Capturing The Internet Component of The New York Times Company

I posted several weeks ago that newyorktimes.com is the largest globals news brand. I think there is tremendous value in that property that is not being recognized by wall street. But on top of that, there is about.com which The New York Times Company purchased for $410 million in February 2005.  I said at the time that the $410 million was going to look like a bargain in a very short time.  Well it certainly does now.

NBC paid $600 million for iVillage recently and About.com has more parenting content and more parenting page views than iVillage. But you can keep going in that direction. About.com may have more health content and traffic than WebMD which is worth $2.3bn. It may have more cooking/homemaking content and traffic than anyone else. Etc. Etc.  I would not be surprised if About.com is worth over $1bn today and I expect that value to keep increasing.

So inside the New York Times Company, you have two valuable Internet properties, the kind that ought to be worth 20x EBITDA or more. The kind that have incredible cash flow and growth. The kind you want to own stock in.

But The New York Times Company trades at a $3.6bn market cap which is about 6x cash flow. The stock has been in decline for the past couple years. What gives?

Well it seems that Wall Street thinks the "offline" businesses such as newspapers and TV stations are going to eat up the Internet cash flow.

So how do you capture this value inside of the New York Times Company as an investor?

I suggest this simple "hedged trade".  Go long New York Times Company.  But 1000 shares at $25/share.  Go short The Tribune Company which does not have these two exciting Internet properties.  Sell 8500 shares at $29/share.

Net out of pocket costs of this trade is zero. In theory, you have hedged out of the newspaper and TV station risk and you are now long the New York TImes’ Internet properties.

It is certainly not a perfect hedge and there are risks that are specific to each company that could cause this trade to fail, but I think its a pretty nice trade.

Thoughts?