Yet Another Value Podcast - Kuppy is active on $LEE

Episode Date: December 16, 2021

Kuppy comes on the show to discuss his recent activism at LEE and why he thinks the stock is dramatically undervalued.My notes on LEE: https://twitter.com/AndrewRangeley/st...Kuppy's LEE thesis: https://adventuresincapitalism.com/20...KEDM: https://www.kedm.com/what-is-kedm/Chapters0:00 Intro2:00 LEE Overview7:55 Why does Kuppy think Alden's LEE offer is so undervalued?12:35 Why does small town, local news offer a moat?17:30 Is LEE's digital growth real or is it just small base effect?20:20 Can the LEE team execute the growth / digital opportunity?30:15 Why did Berkshire sell their newspaper to LEE if the growth is so attractive?35:40 Is TownNews a hidden gem?40:00 What other levers can LEE pull to juice growth?42:15 Online gambling upside for newspapers44:30 Valuing LEE"s digital side51:20 Why are papers like Tribune selling if the outlook for digital is so good?53:35 Closing thoughts

All right, hello, and welcome to yet another value podcast. I'm your host, Andrew Walker, and with me today, I'm happy to have my friend, fellow Tulane alumni, Cuffy, how's it going? Doing great. Thanks for having me on, mate. The real name's Harris Cupperman, but everyone calls him Cuppie. So, hey, let me start this podcast the way I do every podcast. First, a quick disclaimer. Nothing on this podcast is investing advice. That's always true, but particularly true today, because we're going to be talking about a, you know, it's basically a microcap stock that Copy has filed a 13D on. So obviously, you know where his interest lies. Everybody should just remember that. Please do your own diligence. Go consult a financial advisor, not financial advice. And then the second way I start every podcast is with the pitch for you, my guess, you know, I don't think it's, I don't think it's crazy to say Cuffy can be a little out there in his thinking. But he's one of my favorite people to chat with. He's always pushing me, hey, look at this quirky situation. Go look at this. Here's something really weird that's going on. People aren't understanding correctly. You know, one of my most profitable people to talk trade ideas and everything. So I'm really excited to have you on.

KDM, I've been a, you know, day one subscriber from back before it was free. It's a great site. First thing I open up when it hits my inbox every weekend. Great site. Everyone should check that out. There'll be a link in the show notes. But that's not what we're here to talk about. What we're here to talk about is the 13D that you filed last week.

The company is Lee Enterprises. The ticker is L-E-E. And with all that out the way, I'll turn it over to you. What is Lee? What's so interesting about it? Why did you file out 13D? All of that. Okay. Here comes a big monologue. Yeah, thanks for having me on. I've been excited to do this.

You know, we actually chatted about Lee, I don't know, six months ago when I was in Manhattan. I put it in my show notes. I said, I even did a little piece on it in August. Copy was pitching me. I kind of said, oh, news, it's whatever. And the stock's up, what, 60% since then? So I'm kicking myself about it. I think it's just started. It's like two times cash flow. It's growing fast. So look, what is Lee? Lee is a collection of 77 regional newspapers, local newspapers that's been written off for dead multiple times. It basically went dead.

But they have a core business with subscribers. And what's happened that got me interested and take a step back, I run in a fund. We do inflection investing. To me, that means you go to places where no one's paying attention, where companies that have been beaten down and forgotten about, and you catch an inflection in the business, whether it's cyclical, you know, like in commodities, or it's secular, like what I see in newspapers, but I catch these inflections. And, you know, one of my favorite types of inflections is good co-badco. And you have a situation here where traditional

print newspaper has been declining pretty much since the day I was born. Through my entire investment career, about once a year, someone does a great write-up about how newspapers are really cheap. And then they just keep declining. and, you know, capital gets destroyed. And the good co is the digital business where, you know, it's growing very, very fast. And at least consistently be growing around 50% a year. The thing is that for many years, no one cared because digital was one, and it became one and a half, and it became two, you know, a percent of the total revenue. And so it just didn't really matter. And it's been kind of forgotten about. And what's changed really is that over the last few years,

digital's gotten to matter. Digital's now 34% of the revenue at that. Lee. Digital has great incremental gross margins. I mean, it's a lot better than printing. You have this big printing facility. You got newsprint and ink and employees. You got deliver the thing. I mean, that's a mediocre margin business versus digital where your incremental margins are massive. But what's happened is that digital's grown to the point where, you know, it's 34% of Lee. It grew, you know, 35% year over year. Digital subscriber numbers up 65% year over year. talking about Q421. And as a percentage of EBDA, 34% of revenue, but you're probably almost half the EBITDA, maybe even more. I don't know. They don't break it out. And so you

have this business as a digital business that's growing very fast. And it's basically taking the subscribers away from the print side. And no one's paying attention. I mean, look at other digital subscription sort of businesses. I don't want to say look at, you know, SaaS companies, but it's kind of the same thing. And these things trade at 20, 30, 50 times revenue and a lot of them lose money doing it. And here you have Lee, and it trades at, you know, less than one time's revenue. It trades at two times cash flow to equity. It trades at one and a half times even a.

And those metrics on the earnings side are horribly depressed because, you know, advertising is a big piece of the business. And COVID really clipped local advertising, particularly in the, the sectors where a local dominates like used cars or employment and those sort of sectors have just really suffered in COVID. And I think the advertising stuff bounces back. I think, and we put this in our 13D. We'll get that in a second. But I think EBIDA goes from about 116 over the last 12 months. I think it goes about 150 in 23. And that's a little bit of, you know, incremental growth of a subscriber. Remember, prints, you know, declining a little while digital's

growing. I think that's a nice pick up in advertising as things go back to normal in terms of COVID and local advertising. And there's some more cost cuts they're going to put through as well. But I think you get to about 150 of EBIT. I think you pay off over 100 million of debt between now and then. It's a levered balance sheet. I like publicly traded, you know, de-leveraging stories, especially when your cost of capital is nine. And, you know, you de-lever it by one turn and then refi it to a normal number. And so overall, I think they get to 150 of EBIDA. I think they're north of 100 of cash flow. I think you put a 15 multiple in that EBITDA. And I think you have a $300 stock price versus today, as I'm talking, we're at 31. So I followed a 13D. I've never done

