The Washington Post Company

Balkar Sivia

The Washington Post Company (NYSE: WPO) is a conglomerate with assets in education, cable, broadcasting and publishing businesses. The Company, under the leadership of Katherine Graham went public in 1971, primarily with publishing and broadcasting assets. In the 1980s the company diversified and entered the education and cable businesses, which have grown and become a major part of the Company under the leadership of Donald Graham, who became CEO of the Company in 1991. The Company is conservatively managed and has astute and accomplished members forming its Board of Directors. Due to the severe decline in advertising and general pessimism about the future of traditional media assets the stock price fell to a low of $322/share in March 2009. The market is not giving much credence to the high growth education or stable and growing cash flow cable assets. Although more than 60% of its revenues come from the education business, the Company trades more like a newspaper Company than a for-profit education business. At the current market price of $440/share, the Washington Post Company has a market cap of $4.14 billion and an Enterprise Value (EV) of $3.42 billion.

Kaplan Inc.
Kaplan was founded by the legendary Stanley Kaplan, and bought by the Washington Post Company in 1984 for $45 million. Kaplan was primarily engaged in the test prep business but over the years it has entered and prospered in the for-profit education business.

Kaplan Higher Education The higher education division, which is the biggest, now accounts for 38% of Washington Posts revenues and 62% of its operating income. The company invested heavily in this business during the late 1990s and finally turned a profit in 2002. On average, the division, organically and through acquisitions, has since, grown revenues at 25%, and importantly, increased operating margins.
The Good Kaplans Higher Education division within the for-profit sector exists to serve the market demand to educate individuals who the traditional schools have failed to satisfy. As the US economy transitions more and more into a service economy, and new employment opportunities require post-secondary schooling, higher education becomes essential for an individual to maintain their living standards. Kaplan and others provide individuals with the convenience of continuing with their present occupation while pursuing further education to enhance their credentials. The option to take courses online has further lit a fire under the growth engine and accelerated Kaplans growth. Their success is evident from the increase in market share of for-profit institutions, measured by degrees granted, which has gone from 2.3% in 1997 to nearly 6% in 2006 and rising. Furthermore, enrollments have grown exponentially in 2009 due to unemployment and, consequently, an increased interest in higher education. The growth in revenues in this division has mostly come from: (a) growing enrollments, and (b) tuition increases. Below is a table documenting Kaplans growth and margins when normalized on a per student basis.

Higher Education per Student statistics Year Revenue Students Revenue/Student Revenue/Student Growth Operating Income Operating Income/Student Operating Income/Student Growth Operating Income/Student Margin

2005 2006 2007 2008 2009E 721,579 878,989 1,021,595 1,275,840 1,709,625 70,800 75,800 80,000 96,400 123,392 10.19 11.60 12.77 13.23 13.86 6% 14% 10% 4% 5% 82,660 103,938 125,629 168,774 261,599 1.17 1.37 1.57 1.75 2.12 -27% 17% 15% 11% 21% 11% 12% 12% 13% 15%

Kaplan Higher Education, through Kaplan University, Kaplan Colleges and Kaplan Career Institute operates in a fragmented industry with many competitors. Kaplan itself has few, if any, competitive advantages, but the industry as a whole is experiencing tailwinds due to pent up demand from the non-traditional student and the convenience of online education. Kaplan and others, however, have a few distinct advantages over traditional schools. First, their marketing prowess is unmatched. They advertise extensively. Nontraditional students are often not aware of the student aid available and consequently, are not sure if they can enroll in higher education. Kaplan admissions counselors help students with the paperwork and make the process effortless. Second, traditional schools do not have an extensive online offering, while Kaplan has a very advanced online education portal. Online education makes it very convenient for a student to obtain a degree as students can study and attend classes when they want and where they want. Importantly, it takes a lot of time and capital to develop and offer comprehensive, trusted, high quality online curriculum. Third, they are more responsive in academic program changes - their program offerings change as market conditions change. The bureaucracy and the public nature of most traditional schools cannot match the agile nature of for-profits. Fourth, because Kaplan is geared towards non-traditional students, they understand their customers and their special requirements. If students require extra help in the beginning or added counseling, it will be provided. Fifth, although the costs of an online school are comparable to an out of state public school, there can be many cost-saving advantages to attending an online school. With an online education there are no room and board expenses, travel expenses or other ancillary expenses.

