Highfields Capital's Media Sector Stock Picks (CMCSA, DTV, KRI, TWX)

by: Value Investor Insight posted on: March 16, 2006 | about stocks: CMCSA / DTV / KRI / TWX

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Newsletter Value Investor Insight carried an interview with Highfields Capital hedge fund manager Jon Jacobson in its February 28th edition. Since starting Highfields Capital in 1998, which now manages $8 billion, Mr Jacobson and partner Richard Grubman have earned a compounded 15.4% annually, vs. 4.4% for the S&P 500. Here's what he had to say about the media sector:

You have several other media-related holdings that have been less than robust. Are you still optimistic?

JJ: Our media, cable and satellite holdings are completely out of favor, but we’re still confident they’ll pay off. What’s frustrating is that the operating results have actually been quite good. We think the competitive threat posed by the phone companies, Google, Yahoo and Apple – to name today’s favorites – is way overblown. We bought a stake in Knight-Ridder (KRI) when the company agreed to explore strategic alternatives under pressure from large shareholders. This is an example of a company that probably shouldn’t be public – the market’s convinced newspapers are lousy investments, but cash flow is plentiful, operating margins are usually in excess of 20% and there are limited reinvestment needs.

You’ve said private-equity firms will make a fortune in the newspaper business over the next 10 years. Why?

JJ: My point is that public investors are worn out by owning companies that are perceived to be going the way of the dodo bird because of technological innovation. When that happens, there’s an opportunity for the companies to be restructured and the likely way that will happen is for private- equity guys to come in, cut costs and shrink the companies to make them look like they can have growth going forward. Then they’ll repackage them and take them public again at a higher multiple. This process is not going to be easy. In a lot of the companies in which we agitate for change, the rank-and-file is rooting us on because they know the business is mismanaged. But in newspapers, the rankand- file are often in it for altruistic reasons. This probably won’t be a fight we’ll lead, but you can expect it to be fought.

Why aren’t you overly concerned by the competitive landscape for cable and satellite- TV companies?

JJ: We own Comcast (CMCSA), DirecTV (DTV) and Time Warner (TWX). The perception is that an arms multiple services will put pressure on price and that everybody’s going to lose. That may be the case, but I think you’re being more than paid to take that risk at today’s valuations. Also, from an operating standpoint, I’d bet on the quality of the managements of the cable and satellite- TV companies over the RBOCs.