activism before. I've always thought that guys who are, you know, throwing hand grenades at management often don't understand the situation. Quite honestly, I got too much on my plate to go fight. battles. If I don't like what management's doing, I'll just pass. But here's a situation where I saw an undervalued stock. A PE firm basically made a hostile offer. I didn't like the price. I mean, I'm not going to sell a company at one and a half times cash flow. That's lunacy. And so management took their sweet time in responding. And I threw out of 13D to say that I wouldn't be tendering in my shares, you know, where the second largest shareholder. And I kind of napkin math showed why I flip the shares are undervalued. And since then, management's thankfully rejected the offer. And since I've

already publicly out there saying why I think this thing is cheap, I figured I'd come on your show and let's talk about it because I think it's one of the great opportunities that's being missed. You know, you have his digital native business that's growing super fast. Remember, 60%, 65% subscriber growth, 35% total digital revenue growth. And it's two times cash flow. It seems the wrong price. price, you know, in every way possible. So let's talk about it. No, look, that was a fantastic overview. And I think the thing that jumps out to me the most is, you know, the valuation. It's two times cash flow, as you say. People have to remember that because these have really transitioned to digital, like there's very little capax associated with them. So when you say

EBITDA, you're almost talking unlevered pre-tax, pre-interest cash flow. It's almost straight through to the bottom line. But so, and, you know, it's two times cash flow. And you said, hey, it's 100 million or 110 million need about it this year, you think it's 150 a few years from now. So two times cash flow and growing is not a combo you see a lot. I want to dive into lots of pieces there. But let's start with something. You know, when you say, I think, I believe the line in your 13D and your press release, which all included in the show notes for anyone who's listening, you say, hey, Alden's offering,

it was 25 or 28 or something per share. And you say they're missing a zero in their valuation. And then when you were talking just now, slap a 15 times. multiple on 2,025 or whatever earnings, I get to a $300 stock price. So I think the first thing that people are going to push back is, where are you getting 15 times EBDA multiple for this? Because right now it trades for two, going from 2 to 15. That's a pretty big jump.

Can you kind of walk me through the math to back up 15 times EBDA? What comps are you using? What kind of, what are you putting that up? So I'm not a big comps guy. I've just never believed in it. I think the whole sector is depressed when it comes to newspapers. Even, I think the industry leader, which is New York Times, which trades at like 22, 23 times EBE.

It's kind of what I was driving at, yeah. So, I mean, look, that's a seven turns discount to the industry leader, which is a sizable discount. But, I mean, finding digitally native businesses that are growing really, really fast that, you know, trade this cheaply. I just think the whole sector is misprice and misunderstood. New York Times is five years further along in the digital transfer. information. But, you know, there are only 52% digital revenue right now. It's probably

about 75% digital EBITDA. So it's about five years further along. It's got a much better multiple than Lee. But I would even say that's sort of cheap. In a zero interest rate world where, you know, you're going to have some inflation coming. There's a lot of latent pricing power in these businesses, because it's a digital business. I mean, there's the whole reason software is so attractive. There's almost no cap X in the business. I mean, Lee is going to have 10 million of KAPX this year. There's almost no physical assets. There are some printing plants that eventually will be sold off and cash will come to the balance sheet. You have a fixed cost of your journalism, your distribution, your IT, and every dollar is incremental. When it's

growing, it's got ridiculously high margins. I mean, the return on invested capital should be over 100. It's the reason that software is so attractive as a business. And I think this should get similar sort of multiples. I mean, if it's growing, obviously, if it's a shrinking business, two, three, four is probably the right number. But what I'm trying to say is that it's a rapidly growing business. It has been for a while. And we're at the inflection now. You know, you have this line which is a print and that's been going down. And you have digital going up and they're crossing. I mean, Lee now has had a positive subscriber growth for the first, in revenue for the first time, literally since I got into finance, you know, you know, advertising growth.

now. And you can say advertising is growing this year over last year because of COVID, whatever. But, you know, it's growing. And, you know, I think the real, the thing that kind of kept me skeptical for a bit was, you know, when you look at the last couple of quarters, look, you had a really good news cycle last year. And there's some rollover, you know, you had COVID, which is probably the biggest news cycle event in 20 years. You had the U.S. elections. You had riots. You had the economic fallout of COVID. Like, there's a lot of stuff that happened that people were looking for news. And so as you get to this year and you're looking at, you know, calendar Q3, which Lee just reported,

I mean, they had their fastest subscriber growth. I think they've had yet. You know, they're 65% digital subscriber growth. And there's been nothing happening in the news this year. Like, Omicron, okay, that was like a day. Like, you know, there's no news cycle. So it's not just people, you know, grabbing for the news. this true interest in regional news, local news.

And so when you believe that this cycle has something more behind it than just a good news cycle, you believe the revenue is sustainable or even growing, it should trade at a better multiple. I mean, just do a DCF on this and use some sort of, you know, reasonable discount, right? And what do you think a company that's growing 60% a year with 90%, 95% incremental margins is worth on a multiple. And you know, you have a terminal growth rate and it probably stabilizes it, you know, some percentage of the population, but they have 50 million uniques and they have 400,000 subscribers. I mean, why can't it get to 5% of their unique pay? And if you get there,

I mean, even business, that's much bigger. Let me, I just want to dive in here, because I know you are bullish on local news and the company, people can look at my notes. I've got some clips from their Investor Day and everything where they say, hey, we're the leader in local news. We, we have these 500,000 or one million person towns that no one else is there. We're doing local. We're like pretty much the only gaming town. That's a massive moat. And I definitely get that. But I keep thinking back to two different things. A, and this is politics. I don't want to dive into politics or anything, but, you know, I look at the nationalization of politics. You know, 20, 30 years ago, you could have a state that was red that was electing a Democratic senator who

was kind of moderate or that type of stuff. Today, you don't really get that anymore, right? I think there's stats where it's like 95% of people, they just vote down party lines, president, senator, all that. And I think about that in terms of the news. It does feel like there's a nationalization of news. And I worry about the Halloween out of local is going to be a big head one for them. And I'll roll that into another thing. Like, I look at something like the athletic, which tried to do, it was basically local news for sports, right? Really in depth, really, and that business has really struggled. Now, that was only sports, but they were going to do subscription, cover great. And there was even a little bit of a network effect where, hey,