Kaplan competitively differentiates itself with: (a) a trusted brand name (which is due to test prep), (b) extensive offering, which is illustrated by its ranking as 4th among online universities in the number of degrees offered, (c) quality, where it is ranked in the top 10 among online for-profit universities by various sources, and (d) regional accreditation, which is superior to national accreditation as credits are transferable. Furthermore, Kaplan can and does raise tuition rates along with the budget constrained public schools, which have to raise rates to remain feasible. Psychologically, an expensive education is considered

superior and this also helps Kaplan raise rates, but the rates will have to remain competitive with public institutions. The Bad The for-profit higher education industry, in which Kaplan Higher Education operates, has little to no barriers to entry. Accreditation, while difficult to obtain organically, can be bought, as evidenced by the sale of Waldorf College in May 2009. It is today a segregated industry. There are many other struggling colleges in the US which, as they capitulate, can be bought to expand or obtain accreditation by for-profits. In addition, the non-profit public and private universities are entering the online education market. Arizona State University (ASU), for example, has lenient admission standards and an extensive offering of online courses; the degree obtained by the online students is not distinguished from students who attend the brick and mortar school. Long term, as more and more traditional schools enter the fray the only students who attend non-profits will be the ones who are unable to get into a traditional school. Then given the admissions standards, how does a degree from Kaplan university fare compared to a degree from an online traditional school? Comparatively, what is the customers ROI on education? After talking to two admissions advisors from Kaplan, and after repeated attempts, I could not get any information on placement rates. Kaplan tuition rates are already at the high end of a public out-of-state college rates. Having said that, public schools, being public, will be slow to respond, will probably not be adept at dealing with non-traditional students, and will probably take a long time to widely enter the online education market. Moreover, there will always be a sect of students, those moving up in a small company for example, who will benefit from an education provided by for-profits. So, although there is a place for for-profit institutions, but long term, it is not a place that harbors 25% growth and 15% margins. For-profit institutions in this environment will only prosper based on the quality of their curriculum, placement rates and marketing. They will nevertheless, retain their distinct advantages in vocational programs. However, Kaplans presence is mostly in the non-vocational degree programs. In addition to the increased competition from public and for-profits alike, Kaplan had a weighted average retention rate of less than 70% and a weight average graduation rate of 42% in 2007. This means that in order to just maintain the revenue levels these students have to be replaced, while even more students need to be added to grow. The story is similar among other non-profit institutions. Although the non-traditional student demographic is large, it is still finite. One has to question the long term sustainability of this business model. And The Ugly Kaplan and most other for-profit universities exist on the back of government funding. In 2008, Kaplan University derived 85% of its receipts from the Title IV programs. An institution with revenues exceeding 90% for a single fiscal year is subject to enforcement, which leads to ineligibility in participating in Title IV funding. Kaplan has hired additional personnel to manage these risks, and I believe it is a risk they can manage as they can filter students with a very high proportion of Title IV funding.

