What we know:
1. They are and have been generating about 160,000,000 in operating cash flow. Amazingly, they have been able to cut costs proportionate to revenue decreases.
2. They have about 890,000,000 in debt. Interest is roughly 85,000,000 per year.
3. They have been investing about 10,000,000 back into the business per year. My guess is that they probably need to put 20,000,000.
For the above run-rate, Lee has about 55,000,000/year to retire debt.
If we assume the above scenario is sustainable, in 5 years Lee could have debt down to a manageable 550,000,000. Assuming the were able to refinance this debt at 8%. They would have 44,000,000 interest expense. Their free cash flow would be about 96,000,000 (160m - 20m-44m). Or about 1.80/share. I have not factored in income taxes (have not done my homework in this area), but let's assume they start paying 1/3 of the Free cash flow....we still have about $1.20 EPS. Throw a PE of 8 onto it. We are sitting on a $10/share stock in five years.
Obviously, the above is based on assumptions on assumptions....very loosy goosy. I think it is fairly valued at $2.40 with 100% downside risk (i.e., no margin of safety) but could be a 4+ bagger in 5 years.
LEE's operating profits have been steady (and huge) for several years, but what everyone keys on for LEE's valuation is falling revenues. If they can steady the revenue decline, LEE's stock will take off. We will see results next week. I think the decline will continue.
Also, some suggested GCI is looking to buy LEE. I find this hard to believe. GCI owns the top TV station in St. Louis and with the Belo purchase will pick up roundabout control of the #2 TV station. Do we think regulators would let GCI also control the largest newspaper in St. Louis, LEE's biggest property? Hardly.
We have seen a buyer enter the market in a big way buying LEE's stock. No one has mention the Koch brothers as a potential buyer. Deep pockets, can refinance all the debt cheaply and have recently made it known they are looking to acquire newspaper properties. LEE would give them a good base to start a newspaper empire where they can swing a liberal outfit like LEE to their ultra conservative view. Just a thought.
You posit a plausible scenario. Buy lots of Lee debt and some of the equity. If lee goes bust, you control the newspapers. If they survive you make 10% on the debt. You win either way if you are a Koch brother. However, the average retail investor could still get clobbered.
I think it is important to remember LEE has a poison pill ....no one can really accumulate more than 7 million shares. And even at 3$/share ....or 150 Market Cap. The shares represent only about 15% of the economic value of this entity (150m in Market Cap plus 900m in debt).
I still think the end game is WEB buying this company. LEE has proven management in place to help WEB scale all of his newspapers. As he buys a paper, I think it is run by the Omaha World Herald people....I got to believe there are issues in they are having scaling up from a few Nebraska papers to being a Nationwide complex. LEE's technology/management should be of great benefit to them.
The St. Louis paper is #$%$, imo. WEB, as part of a buyout, may sell that one.
The pertinent issue at this point is getting the 15% refinanced to 10 to 11% debt. This will free up another 5 or 6 million a year for debt retirement and hopefully extend the maturity out 5 years. That they have not done this (or been able to do this) is definitely concerning to me.