you really like the Saints. Just sign up for the Saints and we'll give you all of our local NFL coverage for free, right? But I look at those two things and they've, they've all really struggled. So I worry that they think that Lee says in their thing, local is a huge moat for you. You just described why local is a huge promote. And I get that, but I also worry, is this, you know, is nationalization? Is the market just, shrinking on them. Does that all make sense? Yeah, and I think we had talked about this five years ago. I think I would have agreed with you, maybe even three years ago. I think there's actually a real trend, you know, a 50, 75 year trend towards globalization. I think it's swung the

other way. I don't know if it's a, you know, short-term pullback of a long-term trend or a real trend change, but I think there's a real trend away from globalization right now. I mean, obviously, you know, you're sitting in Manhattan and your full-on globalization, that's I'm just a full globalization here. I'm one of the global elites now. Yeah, yeah. But I mean, I think the guys in smaller cities, they're saying, I don't care what happens at national news. I have no control over it. I don't care what happens global. I want to know what's happening local. I mean, when you look at the local news, the things that people care the most about is usually tied to property values because that's their biggest investment. So they want to know what's happening in their town, you know, what's getting permitted, what's getting built, infrastructure, transit, you know, shopping mall. Am I getting a Walmart next to me versus getting, a whole food. So that's going to dramatically change, you know, the value of my home if I'm five miles away. What's happening with a zoning school board? I mean, these are the things that people want to know about because they want to know if they need to go protest or do something

about it. They want to know what's going to change in their, you know, financial situation. They want to know what's happening local sports. They want to know, you know, college sports, high school, all that. They want to know. They want to know, you know, just they saw sirens last night, what happened. And it's hard to get that sort of information. You want national news or global news. Go to Twitter. You'll get, you know, a thousand bad tapes. You know, you want to know why there was a police copter above your house last night. I don't know where to go look. And so I think that's part of what's really growing this. There's a lack of good information. And, you know, the products changed also. You know, it's when it was a print product, you know, the news was 12 hours sale.

It's used because of the cost of printing distribution, it was expensive. I mean, think about it, you have a middle class family spending 50, maybe even $100 a month for the paper. I mean, that's a big cost. Now it's like $7. And it has like embedded digital, it has embedded video and it links to a prior article on the topic. It's an infinitely better product in a lot of ways. And I think that's what's growing this. I mean, if you look at Lee and they have 77 papers, you know, their 10 biggest are slowly shrinking.

quite honestly, in terms of page views and Uniques, St. Louis, Buffalo, those guys are swinging national. And I would add that management would say that they've done some things with the gating function as to how many free articles you get before you hit a paywall. And so they'd say that that's part of it. And they've targeted those newspapers first rather than the regional ones.

So data sometimes lies, keep that in mind. But you're seeing less users of those. those bigger papers. The next 10 down are growing, you know, single digit, maybe low teens. And the next 57, those are growing like 20. Some of them are 100% a year. Like the guys who are local, I mean, in smaller towns, you know, towns of a quarter million, half million, they really want this information that no one's covering and Lee is the only place to get it. And Lee's really doing well in those markets. That makes little simple. Let me ask you, because you mentioned it, their smallest papers are growing 20,

some of them 100% year over year. You know, Lee's got some quotes. I'm trying to find it. But basically Lee says, hey, for the past two years, we are the fastest growing digital media company out there, right? I think they might qualify it with news or something. But they say, we're faster than New York Times. We're faster than WAPO.

Like, you compare us to anyone. We're fast. And you love to see fast growth, right? Like, when you're growing that fast, it's awesome. But I did wonder with the small papers you refer to with what they're saying, are they just gaming, like, really small numbers? You know, like, okay, cool, our smallest paper is growing 200% year over year. But yet, last year it was $1,000 in online revenue.

And this year, it's going to be $3,000 or something. Do you worry about anything like that? Well, I mean, they just put out their K and has all their subscriber numbers per paper. So you can look at it. And some of the smaller papers, yeah, they have, you know, a few thousand subs. You know, it's not like such small numbers, but it's small numbers. And so, you know, you have a base effect that has huge multiplier. It's going to, but what I think is interesting is that,

Here we are, and now, you know, you're comping with, look, they have 402,000 paid subscribers now. So it's not like a nothing number. And the subscriber growth is actually accelerating now. And like I said, it's accelerating against really hard comps. You know, on a two-year stack, the numbers are, you know, stupid. But you would have thought it would decelerate against, you know, election last year and COVID last year. And it's accelerating. So, no, I think they've played with the ad tech more.

They've played with, you know, how they market the product. They've played with the paywall gate a bit more. I mean, look, five years ago, they gave the product away for free on the website and then hoped someone paid for the print version and it didn't work. You know, it's come a long way. And I think these guys are going to keep iterating with this. There's a lot of, you know, text that you can buy, you know, white label. I know they've built some of the stuff themselves as well.

I think they're just learning how to do this smarter and better over time, trial and error. But yeah, look, it's off a small-ish base, but they're only a million print subscribers and they're 400,000 digital subscribers. And some of it's cannibalizing the print, but the total subscriber number is growing too. Perfect. Let me ask the next most obvious question, right? So I treated this out, and I've kind of been, it's not a perfect analogy, but 10 years ago, it was clear that the future of retail was in large part digital. You know, I think people, five years ago, people thought physical was completely going away, which was, I think, too much. But, you know, it was clear that digital was going to be the future. And if you have bought one of the market

leaders, Walmart or Target, you know, best in class physical retailers, you did fine. If you bought one of the worst retailers, so I think of Macy's or, you know, the second tier department stores like Sears, those are all bankrupt or Macy's is just perpetually, hey, we're going to try and do something. They've got so much Herald Square value in that real estate, but the stock's gone nowhere. the best play, though, would have just been to go by Amazon, right? So I think about that. And then in the same lens, I look at this company, I look at the board and I say, okay, well, half the board's been on this company since 2000. The other half's been here since 2015. You know, the CEO doesn't exactly have a digital background. And I just kind of mesh those two together. And I wonder,

like, all right, the least story sounds nice. It's got a little bit of a moat. But you've got a CEO who's probably not who would be my first choice for a massively growing digital subscription business, a board that's pretty tired and doesn't have a lot of skills here. And then I just keep thinking of that, oh, you know, if you bought the laggard in retail, it didn't work out well for you. Are we buying the laggard in news here, if that makes sense? Yeah, I mean, I worry about that, too. I wish there were some younger guys on the board. You know, I feel like, you know, you could have some younger people throughout the company at the same time you know they're beating everyone else it might just be that everyone else is you know even older i don't really know um you know

so look i think over time and that's really the opportunity i think these guys realize that they need some fresher younger blood involved i think they're going to grab some guys out of a facebook or a google and really get the ad tech better i mean if you think of it consensus Step one is get to a few million paid readers because you could track the readers. You know, everyone has a unique sign-in. Everyone has a unique account. You could see what articles they read. You could actually build up digital data on the person so you can have targeted advertising.

