought wireless spectrum and will be able

to offer a quadruple service if and when it makes the necessary investments.

Cable ONE has faced stiff competition from Direct Broadcasting Satellite (DBS) providers

bundling their services with DSL high speed data providers. DBS carries more digital

channels and is cheaper on a cost/channel basis. DSL data, though slower than cable, doesnot have the same restrictive caps. DBS providers now also offer local channels, which has

prevented higher penetration in the past. The jury is out and a lot can be said about the

cable vs. satellite debate. At the end of the day, however, the choice depends on each

customers personal preferences. The two services are very comparable and have their pros

and cons (outside of this reports context). The fact that Cable ONE has increased rates twice

in the last three years and has seen an uptick in total revenue (in spite of some loss in basic

subscribers) and operating margins, speaks to its position within the region it serves.

Furthermore, another formidable competitor in the future could be Internet Protocol

Television (IPTV), where television service is distributed via the Internet. Qwest, which is

present in most of Cable ONEs regions, has publically stated that it does not want to enter

the IPTV market. Also, it is uncertain whether these companies would find it profitable tobuild infrastructure (for IPTV) in small communities that Cable ONE serves. The worst case in

this business would likely be loss of revenue to alternates, it will however, likely be

measured and transparent.

Valuation

CableONE

2005 2006 2007 2008 2009E*

Revenues 507,700 565,900 626,400 719,100 755,100

Growth 2% 11% 11% 15% 5%

Operating Income 76,700 120,000 123,700 162,200 170,310AddD&A 100,031 104,591 108,453 121,310 130,200

SubtractCapex 111,331 142,484 138,258 114,176 92,000

SubtractShare of Corp. Overhead 6,600 8,505 5,202 6,640 6,800

adj EBIT 58,800 73,602 88,693 162,694 201,710

adj EBIT Margin 12% 13% 14% 23% 27%*2009 assumes continuation of 2009 trends where feasible and guess estimates where required


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Cable ONEs peers are presently valued at around 6x EBITDA for Comcast and Time Warner

and 8x EBITDA for CableVision due to superior penetration and segment numbers. The

capital expenditures for Cable ONE in 2008 and 2009 have died down, and might be low in

the short term as the digital conversion has taken place; long term however, some new

technology will certainly require additional outlays. Considering that Cable ONE has no debt,

while all its peers are heavily indebted, Cable ONE can be valued at 10x-11x adj EBIT or at10x, $2,017 million. In addition, after normalizing the bigger peers on a EV/RGU basis, I

believe, Cable ONE should be valued at 1.5x RGU due to no debt, lower cable competition,

and higher relative growth potential; giving an EV of $2,089 million for Cable ONE.

Post-Newsweek Stations Inc.

The Post-Newsweek Stations Inc. owns six VHF television stations located in Houston, Texas;

Detroit, Michigan; Miami, Florida; Orlando, Florida; San Antonio, Texas; and Jacksonville,

Florida. Every station, with the exception of the Jacksonville, WJCT station, is affiliated with

one of the major national networks. Three of the six company stations have leading market

share in their respective markets. Local TV broadcasters have no competitive advantages,per se, but earn superior returns because of their sheer presence, which is preserved by

broadcasting licenses. These stations also benefit from experienced management and

established newscasters. The local stations rely heavily on the popularity of local news, as

the local news differentiates them from national networks and the ad spots are coveted by

local advertisers. In a difficult year for media generally, local television stations were hardly

immune and experienced steep decline in revenue and operating income. The declines,

however, are cyclical and the revenues should recover as the economy comes back.

On a secular basis, the DVR, internet and cable television have kept growth in local

television revenues subdued. The operating revenues have, in fact, declined on an inflation

adjusted basis. Basically the problem is that the advertising revenue is still there, but moreand more of it is going to cable networks, which can now do regional advertising, and other

alternatives rather than local network stations. They are in a better position than the

newspapers due to a lower cost base and have a lead in finding a solution. Additionally,

another looming threat is a potential shift in the relationship between NBC their affiliates

after the Comcast acquisition. Although Comcast has publically stated that it is committed

to this model, there can be no guarantees. On the positive side, the company has some

experience managing a station without an affiliate.