Also, during 2008, funds received under the Title IV programs accounted for approximately $904 million, or approximately 71%, of total Kaplan Higher Education revenues, and 39% of Kaplan, Inc. revenues. The business overwhelmingly depends on Title IV funding. Starting in 2009, in order to remain eligible for Title IV funding Kaplan has to maintain 3 year cohort default rates (CDR) below 30% (increased from 25% and 2 year) for three consecutive and below 40% for one year. Below is a table presenting the cohort default rate for various Kaplan institutions in 2007.
Trial 3 2 Year Retention Year Name City Graduation Rate Enrollment Default Rate (FT) Default Rate Rate Kaplan University Davenport 66.0 35.0 53,212 13.3 23.2% Kaplan College Phoenix 77.0 49.0 587 18.0 25.7% Kaplan College Stockton 97.0 67.0 1,043 14.4 27.5% Kaplan College Hollywood 92.0 85.0 1,328 17.0 12.2% Kaplan College San Diego 89.0 74.0 2,239 8.1 15.3% Kaplan College Salida 86.0 66.0 1,364 14.8 27.7% Kaplan College Sacramento 79.0 52.0 861 18.8 33.5% Kaplan College Vista 92.0 69.0 1,686 13.2 23.1% Kaplan College Panorama 94.0 74.0 520 17.6 28.7% Kaplan College Merrillville 57.0 20.0 676 17.3 28.6% Kaplan College Indianapolis 75.0 60.0 1,702 12.5 22.1% Kaplan College Las Vegas 69.0 48.0 832 21.2 31.5% Kaplan College Columbus 61.0 30.0 931 22.8 32.8% Kaplan C. Institute Boston 37.0 68.0 792 15.3 31.6% Kaplan C. Institute Brooklyn 65.0 65.0 1,105 16.8 37.7% Kaplan C. Institute Harrisburg 73.0 58.0 916 20.4 35.3% Kaplan C. Institute Harrisburg 73.0 59.0 916 20.4 35.3% Kaplan C. Institute Pittsburgh 86.0 34.0 1,827 21.9 37.9% Kaplan C. Institute Nashville 57.0 47.0 616 7.9 22.2% Kaplan C. Institute San Antonio 68.0 67.0 1,986 16.4 29.8%
Source: Department of Education and NCES

As we can see from the above, the 3 year CDRs for some of the institutions are already higher than 30% and many are very close to the 30% mark. Please note that these statistics are from 2007. Here is a table showing the trend in Kaplan CDRs:
Kaplan University 2 year CDR Fiscal Year Default rate
Source: NCES

2005 5.90%

2,006 9.20%

2,007 13.30%

The trend, in this case, is clearly not favorable. With increasing unemployment and general economic malaise, I would expect the CDRs for 2008 and 2009 to be much higher. Kaplan is

in serious risk of loosing its Title IV funding under the new rules. Kaplan will have to change its enrollment strategies in the immediate term to recruit students at a lower risk of default. This again shows that growth will (should) taper, there are no signs however, that it is. Moreover, there is only so much Kaplan can do to stem the rise of CDRs, Kaplan cannot, for example, control the macroeconomic environment. The Department of Education will not impose sanctions based on rates calculated under this new methodology until three consecutive years of rates have been calculated, which is expected to occur in 2014. Furthermore, the company is facing three separate lawsuits related to Title IV funding. Valuation Kaplan Higher Education
2005 2006 2007 2008 2009E* 721,579 878,989 1,021,595 1,275,840 1,709,625 29% 22% 16% 25% 34% Operating Income 82,660 103,938 125,629 168,774 261,599 Add D&A 24,100 30,778 32,608 43,602 Subtract Capex 51,406 41,079 47,598 50,990 Subtract Share of Corp Overhead 15,222 27,236 23,646 27,299 adj EBIT' 40,132 66,401 86,993 134,087 200,500 adj EBIT' Margin 6% 8% 9% 11% 12% Subtract share of cash stock option 14,080 15,650 5,130 59,570 5,155 adj EBIT 26,052 50,751 81,863 74,517 195,345 Revenue Growth (%)