Right now, they don't have that capability, really. They sort of know, you know, basically what zip code you're in. That's it. There's a lot of things to be done. And it reminds me of Facebook when they first IPOed it. And everyone's like, wow, you have a lot of eyeballs. What are you going to do with it? You know, so step one is get a lot of eyeballs on digital.

Because when they're on print, you have zero data. Step two is modernization. And step one seems to be going very well. That's kind of all I can say. It does make sense to me. At the same time, I'm like, oh, we're in, we're almost in 2022. And they still can only target like, hey, we're pretty sure you're reading, you know, the Buffalo local news.

We're pretty sure you're in Buffalo. Like, that's the best they can do in 2022, where if I go on to, you know, choose your online retailer's site. If I go onto it once by accident or I shop for sweatpants, like every site for the next 10 days, all I'm getting hit with is that ad. It's like, these guys are so far behind. But that's part of the opportunity, right? This is very low-hanging fruit. There's a reason this trades at two times cash flow, put it that way. Yeah, yeah. Related question. You're obviously very bullish on local news. And I think the way you're really expressing it is through Lee, right? Yeah, I've got a link to the thing you posted last week

on the heels of your 13D, which shows you own, I believe, a local Australian newspaper. You own a little bit of GCI, Gennett, which owns USA Today as well as some local newspaper. Dallas Local News, which I didn't even realize was publicly traded until you posted that site. It's a net net. It trades a half of cash. But I, well, nobody beat me to looking at that one. That's later on the list for today. But I think Lee is your largest play here.

You can correct me if I'm wrong with it. Why, why Lee over the other people, right? because you're bullish local news, why not just equal weight of basket? Why not go Dallas local news, which is net net? I've always a little bit biased to connect just because I like USA Today and that national brand. New York Times and WAPO have been very successful. USA Today is not either them, but they've got a little bit of a national brand. Why is Lee the play?

So I've looked at a lot of these that are publicly traded. And I do basket approach usually when I invest in something. So the first step is to get a pure play of what I want. So I started eliminating the guys with television stations with, you know, big radio exposures, you know, because radio's going nowhere. It's probably going to be shrinking. I want to have pure play on this digital transformation of print. So we eliminated a lot. From there, we started looking through them and saying, you know, what are the assets? What are the opportunities? You know, we owned a lot of reach in the UK. But it tripled on me. And I said, let's reallocate it to leaks. It's kind of the same trade. We still own a lot of New Zealand Herald. dominant business, very, very cheap with a lot of hidden assets there. But to me, Lee is the most interesting. We looked at like New York Times, but it's kind of mature at this point. The transformation is already, people know what's happening. And you're really just buying a crossword business at the end. Well, I don't disagree with you there. People know what's

happening. But I have looked at loosely looked at New York Times in the past. And I'm always interested because, and Lee could follow something similar. It won't be on the same scale. Again, this is the National versus Local. But New York Times owns like four of the top 10 podcasts in the U.S., right? Like the daily, I think is the biggest podcast in the U.S., probably behind Joe Rogan. But the daily, that is valuable. And, you know, if you're bullish towards podcast monetization or those opportunities,

like, now New York Times 20 times, EBITA, as you said, Lee's two times. We're missing a zero. But that is, it is interesting. What's the right multiple for New York Times as, it gets to be 100% digital as the margins expand, as the revenue keeps growing, as the user base keeps growing, you know, it's not going to be doing 60% growth because everyone already knows about the New York Times, but why can't do 10% you know, revenue growth before any pricing effects? Like for an inflation resistant business, why doesn't this trade at a, you know,

30, 40 times EBIT off? You know, I think there's a lot of upside there. It's just not like home run upside like Lee. Yeah, I mean, when I was looking at Lee versus Say, Gennett, I mean, my problem with Ginnett is that it's a recent merger of two companies, just like Lee is, but they haven't figured out the top line yet. The top line is still, you know, double digits negative. And so you don't know where it's going to bottom out, even though digital's growing fast, the top line's still shrinking. And if the top line's shrinking with high incremental gross margins, you don't really know what your stabilized EBIT is. I mean, if stabilized EBITDA bottoms out, you know, down from here, well, on a levered balance sheet, you don't really have anything. So, you know, I like the risk reward a lot better at Lee. There's no covenant debt. It's 9% which is high, but there's no covenants. We know we're even as bottomed out at. It's actually growing again. The top line's growing again. Part of it's, you know, comping against COVID on the advertising, but the subscription side's growing too. I mean, I think the subscription side will start growing quite rapidly as digital goes from 34 to like 40% of the business. So, you know, you're going to have

acceleration here. And usually stuff gets priced on the second derivative in finance, and the first derivative is positive, and the second derivative is accelerating. You know, I think conceptually also, Gannette is very much tied to USA Today, and USA Today is stuck in, it's kind of in stuck in no man's land. It's not a local paper, so it's not a monopoly business. It's not the New York Times or WAPO for national and international news. It kind of doesn't really have an identity. It's just stuck in the middle, and it's been losing market share for years and years and years because everything on USA Today, you can find on Twitter for free. The whole point of Lee is that for $7, you can't find out what happened at the school board meeting on Twitter for free.

