Graham Holdings Continues To Transform, Will Spin Off Cable ONE On July 1

Graham Holdings Company(GHC) was, not long ago, The Washington Post Company. But after the sale of The Washington Post to Jeff Bezos in 2013, the name needed to change. The Washington Post was neither the first nor the last asset bought or sold as Donald Graham radically transforms the company he inherited from his mother Katherine. Previously, Newsweek had been sold to the late Sidney Harman, a television station and cash traded to Berkshire Hathaway(BRKB) for cash and Graham Holdings shares, and a stake sold for around $400 million.

The July 1 spinoff of Cable ONE(CABO) is the largest move yet. At its when-issued trading close of $430 yesterday, it has a market capitalization of just under $2.5 billion.  This is slightly below the valuation for recent cable transactions which would place it at $2.6-$2.7 billion. At the same time, even after raising $550 million in debt to fund a $450 million dividend to Graham Holdings, the company will have leverage of 1.8x trailing EBITDA, far below its target of 3.0x.  An informative presentation about the company’s strategy can be found here.  The company is focused on growing higher profit internet access over low margin television service. It also plans a $6/year dividend, and will buy back stock opportunistically.

Graham shareholders as of June 15 will receive one share of Cable ONE for each share held. After the transaction, Graham will have over $850 million in net cash, a pension overfunded by over $1 billion, and various operating businesses. These assets include Kaplan, which has been under pressure with the rest of the for profit education sector, but is one of the higher quality assets in the space, a high margin broadcast television business with a valuation of greater than $1 billion, and various digital assets including SocialCode. Also, the company acquired several manufacturing and home healthcare businesses in 2014. Though Buffett sold his stake in Graham Holdings last year, he remains a close friend and advisor to Donald Graham.

Even after the spin, it would appear that each company trades at a slight discount to intrinsic value. Cable ONE is a rare independent cable operator which could make it a ripe acquisition target. Graham’s transformation will likely continue to unlock value beyond its share price.

Disclosure: The author holds shares of BRKB