FP Newspapers Inc. - FP-V

Dominant local media business offers a deep value opportunity. Hidden assets and consistent cash flow—too cheap to ignore.

You can buy a dominant Canadian newspaper at ~1-2x EBITDA. The 150-year old business has no net debt, real estate worth multiples of its current market cap, and throws off about $5 million of cash in a good year.

Background

FP Newspapers Inc. (“FP-V”) is a nanocap orphan that trades on the TSX Venture Exchange. FP-V owns a 49% interest in FP Canadian Newspapers Limited Partnership ("FPLP"). FPLP owns 100% of The Winnipeg Free Press, the largest newspaper in Manitoba. FP-V investors are paying about $6.8 million CAD for The Winnipeg Free Press at the current price of $0.48 per share.

Although the structural decline of print newspaper industry is well documented, FP-V represents a compelling deep value opportunity due to its discount to tangible asset value and consistent (albeit shrinking) cash flow. At current levels, the risk/reward appears highly asymmetric.

All $ amounts in this write up = Canadian dollars.

Courtesy of Manitoba Historical Society.

William Fisher Luxton (pictured above) founded the Manitoba Free Press in 1872. At that time, print subscriptions were just 25 cents per week, compared to $13.62 per week today. In the early days, prints were pressed by the hands of Luxton’s co-founder, John Kenny.

W.F. Luxton served as editor and retained control of the Free Press for 21 years, until a lender ultimately forced him out of the business. He went on to launch another newspaper, the Daily Nor’Wester, which he sold a few years later.

In 1931, under new ownership, The Manitoba Free Press was renamed The Winnipeg Free Press, a name it proudly carries to this day.

Free Press newsroom staff 1886. (Winnipeg Free Press archives)

Winnipeg is a remote city in central Canada where local news is especially important. Home to about 830,000 residents, Winnipeg accounts for more than half of Manitoba’s population. Calgary is a 14-hour drive to the west, Toronto is a 20-hour drive to the east, and there’s not much else in between.

Winnipeg's newspaper industry has a rich and complex history — there have been some ups, many downs, and significant consolidation over the years.

Of the twenty newspapers that were started in Manitoba between 1859 and 1890, only The Winnipeg Free Press survived.

Remember William Luxton’s other newspaper, the Daily Nor’Wester? That became the Winnipeg Telegram. The Telegram later merged with the Winnipeg Tribune.

The Winnipeg Tribune shuttered in 1980 after it was ‘unable to capture the dominant position over its competitor, The Winnipeg Free Press.’ Notably, the Winnipeg Free Press acquired the Tribune's assets for $2.2 million.

Below are clippings from the Tribune’s final issue:

The Manitoba Monopoly

The Winnipeg Free Press’ main local competitor today is The Winnipeg Sun, a tabloid-style paper with a focus on sports and entertainment, launched in 1980 after the Tribune closed. Despite the presence of The Winnipeg Sun, The Winnipeg Free Press maintains a monopolistic share as Manitoba's leading news provider.

Although its print circulation and advertising revenues have declined over time, the Winnipeg Free Press benefits from a loyal, captive audience in a market with limited alternatives. More than half of Winnipeggers currently engage with Winnipeg Free Press print and digital products each week, giving it the highest per capita readership of any daily newspaper in a major Canadian city. Additionally, The Winnipeg Free Press websites attract ~1 million users each month.

Winnipeg Free Press earnings have shrunk in recent years, and FPLP-level EBITDA is currently about $5 million per year. Since FP-V holds a minority stake, its pro rata share is about $2.45 million/year.

I don’t have a strong view on the normalized earnings power of the Winnipeg Free Press, nor do I believe it’s necessary for me to have one. This stock is a cigar butt after all, and you could drive a truck between the current price and the value of the business’ tangible assets.

Properties

From what I can tell, the Winnipeg Free Press owns two properties: 1) its current headquarters and 2) a vacant lot on the same street. The Winnipeg Free Press headquarters sits on 9 acres. The building, approximately ~200,000 square feet in size, houses offices and the company’s printing operations.