Or maybe you can, but it takes a lot of effort. And you can find out, but it'll probably be really biased, right? It'll be the people who went and were yelling. They'll be the people posting a lot on Twitter. So you'll get a, whereas the hope is with Lee, you get an unbiased reporter who's actually going to report, here are the facts, just the facts, man. This is what happened. And there's value in that. Whereas, as you said, for national, you can probably find a unbiased report of any national event somewhere. Or you can triangulate for biased people and come to where the middle is. Yeah. Yeah. So USAID just doesn't really have an identity. And if you don't have an identity, what's the product you're selling? So. But they also. do have, so what I think is interesting with Gannett is that they do have the biggest number of local newspapers. So as USA Today gets to be a smaller piece of business, those should keep

growing. And what they've shown is that if you have a lot of eyeballs, ways to monetize those eyeballs that are beyond just subscription and advertising. You know, they just did a huge sports betting deal, which is going to really move the numbers for them. If you look at what Reach has done in the UK. They have click-through marketing, a product. So you can go right through from, here's a product. We give you an article about the product, click through to product fulfillment. It's in your house next day. And they're getting a commission on that. I mean, it's almost journalism, you know, in advertising merging, but some of it's really interesting. You know, they've done this with travel now. They've done this with, you know, individual just, you know,

products delivered to your house. Like, I think that's the future where this is going, where rather than, you know, selling someone else's advertising inventory, you partner with them, and you give the inventory away for free, and it's all based on a success function. Because the newspapers know where to place the ads. And those are a lot more valuable than people are giving them credit for. New York Times is something like wirecutter or something. Obviously, it's buried inside New York Times, but you frequently hear that the money they're making from those things. Go look at CNN's front page. They always have the CNN. It's basically CNN product placement, exactly what you're saying. Like, it is questionable, right?

You do worry that they're hurting their brand by pitching all these products and stuff, but there's so much money to be made from it. Everyone else is going for it. And as you said, that seems like an area of very easy upside for Lee. Let me ask you, you mentioned earlier mergers and acquisitions. And I have two questions on M&A, one negative and one positive, because I'm trying to push on your thesis. I'll start with the negative.

They bought Berkshire Hathaway's newspapers, the Buffalo print was the big one, but there were one or two others in there. there were several others in there. They bought them. The deal closed March 16, 2020, which is a weird time to close a deal. But they bought that. And they even say in their presentations, I've got a quote in my thing. They're like, look, we're, Berkshire Hathaway chose us to be their partner. Berkshire Hathaway did our debt, did our cap structure. Like, what a sign of approval for Warren Buffett? I think Warren Buffett even had a quote in the Lee press release announcing that they were buying Berkshire Hathaway's deals, which is great. But then I also

look at and I say, well, Warren Buffett sold his newspapers to you instead of taking equity, which he very easily could have rolled equity if you really like this. Now, this is small potatoes for him, but he could have rolled equity. Instead, he took almost loan shark debt, right? 9% interest rate, huge covenants on the debt. I believe that there's a big change of control, pay out on the debt. They can prepay it, but 9% debt. He didn't take equity. He took debt. So I look at that and I say, well, Warren Buffett, maybe the smartest investor of all time. obviously small potatoes here, but he didn't roll. He took debt. That's very unlike him. So wasn't he kind of saying, I don't believe that these guys are capable of doing this?

I don't know about that. I mean, look, 9% debt, but it was actually cheaper than the debt they had. And it comes with no, it comes with no covenants. I thought there was no, I thought they said there was covenants, no, no dividends, no share buybacks. Obviously, there's no I need to covenants, but, you know, there's a cash sweep. So there's no EBITCOvenants or performance covenants, whereas the prior debt they had, had a couple tiers of it was higher cost debt, and had really had some teeth in there if they didn't perform. And so, I think Buffett actually refied the debt on better terms. Why didn't he take equity? I don't really know. It's small numbers, but, you know, they were managing, Buffett bought a bunch of papers as a value investor.

and really lost his ass at it. And he brought in a lead to manage the Berkshire newspapers because he couldn't find the right guys to run it. Because it's a scale business in the end, especially now that you need tech. 50 years ago, you had a printing press. Anyone could print a newspaper. You could actually borrow someone else's printing press

and let them print your paper and let them distribute it to you. Now it's really about the tech stack and you need a huge scale to get synergies on your R&D. And he just wasn't there. He brought in Lee to manage it. Lee did an okay job managing it. I think he just kind of realized that, you know, an outsource management wasn't the way to do it.

And this was a way for him to take a tax loss and, you know, kick the can. I think there's also a bit of like a civic pride thing there because Lee ended up acquiring a lot of Omaha sort of papers. I think he wanted those papers to end up in the right hands, you know, right hands, so to speak, of guys that would actually take care of the papers and not just got them. And so I think there's like a civic pride sort of thing there too. But I mean, he's getting 9%. So he's still kind of sharking a little.

Okay. Let me ask you the other side of MNA, right? There's lots of other local newspapers out there. We have seen M&A in the local newspaper industry, mainly Alden going and buying up everything that moves. But I look at their acquisition of Berkshire Hathaway. I'm trying to find my notes. I think they originally said, hey, we're going to buy Berkshire's papers and we're going

to realize 20 to 25 million in synergies. and then I believe at their investor day, they said, oh, actually we realized, what was it? Almost 100 million in synergies is what they realized. Yeah, so here's the quote. Originally we got it to 2025 million in synergies. In the first nine months, we realized 103 million in cost reductions. And I look at that and I say, wow, there are synergies to be had here. So the flip side is, you know, people ask them about their capital allocation.

They want to get to their two and a half times debt target. They're not quite there yet. But I look at all those numbers and I say, is there more opportunity for them to go buy? more local newspapers at, you know, pretty distressed prices and get these synergies and play more on the local news theme that you're so bullish on? Yeah, I think there's a lot of opportunity once you have your tech stack built and once you have your distribution platform. I think there's a lot of opportunities. I think there's a lot of synergy here. Obviously, they have to get their debt and get their house in order a bit more. I mean, I think the issue, though, is that a lot of the

newspapers are very slow or have been slow on the digital transformation. So if you go and buy a newspaper that's 10% digital or 20% digital, you have a long road to transition it into where Lee is today. If you look at what they did when they bought BH Media, you know, they were already one-third, you know, high 30s for digital revenue. And when they bought BH Media, we set all their numbers down into the 20s again because BH Media was almost as large as them and had almost no digital. Yep. So, you know, you look at it, you know, their traditional papers are probably half digital now, whereas VH papers are in the 20s or high 20s. So I'm not sure how much more they want to buy a traditional print because it takes five

years to really transition it into digital. But I think there's going to be opportunities there on the acquisition synergy side for sure. Let me flip. They've got a subsidiary called Town News Digital Service, which I'm just including quotes from their press release and their 10K. People can go look into 10K press release. the leading web hosting provider

and number one content service provider of local newspapers. Past 10 years, 10% compound annual growth rate, attractive 47% margins. It does a lot of the back end for lease papers, but they also have third parties who use them for the back end.