Valuation

In 2009, revenues of $283 million and $68 million in operating income can be estimated,

assuming the first three quarter trends continue. The political and Olympics revenue above

was averaged for two years and added to the odd years. The operating income was adjusted

based on the overall margins. On a normalized basis, assuming a new normal going

forward, the revenues should stabilize above $300 million, down from $350 million during

the 2004-2007 period. In addition, with the decline in revenues we will assume lower

operating margins, which nonetheless, should be temporary as the management will likely

cut costs (as they are incentivized to maintain margins).


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Television Broadcasting

2005 2006 2007 2008 Normalized

Revenue 353,050 344,800 357,100 310,800 300,000

Growth 4% -2% 4% -13% -


AddD&A 10,202 9,915 9,489 9,400 9,200

SubtractCapex 8,559 8,800 9,500 11,500 8,500

Subtractshare of Corp. Overhead 4,238 5,104 2,861 3,652 3,500

SubtractPension Credits 2,939 1,413 888 1,041 1,100

adj EBIT 145,126 148,558 145,180 110,987 106,100

adj EBIT margin 41% 43% 41% 36% 35%

With the above, adj EBIT at $106 million can be estimated going forward. There are no

public comparables. Due to superior margins, low capital expenditure requirements, but

uncertain growth and future prospects, this business can be valued at 10-12x adj EBIT. At a

10x multiple a value of $1,061 million for the entire business can be obtained. The worstcase in this business will likely come from a continuing precipitous decline in revenues due

to secular shifts. On the other side, in an increasingly metered approach to broadband,

watching television on the phone or computer will be an expensive proposition. I reckon my

new normal revenue and margin assumption takes some deterioration into account.

Newspaper Publishing

The Washington Post Company publishes The Washington Post, which is a morning daily

and Sunday newspaper primarily distributed by home delivery in the Washington, DC. In

addition, the Company publishes of The Herald in Everett, WA; El Tiempo Latino, a weekly

Spanish-language newspaper; and the Gazette Newspapers among others. Furthermore,Washingtonpost.Newsweek Interactive (WPNI) develops news and information products for

electronic distribution and produced washingtonpost.com (which is free). The Slate Group, a

division of WPNI, produces Slate, an online magazine, and several additional websites.

The demise of the newspaper business is well known. The major problem with the business

model is that the revenue lost from subscription and print advertisements (display,

classifieds, and inserts) is not being recovered from online advertising and the online

subscription model does not work for many newspapers. Also, with the digital evolution,

and the rise of the aggregators, news has become a commodity. Newspapers also are not

the fastest way of getting news today. Although, more people read news stories today than

ever before, there is no system to profitably monetize the eyeballs. Furthermore, with

services like Google in the mix, yes, newspapers benefit when their news stories are linked,

but it also prevent them from putting up paid walls. Some newspapers are to blame as well;

their superior assets helped them raise debt levels, and when revenues declined, this debt

caused a negative feedback loop resulting in a decrease in quality. In addition to these

secular declines, in 2008-2009, newspapers were at the forefront of the cyclical decline in

advertizing.


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The Washington Post newspaper ranks 3rd

in the US after New York Times and USA Today.