The headquarters and neighboring lot were assessed by the City of Winnipeg at a combined value of $22.8 million. In my experience, tax values are often a conservative measure for the market value of land and buildings. Replacement cost of the building may be in the $40 million to $60 million range due to recent construction cost inflation.

If The Winnipeg Free Press were to execute a sale-leaseback of the properties, I think it would be fair to expect $15 million to $25 million of gross proceeds, or 2.2x to 3.5x the current market cap.

Printing Press Blunder

Perhaps one reason FP-V is trading at such an undemanding valuation is due to a recent near-death experience.

In 2022, the FP-V announced plans to buy a used printing press from the New York Daily News. The press was supposed to take many months to transport from New Jersey and re-assemble in Winnipeg, and it was expected to be operational in 2023.

For whatever reason, management decided to abandon the installation of the new press in early-2023, and the stock has been left for dead ever since. I don’t know if management underestimated the installation costs, or if they couldn’t get the press to work. Either way, the company took a whopping $8 million write off during 2023.

Risks

There are a number of important caveats associated with the Winnipeg Free Press’ current and future profitability. A few that come to mind:

1. Print advertising and circulation revenues continue to decline unpredictably, and may accelerate.

2. Printing presses are costly to maintain and, as the company discovered, even more expensive to replace.

3. The Winnipeg Free Press has unionized employees under a collective bargaining agreement that will expire in June 2026. Upon renegotiation, there is a risk that payroll costs could increase substantially.

4. The company is eligible for journalism labour tax credits, a 25% refundable tax credit on salaries or wages paid to eligible newsroom employees. These credits may be eliminated by the Canadian government.

5. The Winnipeg Free Press is a controlled company. Ron Stern, a Canadian businessman, is the beneficial owner of 57% of the Free Press (6 million FPLP General Partner units and 2 million FP-V shares). Bob Silver owns another ~8% of the company.

   1. Management and ownership may choose not to sell the properties. They may also throw money at another printing press or bad acquisitions, and there is not much minority shareholders can do about it.

Recap

FP-V is a classic deep-value opportunity. While the newspaper industry faces well documented headwinds, FP-V’s market dominance, strong cash flow generation, and real estate assets create a large margin of safety.

I believe FP-V offers a highly asymmetric risk/reward for patient investors. I don’t have a good sense for what FP-V should be worth, but I think it’s a fair amount more than $0.48 per share.

Disclosure: I own FP Newspapers Inc. shares.

FP-V is extremely illiquid. Please use limit orders should you consider to buying shares.

THIS IS NOT INVESTMENT ADVICE. SMALL, ILLIQUID STOCKS CARRY SIGNIFICANT RISKS. PLEASE CONSULT A FINANCIAL ADVISOR, AND DO YOUR OWN RESEARCH. I AM NOT YOUR FIDUCIARY.

Sources:

• Company filings.

• https://www.winnipegfreepress.com/business/2022/08/02/free-press-invests-10-million-in-new-presses

• https://www.winnipegfreepress.com/arts-and-life/2022/10/21/our-journalism-your-support

• https://digitalcollections.lib.umanitoba.ca/islandora/object/uofm%3A2865605

• https://www.cbc.ca/archives/in-1980-winnipeg-wasn-t-a-one-newspaper-town-for-long-1.5273447

• https://nmc-mic.ca/2022/08/11/the-winnipeg-free-press-invests-10-million-in-new-presses/

• https://www.cbc.ca/amp/1.7215883

• https://www.cbc.ca/news/canada/manitoba/tc-transcontinental-printing-closure-winnipeg-1.5738904

• https://www.mhs.mb.ca/docs/people/luxton_wf.shtml

• https://www.mhs.mb.ca/docs/business/freepress.shtml

• https://wfpquantum.s3.amazonaws.com/pdf/2024/35138_wfp-collective-agreement-2023-2026.pdf

• https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/corporations/business-tax-credits/canadian-journalism-labour-tax-credit.html

• https://www.cbc.ca/news/entertainment/google-online-news-act-exemption-1.7422690

• https://www.theglobeandmail.com/investing/markets/stocks/fp-x/pressreleases/14959439/fp-newspapers-inc-announces-halt-to-capital-production-project/