A New York Times Digital IPO

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The New York Times Company (NYT) has done poorly in the stock market over the last couple of years. That does not make it different from any other large newspaper chain. But, some of the company’s big investors have objected that no one from the outside can force the company to cut costs, increase dividends, or sell off properties. That is because because NYT is controlled by its founding family

NYT does have some valuable assets. Among them is what is known as the New York Times Digital operations. The company likes to brag about the fact that online revenue now runs at about 10% of total revenue. That would put it at an annual level of about $300 million. The company has online versions of its newspapers and an odd but successful reference property called About.com.

In the June quarter, NYT had revenue of $789 million and an operating profit of just over $43 million. Of that total, About.com was $25 million of the revenue and $8.5 million of the operating profit. The company does not break out exact figure for its other internet sites but does use the 10% of revenue number in its earnings statements.

While online revenue across the NYT holdings is growing at about 20%, print revenue continues to decline each quarter.

The controlling shareholders at NYT, the Sulzbergers, have, through a well-constructed trust, a virtually permanent hold on the company’s future. While the NYT’s stock has dropped over 30% during the last two years, the Sulzbergers have little obligation to bend to the demands of outsiders who would like to see the company broken up and its editorial costs lowered.

There is, however, a way that the company could do something for its shareholders. The Sulzbergers could make a public offering or at least spin-out a minority position in the company’s online operations.

ComScore lists New York Times Digital properties as the 11th most visited set of websites in the US with 42.7 million unique visitors. The other large internet audience rating service Nielsen ranks nytimes.com as the most visited newspaper website in the country and boston.com, the Boston Globe website as the 6th most visited site, just behind the online edition of The Wall Street Journal.

The most comparable public company to the NYT digital properties is CNET (CNET). The company had fewer unique visitors, 32.2 million, in July. It has an annual revenue run rate of $400 million and its earnings reports indicate that it is just breaking even. It’s market cap is over $1.1 billion.

Depending on how The New York Times charged editorial and management costs to an online company, the new firm could be fairly profitable. And, the company would be growing, unlike the NYT.

The attraction for outside shareholders and the Sulzbergers is that NYT Digital should be worth well over $1 billion. The NYT itself has a market cap of only $3.1 billion. The new online public company would have 10% of the revenue of the current parent by a market cap 35% as large.

Undoubtedly, the value of the current NYT shares would fall. But, they will fall anyway as operating income evaporates each quarter. Having a second stock helps take the sting out of that.

The new company would have to be controlled by the Sulzbergers, They would not have it any other way. The  costs of editorial services provided to the online operation would determine how profitable it would be.

But, at least an independent stock for NYT Digital would provide some light at the end of the tunnel.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.