Given the conundrum between the short term, long term and the CDRs, it is very difficult to value Kaplan Higher Education. Among the competitors Corinthian Colleges, Inc. and Lincoln Education Services had CDRs above 25% for the 3-year CDRs and are trading at 4-7x EBITDA. On the other hand, DeVry, Strayer Education and University of Phoenix all had 3year CDRs well below 20% and are trading at 9-16x EBITDA. Kaplan had a weighted average 3-year default rate of 24% and can then be, comparatively, valued at 6-8x adj EBIT. Although this is not an ideal way as we are comparing the peers on only one dimension CDRs, it is the most conservative as it takes into account the core risk. In a worst case scenario (really only a bad case), where Kaplan higher education is not compliant with Title IV rules, the operating income will be deep in the negative. The results have been lumpy because the Kaplan stock options are paid in cash by the company and in 2008 the CEO of Kaplan abruptly resigned, triggering a big payout. The recession has forced a lot of people out of employment. This has directly benefited institutions like Kaplan who have seen a large jump in enrollment, but this is only temporary. Valuing the business at 7x adj EBIT an enterprise value of $1,368 million is obtained for the higher education division. Also, in January 2009, the company placed a value of $2,550 on each share of Kaplan. Furthermore, there were 2000 options remaining constituting 0.2% of stock outstanding. We can reverse engineer this data and obtain a value of $2,550 million that the compensation committee placed on the entire Kaplan business (higher education and test prep) in January 2009.

Kaplan Other Kaplan Other consists of Kaplan Test Prep, Kaplan Professional, Kaplan International, and Kaplan Ventures. Test Prep is the original business of Kaplan Inc. and has been a steady cash generator for the Washington Post Company. Over the years, the Company has grown by increasing offerings and through bolt on acquisitions. Lately, the business has expanded internationally. This is a division made up if many small and large businesses providing the same basic service - prep. The Company has some inherent competitive advantages. Kaplans materials and coaching are trusted mainly because of its brand name and years in the business, and over and over again, it has been proven that it works. Kaplan has a leading market share in most categories. Kaplan has a formidable presence with test centers scattered all over the country. This is all because Kaplan invested in the right people and over time has developed comprehensive, trusted material that can benefit the customer and that is difficult for competitors to duplicate. Kaplan has a duopoly of kinds in many segments with Princeton Review with many other competitors holding a small market share.
This business has experienced losses in 2009 due to a decline in all categories, but especially in the professional business which caters to the real estate and finance sectors. In addition, many competitors have penetrated in less specialized categories like the GMAT, SAT and others. Kaplan still provides structured course offerings in the test centers, but is relatively expensive; and in a recessionary environment, customers are perhaps choosing to make do with less. Furthermore, Kaplan has faced heavy losses with its Score business, where management has admitted that the model does not work; and Kaplan Ventures, where various businesses have negative operating earnings as they are still mostly in development phase. Another risk - the worst case for this division - is that there have been talks of abolishing SAT for many years. If this occurs, this division will be hit with a material loss of revenue. The company has priced some of its offerings very high, where there is now room for new competitors in a new digital sphere. It also makes customers seek alternatives with more vigor. In addition, due to the increasing digitization of course material, losing revenues to piracy is also a big problem. Valuation Kaplan Test Prep & Professional
2005 2006 2007 2008 Normalized Revenue 690,815 805,152 1,009,036 1,055,071 950,000 Growth (%) 20% 17% 25% 5% Operating Income* 117,075 109,887 129,589 105,568 Add D&A 20,073 24,826 36,701 38,605 Subtract share of Corp. overhead 20,983 26,363 14,126 11,800 Subtract Share cash stock option 21,120 15,650 2,997 25,530 EBITDA 95,045 92,700 149,167 106,843 95,000 EBITDA Margin 14% 12% 15% 10% 10% Subtract Capex 32,134 31,952 48,544 47,834 40,000 adj EBIT 62,911 60,748 100,623 59,009 55,000

Revenues of $950 million, operating income of $15 million (after reversing non-cash/one time charges), and a negative adj EBIT can be estimated for 2009. Going forward however, as the newer businesses stabilize, and economy improves, even with lower contribution from Kaplan Professional as compared to the bubble years, Kaplan Other should conservatively be able to make $950 million in revenues. Again, conservatively, assuming 10% EBITDA margins and $40 million in capital expenditures, this division can produce adj EBIT in the $55 million neighborhood. Princeton Review (REVU), Kaplans main competitor, is smaller than Kaplan, has 5-8% EBITDA margins and has had negative adj EBIT numbers for many years. Taking all of the above into consideration and valuing this business at 11x normalized adj EBIT gives us a value of $605 million for Kaplan Other.