The paper is developing a stronger niche and differentiating itself by covering the business

of Washington, thereby, attracting a niche, loyal audience, and correspondingly,

advertisers. The circulation and advertizing inches numbers are down over the last 3-4

years. The company however, has been successful in increasing advertizing and subscription

costs at around the rate of inflation. They have also invested in WPNI, their digital frontwhich enables them to participate in the digital upside. On the content side, although

general news stories are the commodity, deep investigative reporting is not. Quality, niche

content can be monetized and is being monetized by various news agencies. On a local

basis, Washington Post operates in a district with a lot of federal and political jobs; and

consequently, subscription wise, the down side is limited. Rupert Murdoch has publically

stated that all News Corps newspapers will have a WSJ type subscription model starting

2010, perhaps others will follow. Associated Press is developing software which tracks the

news story to the source. Many great minds are working on this problem and a lot of

experimenting is taking place whether something will come out of it is uncertain. Devices

like e-readers and mobile phones, for example provide another platform for the

experiments. At this point, there are more questions than answers.

Valuation


2005 2006 2007 2008 2009E*

Revenue 957,100 961,900 889,800 801,300 640,800

Growth% 2% 1% -7% -10% -20%

Operating Income 125,400 63,400 66,400 - 192,700 - 189,000

Reversing non-cash/one time - 49,400 - 145,600 57,900

AddD&A 37,556 36,929 38,800 65,500 81,213

AddPension expense 784 56,785 10,010 87,962 76,952Subtractshare of Corp. Overhead 11,410 14,884 9,105 11,621 16,337

EBITDA 152,330 191,630 106,105 94,741 10,728

SubtractCapex 33,276 57,664 36,020 28,428 25,000

adj EBIT 119,054 133,966 70,085 66,313 - 14,272

The Company has reduced costs in a big way by offering buyouts to employees, merging

print and online divisions and closing bureaus. It is difficult to determine the proportion of

secular and cyclical declines over the last two years. Given the uncertainties, I am unsure of

what the normalized earnings would be going forward. The management has stated that the

losses in 2010 must diminish, if they will is yet to be seen. New York Times is being valued

at 8x EBITDA and Gannett at 5x EBITDA, they are both however, much more levered thanthe Washington Post but have better circulation numbers.

This is a very simplistic approach (and perhaps not very accurate) but valuing the newspaper

business at 8x 2009E EBITDA a value of $86 million is obtained for the newspaper publishing

division. This is at the cyclical trough. Any other method of valuation would require heroic

assumptions, which I am not adept at making. At the end of the day, the Washington Post

Company is a public corporation answerable to its shareholders and is not a non-profit. If


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and when the news organizations find a profitable business model, not only will the

earnings improve, but they will get a big boost in the multiple. The worst case in this

business is declining subscription and ad revenue. In addition, all the experimenting may

never result in a profitable business model - resulting in further, continuing operating losses.

It must also be noted that newspaper assets attract wealthy individuals looking to wieldinfluence. For these individuals, The Washington Post would make a trophy property.

Although the probability is low that the Graham family will sell anytime soon, it is still an ace

up their sleeve.

Magazine Publishing

In Magazine Publishing, Newsweek Inc. publishes Newsweek, weekly global news and ideas

magazine and its digital front, newsweek.com. Newsweek is published domestically and

internationally. Newsweek recently announced plans to reduce its domestic rate base to 1.5

million copies by January 2010 (from 2.6 million), reflecting a shift in focus to a different

demographic that is closer to its core base of loyal subscribers. They are aiming at peoplewho have already read the news, and desire targeted analysis as well as deep investigative

reporting. If newspapers have it hard, magazines have it even harder. It should be noted

however that in a difficult year, magazines such as The Economist, The New Yorker and The

Atlantic saw readership gains. It is uncertain if this new, niche strategy will produce profits,

but it is probable that it will produce better numbers, due to the cost efficiency, compared

to the current strategy.