And I've got a few questions in this business. The first thing, when I look at something like that, I think they have an 87.5% of it, I look at something like that and say, oh, well, if they're going to host third parties, wouldn't make sense to spin this out and have it

as a standalone independent company or anything or, you know, what's the value there? Is there hidden value here? All that type of stuff. So I'm hoping you could just maybe talk a little bit about the town news subsidiary. So that's a really valuable asset. It's a SaaS business that does the back end for smaller newspapers that are too small for me to care about. But it's also, you know, your college newspaper, your high school newspaper. Now, they're doing all the digital background of that. I think there's a huge opportunity there. I think it's a really valuable asset. I think it's a little too small to be spun out, quite honestly. If you start allocating public company costs to it, what is it, it's like $25 million

of revenue, you know, so there's about $12 million of EBITDA there, there's a little corporate SGDA allocated. I mean, what's a $10 million EBIT business? I mean, it would be $5 million of public company costs. I don't see why you spend it out. Yeah. I think the more interesting thing is you keep using that with the digital marketing platform that Lee has in-house, and you're basically, Lee is going to be earning.

advertising fees for placing advertisements on the local college paper. I think it all kind of works together in a way. I don't think you'd spend it out. But it's a SaaS business. And as we all know, SaaS business is traded for like 40 times of revenue. Not anymore. They used to. That was six months ago. Get with the times. Now they're 30 times. But a lot of them aren't profitable, which is the crazy thing. These are all subscription businesses that are growing fast. And a lot of these things aren't growing fast anymore. Just on town news. So it's growing quickly.

In their 10K, they break out the revenue line. Obviously, town news does internally revenue, which can't be included in the 10K, right? But when I look at, I believe the 10K has got the third party revenue. So fiscal year 2019, 8.9 million in revenue for town year, town news. Fiscal year 2021, so I skipped the COVID year, which was down a little bit. But fiscal year, 2021, 19 million in town news digital revenue. I look at that and say, well, they're saying it's valuable. I definitely hear the upside you're making, but it was down in fiscal 2020 a little bit.

It was basically flat from 2019 to 2021 on external revenue. I think it's actually comp positive every quarter for like 10 years an hour since they got into it. I think that includes the Lee internal revenue. You would know better than me. This is just a glance at the 10K, but I'm looking at it right now. 2019, 18.88 million in revenue, 2020, 18.1, 2021, 19 million. So I'm not trying to word, number vomit at you. But I just look at that and I say, has the growth kind of sold out our third parties not going to this platform anymore, or am I just looking at that

wrong? I think it's still growing. I mean, there could be some, you know, intercompany, because I think the number is 26 when you include. It's 27 million, but I believe that includes the Lee revenue side. Yeah. Yeah, yeah. I don't know. I think it just moves around. I mean, I don't think they're losing any customers. I mean, there's competing platforms. I don't think they're really losing anyone. Just because once you're embedded in this software, you're not going to switch, you know, and these guys are the biggest nationally. I don't think you'd go somewhere else. it might be, you mentioned high school and college newspapers. It might be a lot of high school and college newspapers just weren't reopening or were running a lot slower in COVID. But I was just wondering because they paint a very bullish picture. And when I saw that revenue line item, it jumped out to me. It's not growing super fast compared to the rest of Lee, but it's just this great annuity business

that they own. And I think there's a lot of synergies there. One of the things Lee's had success, You know, you've mentioned they're toying around with how quickly you hit the paywall limit if you're just browsing free articles. They've gone from a lot of their newspapers. Obviously, newspapers used to publish every day. Lots of newspapers now publish three or four times a week, which cuts cost, but kind of keeps the subscribers happy, all that type of stuff. Is there any other kind of obvious levers? I know I asked this because I know you've looked at tons of local newspapers across the globe. Are there any obvious levers that Lee hasn't pulled yet or has just started to pull that you're, kind of excited about them to, you know, keep pulling and juice the business a little bit more? I think they're super early on the advertising side, like super early, just customer data.

It's like the first innings of knowing about the customer and then being able to target advertising. I mean, that's going to be huge. I think being able to sell through, being able to create other products to sell through. I mean, I've just seen all the models other people have used. There's so many things you can do when you have 50 million eyeballs that, you know, it's just like I would have never thought Gannett could have done a sports betting partnership. I could just never thought about it. You know, you look at what a New Zealand Herald's done where they basically created the Zillow of New Zealand. I mean, they took it from nothing, like zero market share. They're about 40% market share against a P.E-backed Zillow clone.

Yeah. P.E. Zach, back Zillow clones been there for years. And New Zealand Herald caught them in 18 months because they had the eyeballs they had the free advertising inventory. Plus they could control how the narrative gets relayed to people. There's just so much you can do

with those eyeballs. The eyeballs are really undervalued and we're just going to see what other people do and I'm sure Lee will copy them. All these guys seem to be copying each other with like a one-year leg. Something works and everyone does it. And everyone's copying New York Times

because they've been doing this the longest. And you know, And this thing is a lot more opportunity. I can't quantify it, though. Do you think sports betting is in Lee's future? Because, you know, as you mentioned, you mentioned the Gannett deal where they got paid a pretty nice sum for doing, I can't remember what it was exactly, but you look at the RSNs. All the RSNs are rebranding. You know, it used to be Fox SportsNet. Now they're all Bailey's SportsNet or something, right, where there's this huge boom for digital gambling and online gambling and they're paying. And when I look