Cable ONE
Cable ONE began in 1986 as a small cable television company and has now grown to be the 10th largest cable company in the US. It is an operator of cable systems that serves 19 states with cable television, telephone and high-speed Internet service. As far as cable systems are concerned, Cable ONE essentially has a monopoly over most of the areas its system covers. This is primarily due to franchise agreements with local governments. It is a regulated industry, where the capital expenditures required in building the essential infrastructure are substantial. It must also be noted that, these agreements are not exclusive; however there has been little precedent of newcomers (overbuilders) upsetting the incumbent. In most cases, Cable ONE has carved a niche in serving small communities, and competing for these limited revenues is difficult for another cable company to justify. In an industry notorious for bad customer service, Cable ONE has scored high in customer satisfaction. Cable ONE differentiates itself by designating a local office, local personnel and a local phone number for each of its systems. Cable ONE compares as follows with other cable companies:
Peer Comparison Homes Passed Basic Video % of Homes Passed Digital Video % of Homes Passed High Speed Data % of Homes Passed Telephony % of Homes Passed RGU's EV ($ thousands) EV/RGU Revenue (TTM) Revenue/RGU
Source: Company Reports

CableONE 1,391 678 49% 222 16% 389 28% 105 8% 1,393 755 0.54

CableVision 4,803 3,066 64% 2,888 60% 2,522 53% 2,001 42% 10,477 20,070 1.92 7,670 0.73

Time Warner 26,918 13,048 48% 8,802 33% 9,046 34% 4,064 15% 34,960 36,778 1.05 17,740 0.51

Comcast 51,078 23,757 47% 18,005 35% 15,684 31% 7,377 14% 64,826 77,188 1.19 34,340 0.53

Cable ONE has plenty of growth opportunities left in the Digital Video and Telephony segments. CableVision has been ahead of all its peers in penetrating its customer base with digital and telephony services. On a qualitative basis, when compared to other cable companies, Cable ONE offers fewer channels, fewer digital channels and low caps on the internet service for the same price. The cable industry, which is notorious for large capital expenditures, where economies of scale matter, smaller cable companies face challenges with infrastructure investments. Cable ONE has been slow, and behind industry behemoths, in rolling out newer services as evidenced by the low penetration in digital and telephony. This gives Cable ONE an opportunity to observe industry leaders and invest prudently, but it also makes them susceptible to competition. It must be noted that, the capital requirements in this business keep increasing and dont die down because there is always some new technology on the horizon. Cable ONE bought wireless spectrum and will be able to offer a quadruple service if and when it makes the necessary investments. Cable ONE has faced stiff competition from Direct Broadcasting Satellite (DBS) providers bundling their services with DSL high speed data providers. DBS carries more digital channels and is cheaper on a cost/channel basis. DSL data, though slower than cable, does not have the same restrictive caps. DBS providers now also offer local channels, which has prevented higher penetration in the past. The jury is out and a lot can be said about the cable vs. satellite debate. At the end of the day, however, the choice depends on each customers personal preferences. The two services are very comparable and have their pros and cons (outside of this reports context). The fact that Cable ONE has increased rates twice in the last three years and has seen an uptick in total revenue (in spite of some loss in basic subscribers) and operating margins, speaks to its position within the region it serves. Furthermore, another formidable competitor in the future could be Internet Protocol Television (IPTV), where television service is distributed via the Internet. Qwest, which is present in most of Cable ONEs regions, has publically stated that it does not want to enter the IPTV market. Also, it is uncertain whether these companies would find it profitable to build infrastructure (for IPTV) in small communities that Cable ONE serves. The worst case in this business would likely be loss of revenue to alternates, it will however, likely be measured and transparent. Valuation CableONE
Revenues Growth Operating Income Add D&A Subtract Capex Subtract Share of Corp. Overhead adj EBIT adj EBIT Margin 2005 507,700 2% 76,700 100,031 111,331 6,600 58,800 12% 2006 565,900 11% 120,000 104,591 142,484 8,505 73,602 13% 2007 626,400 11% 123,700 108,453 138,258 5,202 88,693 14% 2008 719,100 15% 162,200 121,310 114,176 6,640 162,694 23% 2009E* 755,100 5% 170,310 130,200 92,000 6,800 201,710 27%