Valuation

Magazine Publishing

2005 2006 2007 2008 2009E

Revenue 344,900 331,000 288,400 250,900 187,500

Growth% -6% -4% -13% -13% -25%

Operating Revenue 45,100 27,900 31,400 - 16,100 - 34,000

Reversing non-cash/one time 1,500 10,400 - 29,200 6,600

AddD&A 2,801 2,640 2,177 2,052 1,920

SubtractCapex 660 564 448 4,675 1,200

SubtractPension credit 38,184 34,704 36,343 15,097 14,300

Subtractshare of Corp. Overhead 4,890 6,379 3,121 4,980 4,100

adj EBIT 5,667 - 707 - 6,335 - 9,600 - 45,080

adj EBIT margin 2% 0% -2% -4% -24%

The magazine divisions performance has gone from bad to worse. Business week is

reported to have been sold for $3-5 million plus the assumption of liabilities. As with

newspapers, I am again unsure as to how to value this division. With declining circulation,

but increasing rates, one has to assume that the revenue figure going forward will be closer

to the 2009E figure or below. Newsweek, as a medium to influence political affairs, will also

make a trophy property in a sale and would probably fetch more than Business week.


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Assuming it will not be sold, I will value this division at zero. The worst case in this business

is declining subscription and ad revenue, resulting in further losses for the Company.

Consolidated Valuation

On a consolidated basis, the publishing divisions dampen the effect of the other, profitabledivisions. The accounting is conservative but lumpy. Due to the overfunded pension plan,

through employee buyouts, the management has transferred substantial operating costs

from the income statement to the balance sheet. Also, due to the growing nature of the

Kaplan business, the company routinely engages in acquiring other business, mostly to

compliment or enhance its existing businesses and as a consequence, restructuring

expenses are a regular occurrence.

In the above, the operating losses of Other Business were proportionally subtracted from

all segments. It is unfortunate, that Course Advisor Inc, which should clearly be a part of the

higher education division, is lumped in with the Other Business category. Also, the

Company experienced a loss due to foreign currency translations in 2008, due to volatilecurrency markets and a temporary strengthening of the US dollar. In addition, the company

has been proficient in managing working capital, resulting, on average, in a net positive

effect on the cash flows. Furthermore, the Company will experience a higher interest

expense going forward as the $400 million in debt was refinanced at 7.75% at the market

trough.

Consolidated Income Statement

2008 2009E*

Revenues 4,461,580 4,480,010

Operating Expenses 4,287,372 4,370,969Operating Income 174,208 109,041

Add one time/non-cash charges 264,400 122,941

Add D&A 288,131 329,474

Subtract net Pension benefit 25,651 6,941

EBITDA 701,088 554,515

Subtract Capex 288,923 244,075

adj EBIT 412,165 310,440*2009 estimates assume continuation of 2009 trends where feasible and guess estimates where required

The 2009 numbers assume continuation of 2009 trends and is a rough estimate. Although

the revenue and operating income increased due to Kaplan and Cable ONE, the operatinglosses in the publishing division have brought the overall results down. Again, due to the

inherent difficulty in valuing the publishing business and its diffusion into the consolidated

statements, it becomes difficult to value the entire business on a consolidated basis. The

Company is currently trading at 6.2x 2009E EBITDA, and 11x 2009E adj EBIT. I would not

value the entire business above these multiples. The other problem is that one cannot say

with any certainly if 2009E really are trough revenue and operating earnings estimates.


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Sum of Parts Valuation

Below is a summary of the various moving parts:

Business Margin of Safety Risks Value

Kaplan Higher Education Brand, Quality CDR's $1,368 million

Kaplan Other Market Position, Brand Low priced alternatives $605 million

Cable ONE Presence DBS, IPTV $2,017 million

Post-Newsweek Stations Presence, Management Secular Shifts $1,061 million

Newspaper Publishing Presence, Niche, Quality Secular Shifts $86 million

Magazine Publishing Brand Secular Shifts $ 0

Sum of Parts $5,137 million

The total enterprise value of the moving parts is $5,137 million. We add to this cash,

investments, net pension overfunding, and subtract debt to get $5,861 million or at 9.4

million shares, $625 per share in equity value. The Washington Post Company is currently

trading at $440 per share. The sum of parts valuation has a 40% upside from the currentmarket capitalization. It is entirely possible that the newspaper and magazine publishing

divisions are worth more than the estimates provided in this report; consequently, if that is

the case, I am under estimating the true value of the franchise.