at the local newspapers, you know, that's a great spot for local sports. One of of the issues is, you know, if you are, if you're in Omaha, there's not a big local Omaha sports team, right? I mean, maybe the college team or something, but it's not like New York where everybody, Knicks, Rangers, all that type of stuff. But I could still see, hey, let's go to the Omaha local paper, rebrand them and we'll have people bet on Nebraska games or whatever. Do you think there's going to be some digital gambling revenue flowing in them, either marketing or something else? Hard to say. I mean, it would make logical sense, but I don't want to, you know, jump the gun until, you know, they actually go do it. Yeah, I just think there's a lot

of stuff. I think the more interesting stuff is really going to be, you know, click through to fulfillment, whether it's, you know, restaurants or it's couponing. When I've seen this where people take their cell phone in and, you know, you remember that big stack of coupons used to get and you cut them out and you get like 25 cents off Campbell's soup. That's all going to be literally on your cell phone. You just can scan it and it's going to come through your newspaper. I think there's just all these things that the tech is there, and it just needs to be adopted. But the first step is to go from 400,000 to, you know, a million or two or five million uniques. And, you know, they're really focused on that piece of it right now. All right. Last question I'm going to have for you,

and then I'll let you kind of wrap up with closing thoughts. But this is what I call build my some of the parts model question, right? So trailing revenue is about 800 million. Of that 254 million is digital, I believe. They've got 117 million in EBIT off for the total company. Now, they haven't broken down the margins for digital versus the trailing company. So you can start playing numbers, right? You can say, oh, if I think digital is 50% EBDA, well, then the rest of the business is basically flat.

But I think digital is 25% EBITDA margin, well, the rest of the business generating 50. So my question to you, because most people I think are probably going to want to value this as let's look at the digital business and let's look at everything else as just kind of runoff Ice Cube that's supporting the digital business. I guess you could say what value would you put on digital because you could do revenue. But I've been thinking of it as let's take the digital revenue. Let's put an EBDA margin on it. That's how much the digital business is generating. And then let's look at Remainco. So what margin do you think the digital business operates at? Or would it operate at scale kind of once it's fully grown? I think it's a difficult

question. I've thought a lot about this. You basically have a centralized resource of journalists. Yep. And it's really hard to allocate, you know, 30% of the cost of a journalist or 34% of the cost of journalists to digital. I mean, I guess you could in a model, but it just seems like a difficult way to conceptually think about it all. In the end, we know that outside of credit card processing fees, everything else is free revenue. And so, you know, if you look at payroll and then the problem is like they have a whole other cost line and it's not clear how much that is printing costs and delivery costs and distribution costs versus, you know, IT costs versus, you know, corporate overheads. I mean, the disclosure isn't there. And I think it's really hard to break it all apart, I guess, is what I'm saying. And I just haven't gone down that exercise. I think print will stick around for a very long time. I think if you were meant to go to digital, you've done it by now, or you're like my parents who will never, you know, 10 or 20 years from now, they'll still be getting print.

I've talked about this story with a lot of my friends. I have friends who are in their 30s, and they tell me they genuinely just prefer to read the print. Yeah. And I shake my head and I'm all confused and they've walked me through it. I can't think of anything I would ever want to do. like you have this stupid thing, you have to fold it, and there's all the, you get the crease, you got a fold, you get newsprint on your hands. But they're saying, yeah, you know, I'm there

and, you know, I see something interesting. I cut it out. And if I, you know, I highlight stuff, I just read it better than on a little tiny screen. I don't know. I'm with you. One of those things, it will decline, but at this point, if you were going to cut, you've done it, right? So it will still decline as the majority of people who get physical die off. But it's probably a slower decline going forward because if you haven't cut now, what are you waiting on? I think what's interesting, actually, is that the subscriber side of print, it's kind of been declining like two, three, four percent and they make a little bit up on cost increasing. What they've actually lost out on on print is a single copy, where there's a large contingent

of people, for whatever reason, they go to a train station and they pay $2 every day at the coffee stand. And they could get a subscription to their house, but they'd wrap. rather buy it at the train station or read it on the train. And those single copy additions, you know, in coffee shops around the world, that's what they've really lost out on with the pandemic. And that's our highest margin product, actually, outside of the digital. And that, I think, will actually come back a bit as people start going back to work. But when you look at the print side, that's really where these newspapers have suffered. Yeah. No, that all makes

sense. I just asked, again, this was the build your sum, build my sum of the parts model for me question, because as you said, the numbers get really interesting where if, if you believe the digital business is worth a revenue multiple, right? Now, you have to back up a revenue multiple. You can't just say, I think it's worth 10 times revenue. You have to back it up with some assumptions, but I don't think it's crazy to say, hey, if you think this is a 33% margin digital business that's growing, Let's just face this on cash flow. Let's assume that in 2023, this is north of 40% of total revenue. We're at 34 now. North of 40, low 40s, mid 40s is going to be digital. And digital has better margins. So if they're at, let's call it 40% digital revenue. Let's say it's 65% digital

EBITDA. And so you're predominantly a digital business. You know, the print kind of subsidizes the rest of it. And, you know, we're at 117 now for EBITDA, and that's during, you know, COVID just smashing the advertising business. Why can't it be 150? Yep. I think these are not heroic assumptions. And I don't see why 15 times. Maybe maybe you take a couple you're wrong. It's only 10 times. Well, then you're still a triple digit share price, especially because you're going to pay down a lot of debt. I agree with you. My question was just like, or the math I was going to walk through was if you think this digital is a 33% margin business, then if you slap a four times revenue multiple on it, you're basically saying that's a 12

times EBITAM multiple, which is not crazy for a digital business that just grew 50% year over year, a little bit of acquisition comps, but it's growing, right? So 12 times EVs is not crazy. That would imply a billion dollars of value for the digital business, which net of debt is $100 per share, and then you get the remain code, the declining traditional stuff, and whatever assets they have in there, you know, that's not huge, but you get that for free. And I just said $100 per share on a $30 stock. Like, that's pretty interesting, right? Yeah.

And I also think, I mean, you're saying 12 times EBDA. I mean, let's do an EBDA of cash flow walk. Okay. There's going to be about 10 million of true CAPX. And a lot of that's going to print. You know, all the IT, all the R&D, that's all getting expense. You know, they're not pulling this out like a lot of the SaaS companies do. They dump it into R&D.