*2009 assumes continuation of 2009 trends where feasible and guess estimates where required

Cable ONEs peers are presently valued at around 6x EBITDA for Comcast and Time Warner and 8x EBITDA for CableVision due to superior penetration and segment numbers. The capital expenditures for Cable ONE in 2008 and 2009 have died down, and might be low in the short term as the digital conversion has taken place; long term however, some new technology will certainly require additional outlays. Considering that Cable ONE has no debt, while all its peers are heavily indebted, Cable ONE can be valued at 10x-11x adj EBIT or at 10x, $2,017 million. In addition, after normalizing the bigger peers on a EV/RGU basis, I believe, Cable ONE should be valued at 1.5x RGU due to no debt, lower cable competition, and higher relative growth potential; giving an EV of $2,089 million for Cable ONE.

Post-Newsweek Stations Inc.

The Post-Newsweek Stations Inc. owns six VHF television stations located in Houston, Texas; Detroit, Michigan; Miami, Florida; Orlando, Florida; San Antonio, Texas; and Jacksonville, Florida. Every station, with the exception of the Jacksonville, WJCT station, is affiliated with one of the major national networks. Three of the six company stations have leading market share in their respective markets. Local TV broadcasters have no competitive advantages, per se, but earn superior returns because of their sheer presence, which is preserved by broadcasting licenses. These stations also benefit from experienced management and established newscasters. The local stations rely heavily on the popularity of local news, as the local news differentiates them from national networks and the ad spots are coveted by local advertisers. In a difficult year for media generally, local television stations were hardly immune and experienced steep decline in revenue and operating income. The declines, however, are cyclical and the revenues should recover as the economy comes back. On a secular basis, the DVR, internet and cable television have kept growth in local television revenues subdued. The operating revenues have, in fact, declined on an inflation adjusted basis. Basically the problem is that the advertising revenue is still there, but more and more of it is going to cable networks, which can now do regional advertising, and other alternatives rather than local network stations. They are in a better position than the newspapers due to a lower cost base and have a lead in finding a solution. Additionally, another looming threat is a potential shift in the relationship between NBC their affiliates after the Comcast acquisition. Although Comcast has publically stated that it is committed to this model, there can be no guarantees. On the positive side, the company has some experience managing a station without an affiliate. Valuation In 2009, revenues of $283 million and $68 million in operating income can be estimated, assuming the first three quarter trends continue. The political and Olympics revenue above was averaged for two years and added to the odd years. The operating income was adjusted based on the overall margins. On a normalized basis, assuming a new normal going forward, the revenues should stabilize above $300 million, down from $350 million during the 2004-2007 period. In addition, with the decline in revenues we will assume lower operating margins, which nonetheless, should be temporary as the management will likely cut costs (as they are incentivized to maintain margins).

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Television Broadcasting Revenue Growth Operating Income Add D&A Subtract Capex Subtract share of Corp. Overhead Subtract Pension Credits adj EBIT adj EBIT margin 2005 353,050 4% 150,660 10,202 8,559 4,238 2,939 145,126 41% 2006 344,800 -2% 153,960 9,915 8,800 5,104 1,413 148,558 43% 2007 357,100 4% 148,940 9,489 9,500 2,861 888 145,180 41% 2008 310,800 -13% 117,780 9,400 11,500 3,652 1,041 110,987 36% Normalized 300,000 110,000 9,200 8,500 3,500 1,100 106,100 35%

With the above, adj EBIT at $106 million can be estimated going forward. There are no public comparables. Due to superior margins, low capital expenditure requirements, but uncertain growth and future prospects, this business can be valued at 10-12x adj EBIT. At a 10x multiple a value of $1,061 million for the entire business can be obtained. The worst case in this business will likely come from a continuing precipitous decline in revenues due to secular shifts. On the other side, in an increasingly metered approach to broadband, watching television on the phone or computer will be an expensive proposition. I reckon my new normal revenue and margin assumption takes some deterioration into account.