Management

Warren Buffet accumulated a position in the Washington Post Company in the early 1970s

and his influence on the management style, compensation policies and accounting is

apparent. The Company is managed much like Berkshire Hathaway, where the Donald

Graham takes a hands off approach and the CEOs of various divisions (and there are

many) make decisions as they see fit. The various CEOs have the right incentives to focus onlong term value creation. Due to the growing nature of many of its businesses, the Company

has been and is heavily involved in acquisitions. As with any business, some acquisitions

work and some do not. A trait of a good Company is that it does little things better than the

competitors, and an investor can expect that from the Washington Post Company. The

Company itself does not play the Wall Street game and is generally underfollowed by the

street. Kaplan itself is underfollowed by investors interested in the for-profit education

business.

The Graham family controls the majority voting shares (Class A) in the Company giving them

complete control. The incentive compensation is a mix of restricted stock and stock options,

to reflect the mature as well as growing nature of its businesses respectively. The

compensation however is very competitive, as shown by their rewards to Kaplan executives.

The company regularly pays a dividend and opportunistically buys back stock, with a

moderate decline in shares outstanding due to dilution from stock options. Although the

ROIC figures have been decent historically (10-12%), given the low asset base for most of

their businesses, they mean very little for an investor going forward.


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Conclusion

Although the company has a prudent board and an intelligent management, the rise in the

rate of CDRs cannot be ignored. It is quite ironic that such discrepancies occurred under

such conservative leadership. The Company could be worth substantially more if CDRs were

not an issue. Although I have, but valuing a business with a high probability of permanentloss of capital at a lower valuation is akin to assuming a high discount rate for a Russian

equity - it does not work. I personally will not invest in the Washington Post Company, even

at a lower price, as Kaplan Higher Education is at a serious risk of losing Title IV funding.

Cable ONE and the Post Newsweek Stations stand on the opposite side of the same court.

TV stations headwinds are generally Cable ONEs tailwinds. The TV stations, even as they

decline, should provide a steady source of free cash flow for many years. Psychologically,

publishing is an old business, but in this new economy, the newspaper and magazine

divisions are still in an experimental stage in finding a profitable business model. The extent

of losses is not known and that makes this space more of a speculation than an investment.

The market, however, is made by differing opinions and if an investor thinks Kaplan Higher

Education is not at a risk of violating government rules, that business then should be worth

12-15x adj EBIT and the Washington Post Company would have a substantial upside.


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Bibliography


[1] USA Today vs. Washington Post vs. New York Times

[2] Washington Post Signals Shift With a New Editor - NYTimes.com[3] WaPo shutters three bureaus - Michael Calderone - POLITICO.com

[4] Is the Huffington Post Killing the New York Times and the Washington Post? - Conor

Clarke

[5] The Washington Post: History of The Post

[6] NYTimes.com to Offer Subscription Service - New York Times

[7] Charlie Rose: Future of Newspapers;

[8] Charlie Rose: A conversation about print Journalism in the digital age

[9] Charlie Rose: Arthur Sulzberger

[10]WAPO ranks No.3: http://www.niemanlab.org/2009/02/top-15-newspaper-sites-of-2008/

[11]Times to Stop Charging for Parts of Its Web Site - New York Times

[12]Murdoch Says News Corp. Will Charge for Newspaper Content Online - New York Times

[13]Media Executives Plan Online Service to Charge for Content - NYTimes.com[14]Layoffs at Newsweek - Michael Calderone - POLITICO.com

