It's deemed a member of the liberal media establishment by free marketeers on Wall Street, but unlike New York Times ( NYT) and other so-called nattering nabobs of negativity in the newspaper industry, Washington Post Co. ( WPO) has yet to be fingered by investors as a dinosauric enterprise in need of a restructuring. The Beltway publisher has diversified successfully away from publishing, with a for-profit education arm responsible for the bulk of its revenue and profits, as well as broadcast TV properties and a cable business. Still, the stock is down 18% since early 2005, and its publishing assets are dragging down valuations. With the New York Times Co. dealing with calls to overhaul its structure, and publishing counterparts E.W. Scripps ( SSP) and Belo ( BLC) splitting up their businesses, it would seem that Washington Post would also face pressure to create more value. Washington Post is controlled through a dual-class share structure by the Grahams, a family devoted to the ideals of 20th century American journalism. Its largest non-family shareholder, who happens to be the legendary investor Warren Buffett, has publicly proclaimed that the newspaper part of its business model is eroding. "Buffett is very familiar with newspaper publishing, and he correctly and long ago saw that the Internet was going to destroy the economic model for the industry," says Whitney Tilson of T2 Partners, a shareholder of Buffett's holding company, Berkshire Hathaway ( BRK-A). "That said, he would never sell his position in Washington Post."
For its part, the company says it doesn't have any plans to separate its newspaper assets from its high-growth education business. "We're comfortable with both the assets and structures we have," says Washington Post spokeswoman Rima Calderon. But publishers Belo and Scripps made similar comments before they
succumbed to pressure from shareholders and split themselves in two in order to free their assets with more growth potential from the drag of their newspaper publishing businesses. Others in the industry have taken even more painful steps amid the carnage. Knight-Ridder and Tribune ( TRB) were pushed onto the selling block by restless shareholders. The Bancroft family couldn't turn down Rupert Murdoch's $5 billion offer to buy their company, Dow Jones ( DJ), and its prize asset, The Wall Street Journal. The Times remains intact even as shareholders have clamored for change and its stock has been pummeled. Its largest non-family shareholder, Morgan Stanley Investments, recently dumped its 7% stake after the company refused to follow the advice of portfolio manager Hassan Elmasry and abolish its dual-class share structure, which preserves control over the company in the hands of the Sulzberger family. Unlike Washington Post, the Times isn't diversified -- it's solely a publishing company, having recently sold off its broadcasting business. Aside from the possibility of ditching underperforming newspaper assets such as The Boston Globe, the company has little choice but to beef up its digital presence and scramble for an online business model that will allow it to start growing again. That, or the Sulzbergers could try to take it private without giving up control, and that could be dicey.
The Post has more options to create value. Last year, its newspaper and magazine publishing divisions made up a third of the company's revenue and a fifth of its operating profits. Its education division, Kaplan, made up 43% of revenue and 28% of operating profits, while its cable business and broadcasting properties comprised the rest of its portfolio. In the first half of 2007, education and cable were the only Washington Post divisions that posted revenue growth. Advertising revenue for the whole company declined 9.3%, while print advertising revenue dropped 15% and circulation for the daily and Sunday editions of its flagship newspaper, The Washington Post, fell 2.9%. If the economics of the traditional publishing business continue to deteriorate while a viable alternative doesn't emerge, Washington Post's exposure to the space could become a touchier subject for shareholders. However, aside from its dual-class share structure, the company boasts another bulwark against Wall Street's animal spirits that its counterpart in New York is lacking: Berkshire Hathaway. According to Washington Post's latest proxy statement, the Oracle of Omaha owns a 30.9% stake in the company. He has ceded his voting rights to the company's chairman and CEO, Donald Graham -- son of the late Katharine Graham, who was a close friend and business ally of Buffett's. As a result, Graham and his family control more than 70% of the company's voting rights, with backing from the most respected investor in history.
Given the relationship, the arrangement is unlikely to change in the foreseeable future. Berkshire's stake in Washington Post is valued at about $1 billion, little more than a rounding error in its $200 billion portfolio. He wasn't available for comment on his stake. "Buffett can be emotional about this investment, because while it was critical in his early days when he was forming Berkshire, it doesn't come close to moving the needle for the company anymore, nor will it ever," says Tilson. "Buffett would view the Washington Post as a national asset, and to the extent that it's not quite as profitable as it once was, you have to understand that the Washington Post is the Pentagon Papers and Watergate," he adds. "Even if it never makes a dime forever, Buffett would want it to continue doing what it has been doing for a century."