Newspaper Publishing
The Washington Post Company publishes The Washington Post, which is a morning daily and Sunday newspaper primarily distributed by home delivery in the Washington, DC. In addition, the Company publishes of The Herald in Everett, WA; El Tiempo Latino, a weekly Spanish-language newspaper; and the Gazette Newspapers among others. Furthermore, Washingtonpost.Newsweek Interactive (WPNI) develops news and information products for electronic distribution and produced washingtonpost.com (which is free). The Slate Group, a division of WPNI, produces Slate, an online magazine, and several additional websites. The demise of the newspaper business is well known. The major problem with the business model is that the revenue lost from subscription and print advertisements (display, classifieds, and inserts) is not being recovered from online advertising and the online subscription model does not work for many newspapers. Also, with the digital evolution, and the rise of the aggregators, news has become a commodity. Newspapers also are not the fastest way of getting news today. Although, more people read news stories today than ever before, there is no system to profitably monetize the eyeballs. Furthermore, with services like Google in the mix, yes, newspapers benefit when their news stories are linked, but it also prevent them from putting up paid walls. Some newspapers are to blame as well; their superior assets helped them raise debt levels, and when revenues declined, this debt caused a negative feedback loop resulting in a decrease in quality. In addition to these secular declines, in 2008-2009, newspapers were at the forefront of the cyclical decline in advertizing.

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The Washington Post newspaper ranks 3rd in the US after New York Times and USA Today. The paper is developing a stronger niche and differentiating itself by covering the business of Washington, thereby, attracting a niche, loyal audience, and correspondingly, advertisers. The circulation and advertizing inches numbers are down over the last 3-4 years. The company however, has been successful in increasing advertizing and subscription costs at around the rate of inflation. They have also invested in WPNI, their digital front which enables them to participate in the digital upside. On the content side, although general news stories are the commodity, deep investigative reporting is not. Quality, niche content can be monetized and is being monetized by various news agencies. On a local basis, Washington Post operates in a district with a lot of federal and political jobs; and consequently, subscription wise, the down side is limited. Rupert Murdoch has publically stated that all News Corps newspapers will have a WSJ type subscription model starting 2010, perhaps others will follow. Associated Press is developing software which tracks the news story to the source. Many great minds are working on this problem and a lot of experimenting is taking place whether something will come out of it is uncertain. Devices like e-readers and mobile phones, for example provide another platform for the experiments. At this point, there are more questions than answers. Valuation Newspaper Publishing
Revenue Growth% Operating Income Reversing non-cash/one time Add D&A Add Pension expense Subtract share of Corp. Overhead EBITDA Subtract Capex adj EBIT 2005 957,100 2% 125,400 37,556 784 11,410 152,330 33,276 119,054 2006 961,900 1% 63,400 49,400 36,929 56,785 14,884 191,630 57,664 133,966 2007 889,800 -7% 66,400 38,800 10,010 9,105 106,105 36,020 70,085 2008 801,300 -10% - 192,700 145,600 65,500 87,962 11,621 94,741 28,428 66,313 2009E* 640,800 -20% - 189,000 57,900 81,213 76,952 16,337 10,728 25,000 - 14,272