[15]How to Save Your Newspaper - TIME

[16]Wharton: Web vs. Print

[17]Updated: Washington Post Online, Print Operations Will Merge Jan. 1, 2010 |

paidContent

[18]Bing trying to get exclusive on FoxSmart blog maverick

[19]Rupert Murdoch: Journalism and Freedom - WSJ.com

Cable

[1] Cable ONE - Package Bundles[2] Comcast, CableVision, TimeWarner 2008 10Ks and 2009 3Q 10Q

[3] Satellite vs. cable, DirecTV vs. Dish HD programming - CNET Reviews - CNET.com

[4] Satellite TV Vs Cable: Comparison of Dish Network vs. Cable Television Home Guide

[5] An Interview With Cable Pioneer John Malone - WSJ.com

[6] CableOne users forum - dslreports.com

[7] Washington Post: Net Neutrality Kills Puppies - Oh, did we forget to mention we own a

cable company? - dslreports.com

[8] Cable or Satellite conundrum PC World

Kaplan

[1] University World News

[2] Straightliner: College for $99/month

[3] Boston university Online Program

[4] You Tube Video: New Players, Different Game: Understanding the Rise of For-Profit

Colleges and Universities by William G Tierney, Guilbert C Hentschke

[5] What to look for in an Online College

[6] Top 5 Online Colleges


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[7] College Board - Student Pays

[8] Apollo Group, Strayer Inc., DeVry 2008 10K, 2009 3Q 10Q

[9] Princeton Review: http://ir.princetonreview.com/index.cfm

[10]Why Barron's Is Wrong About For-Profit Education Stocks -- Seeking Alpha

[11]Education Management IPO Gets an A+ -- Seeking Alpha

[12]20+% Growth Rate For Students Over 25 Participating in Post Secondary Education Until

2015-2020 Timeframe: Target Market For Education Stocks - Yahoo! Finance

[13]Stanley Kaplan, Pioneer in Preparing Students for Exams, Dies at 90 - Obituary (Obit) -

NYTimes.com

[14]Kaplan Inc. News - The New York Times

[15]Undergraduate tuition and fees and room and board rates for full-time students in

degree-granting institutions, by percentile of charges and control and type of institution:

200001 through 200708

[16]College Navigator - University of Phoenix-Online Campus

[17]Fast Facts NCES Fast Facts

[18]College Navigator - Kaplan University

Network TV

[1] Article on Threats: http://tvbythenumbers.com/2009/02/28/todays-threat-to-

broadcast-tv-networks/13686

[2] Future of Broadcasting:

http://www.nytimes.com/2009/11/21/business/media/21network.html

[3] John Malone and network affiliates:

http://www.tvnewscheck.com/articles/2009/11/23/daily.5/

[4] Comcast Memo: http://blog.comcast.com/nbcucommitment/

[5] http://www.thewrap.com/article/1206?page=2 Network to Cable

WPO General[1] The Washington Post Company - Investor Relations

[2] What Members are saying about The Washington Post Company (WPO)

[3] WPO Please Act Accordingly PAA Research Report

[4] Washington Post Co. (WPO) Stock - Latest Articles -- Seeking Alpha

[5] Newspaper Circulation: Less Really Is Less -- Seeking Alpha

[6] Donald Graham - Not Boasting, Even Though He Could - New York Times

[7] Interview: Don Graham, CEO, Washington Post Co.; Katharine Weymouth, CEO, WP

Media | paidContent

[8] BBC NEWS | Business | Don Graham's debt to Warren Buffett

[9] Yahoo Newspaper Consortium Adds Boston Globe And St. Petersburg Times |

paidContent

[10]@ UBS Media Week: WaPos Graham: Having Conversations About Online Pay; Backs

Comcast-NBCU Deal | paidContent

[11]Top 15 of 2008: The leading regional newspaper sites shuffle their ranks Nieman

Journalism Lab

[12]Magazine M&A and Magazine Finance - Media M&A - Publishing Finance Resource @

FolioMag.com

[13]Dirks, Van Essen & Murray: Newspaper mergers, acquisitions, and brokers

The Washington Post Company

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