This is just going through. OPEX. You're going to have a cash interest expense. You're going to pay some taxes. But it's basically almost a straight walk. You don't have this giant depreciation thing. You don't have, you know, all these other things that are debited out of EBITDA. I mean, the pensions overfunded, you know, stock expense is reasonable here. It's not, you know, your SaaS company where you walk from adjusted EBITA and there's nothing left, you know. I'm just laughing to myself because I just made an argument. that said, hey, the digital business is worth $100 per share with a $30 share price.

And you came back to me with, hey, that sounds good. But let me tell you why that multiple might be too low. What's the right multiple? I mean, I don't know what the right multiple is on a subscription business with low churn. But 12 sounds low to me because I can't find anything out of newspapers with similar multiples, you know, with low churns. A lot of the stuff you see with a subscription businesses, it's a cackpress LTV. and all the cash flow goes right back into marketing to grow the LTV. And then you look at the LTV and you do some back of the envelope and you're like,

that LTV isn't worth much, you know. And here I think the LTV is very high and the KAC is very low. Last question here. And then I'll give you closing thoughts. In March or April of this year, Tribune sold themselves. And Tribune at that point was pretty much only, pretty much only newspapers at this point, right? They sold themselves. I looked through the proxy. Lee and Gannett are even included as comps in their proxy, right? And they sold themselves for,

I don't know, five or six times even, something very low. Maybe seven, okay. But I just look at that and I say like there have been a lot of local newspaper sellers. And I get local newspapers, the sellers are often the people who owned at the heyday in the 90s, right? So they've been beaten. They thought these businesses were dead. they're selling just to salvage whatever's left of their investment. But I do look at them and say, hey, the people who own them are selling and, you know, they should have some clue what's going on, what's going on with the digital transition. And obviously you're early to this and you've done a lot of work on that.

But I just worry when I see, hey, there's a lot of people in the industry who are just, they're trying to get out despite what seems like a really attractive digital story. How do you kind of mesh those two thoughts? Well, I don't think Tribune should have sold at the price they were trading. I thought it was insane. I think it was a great business. Tribune was a little different than Lee, though. I mean, Chicago is kind of like a national market,

so it probably won't have the same impacts as Lee. The guy reading Tribune is just as likely to read New York Times, and Tribune is kind of a court in the middle. It's like USA Today. They had some regional markets as well. They were very strong regional markets. So it wasn't just Chicago. You know, Tribune, it was a really good.

restructuring, when bankrupt, you know, different shareholder base, different goals. So I don't really know, but I think the price that they sold it at was wrong, quite honestly. I think Alden got a great deal. And Alden, who bought Tribune, is also the people who are trying to buy Lee here. So Alden clearly has a view of what's going to happen in the local media space, and they want as much of it as they can get. Cuppie, you've done tons of work here. I think that shines throughout the podcast.

I just want to give you closing thoughts. Is there anything we didn't hit that you think we should talk about? Anything we kind of brushed over that you think we should have hit harder, anything like that? No, I think we hit it all. I mean, in the end, if the subscriber count keeps growing, this thing's going to be a huge success, as long as they can handle their debt in, you know, in economic crisis if advertising totally falls off. If the subscriber count doesn't grow, it's not going to work as a thesis. You know, a lot of things I own are, you know, you don't risk very much and you have a lot of upside.

This is one where because of the debt is some risk. And, you know, inflection sometimes don't inflex. So do your own work. But so far, it's been inflecting and it's inflecting against probably some of the hardest year-over-year comps they've ever had to face. And, you know, the growth is accelerating. So, you know, the main bare thesis we had a year ago when we were looking at this was, oh, everyone's stuck at home to Stimmy's.

Of course, they're buying newspaper, you know, digital. Because what else are you going to do? You're going to figure out, you know, what's open and what the government's talking about this week. but we're lapping that and it's accelerating. So I don't know. In the end, I own a lot of this. I'm biased. So keep that in mind.

If we had done the podcast last week before they put out the Q4 calls with the digital numbers, one of my questions would have been, hey, aren't we just like very similar to Peloton, right? Aren't we in the best time ever for them getting digital subscriptions? Because people are stuck at home. They've got nothing to do and they want to read the news. But you would have seen a decline in digital subscribers in Q4 if that was the case, right? because that's really when the weakness would have started to show.

And we did not see that. And in fact, I'm looking at digital subs went 337 in Q3 to 402 and Q4. I'm not sure if there's some gaining numbers, but it's not like it's not shrinking, right? So I do think that that COVID Peloton winner case has been disproven by those numbers. I mean, look, Q4 was 19.3% year-over-year growth. Q3 was only 9.1% year-over-year growth. Q2, which was absolute peak COVID, was 8% year-over-year growth. So, look, there was a bit of a comp effect because in Q2, they were comping against, you know, peak COVID.

But in Q2, is there is, is calendar Q1, by the way. Yes, yeah, yeah. You know, that was peak. Everyone's sitting at home doesn't know if they're going to die or not from, you know, from germs. So, you know, there was a bit of a comp effect. But Q4, you're comping against, you know, the elections, basically. it's 19.3. So it's just accelerating again. Yep. Yep. Totally. Anything else you want to say before we wrap this up? No, no. I mean, I'm excited to get on here and talk about this. Hey, well, you do great work.

And, you know, people know you for the uranium trade, which is awesome. We did a podcast on it in large part because you were pitching uranium. But I know you do great work. You were the one who told me, did I tell you, you told me to look at St. Joe. And I was in it for a while. I wish I had stayed in it. But I had a trip to go down to Joe, because you said, you've just got to go look at the land. You need to drive around for two days and look at it. I had a trip. It was planned for either like March 30th, 2020 or April 4th, 2020 or something, because I was going to do what you told me. And obviously, that did not happen. But you've done great work on Joe, Uranium, Lee. A lot of people think of you as macro, but you do good fundamental work. So I'm excited to have you on for the next one. That was Cuffy's pitch on Lee. I'm going to include a link to his

post that talked about why he's bullish local news. I'm going to include a link to his press release in 13D, which obviously talks Lee specific. And a link to KEDM, Cuppie's event-driven monitor for anyone who's interested in that. But Cuppie, thank you so much for coming on. Looking forward to having you on the next one. Sounds good. Thanks for having me on.