The Washington Post Company (NYSE:WPO) announced October 1 that it was purchasing a majority interest in Celtic Healthcare, a leading provider of skilled home healthcare and hospice services. The iconic newspaper seeks to diversify its investments. Should investors be excited about the news?
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Although the terms of the deal weren't announced, Celtic Healthcare's Chief Operating Officer, Kurt Baumgartner, describes the company on his LinkedIn page as "a $44 million, 2500+ daily census, multi-state provider of home health, hospice and private duty services." In the Washington Post's press release, the company said it was acting on its "ongoing strategy of investing in companies with demonstrated earnings potential and strong management teams attracted to our long-term investment horizon." In other words, it wants to be a conglomerate just like Berkshire Hathaway (NYSE:BRK.A, BRK.B), which owns 28% of Washington Post.
It didn't take long for someone in the media to point out the irony of the Post buying a hospice care business when it too has been on life support during the past few years. It's true the Post's best days are clearly behind it. Its Kaplan Education segment, the largest of its businesses, stumbled badly in the first half of 2012, delivering a $9.8 million operating loss on $1.11 billion in revenue. Cable TV and television broadcasting are the businesses paying the bills these days. The television broadcasting division consists of TV stations in six different cities, including the country's 10th ranked station, KPRC, in Houston. In 2011, the TV broadcasting business had an operating profit of $117.1 million on $319.2 million in revenue. Its capital expenditures were just $6.4 million - it made 18 times that in operating profits for a return on assets of 28%.
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If it wants to move the shares significantly higher, it needs to find other places to invest its free cash flow that will generate greater profits. If its education segment can't generate more than 4% return on assets, it should sell Kaplan and reinvest the proceeds in other businesses that can. Both its TV broadcasting, and to a lesser extent, its cable television unit, have figured out how to be sufficiently profitable. I'm sure it can find ways to allocate the proceeds, including growing Celtic Healthcare.
The Washington Post Company owned approximately $332 million in Berkshire Hathaway stock as of Sept. 28, 2012. At the end of December 2011, those shares were worth $286.5 million, meaning three-quarters of the way through 2012, it's achieved an annualized return of 21.8%. That's significantly better than its own shares, which have lost 1.35% through October 1.
The Bottom Line
We don't know all the reasons why the Post's management chose this particular company. Perhaps it felt the aging demographic is a good platform for growth using Celtic Healthcare as the vehicle. In the days and weeks to come, we'll get a better idea why it pulled the trigger. At this point, rather than trying to bring back its glory days like Gannett (NYSE:GCI) is attempting to do with USA Today, it is better off redeploying some of the $240 to $260 million in capital expenditures that it will invest in 2012 in something other than newspapers or education. In my opinion, diversification is a good thing in this situation. Whether or not it can execute effectively is the $100-million question. However, on a positive note, it can't do much worse.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.