The Company has reduced costs in a big way by offering buyouts to employees, merging print and online divisions and closing bureaus. It is difficult to determine the proportion of secular and cyclical declines over the last two years. Given the uncertainties, I am unsure of what the normalized earnings would be going forward. The management has stated that the losses in 2010 must diminish, if they will is yet to be seen. New York Times is being valued at 8x EBITDA and Gannett at 5x EBITDA, they are both however, much more levered than the Washington Post but have better circulation numbers. This is a very simplistic approach (and perhaps not very accurate) but valuing the newspaper business at 8x 2009E EBITDA a value of $86 million is obtained for the newspaper publishing division. This is at the cyclical trough. Any other method of valuation would require heroic assumptions, which I am not adept at making. At the end of the day, the Washington Post Company is a public corporation answerable to its shareholders and is not a non-profit. If

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and when the news organizations find a profitable business model, not only will the earnings improve, but they will get a big boost in the multiple. The worst case in this business is declining subscription and ad revenue. In addition, all the experimenting may never result in a profitable business model - resulting in further, continuing operating losses. It must also be noted that newspaper assets attract wealthy individuals looking to wield influence. For these individuals, The Washington Post would make a trophy property. Although the probability is low that the Graham family will sell anytime soon, it is still an ace up their sleeve.

Magazine Publishing
In Magazine Publishing, Newsweek Inc. publishes Newsweek, weekly global news and ideas magazine and its digital front, newsweek.com. Newsweek is published domestically and internationally. Newsweek recently announced plans to reduce its domestic rate base to 1.5 million copies by January 2010 (from 2.6 million), reflecting a shift in focus to a different demographic that is closer to its core base of loyal subscribers. They are aiming at people who have already read the news, and desire targeted analysis as well as deep investigative reporting. If newspapers have it hard, magazines have it even harder. It should be noted however that in a difficult year, magazines such as The Economist, The New Yorker and The Atlantic saw readership gains. It is uncertain if this new, niche strategy will produce profits, but it is probable that it will produce better numbers, due to the cost efficiency, compared to the current strategy.
Valuation

Magazine Publishing Revenue Growth% Operating Revenue Reversing non-cash/one time Add D&A Subtract Capex Subtract Pension credit Subtract share of Corp. Overhead adj EBIT adj EBIT margin 2005 344,900 -6% 45,100 1,500 2,801 660 38,184 4,890 5,667 2% 2006 331,000 -4% 27,900 10,400 2,640 564 34,704 6,379 - 707 0% 2007 288,400 -13% 31,400 2,177 448 36,343 3,121 - 6,335 -2% 2008 250,900 -13% - 16,100 29,200 2,052 4,675 15,097 4,980 - 9,600 -4% 2009E 187,500 -25% - 34,000 6,600 1,920 1,200 14,300 4,100 - 45,080 -24%

The magazine divisions performance has gone from bad to worse. Business week is reported to have been sold for $3-5 million plus the assumption of liabilities. As with newspapers, I am again unsure as to how to value this division. With declining circulation, but increasing rates, one has to assume that the revenue figure going forward will be closer to the 2009E figure or below. Newsweek, as a medium to influence political affairs, will also make a trophy property in a sale and would probably fetch more than Business week.

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Assuming it will not be sold, I will value this division at zero. The worst case in this business is declining subscription and ad revenue, resulting in further losses for the Company.

Consolidated Valuation
On a consolidated basis, the publishing divisions dampen the effect of the other, profitable divisions. The accounting is conservative but lumpy. Due to the overfunded pension plan, through employee buyouts, the management has transferred substantial operating costs from the income statement to the balance sheet. Also, due to the growing nature of the Kaplan business, the company routinely engages in acquiring other business, mostly to compliment or enhance its existing businesses and as a consequence, restructuring expenses are a regular occurrence. In the above, the operating losses of Other Business were proportionally subtracted from all segments. It is unfortunate, that Course Advisor Inc, which should clearly be a part of the higher education division, is lumped in with the Other Business category. Also, the Company experienced a loss due to foreign currency translations in 2008, due to volatile currency markets and a temporary strengthening of the US dollar. In addition, the company has been proficient in managing working capital, resulting, on average, in a net positive effect on the cash flows. Furthermore, the Company will experience a higher interest expense going forward as the $400 million in debt was refinanced at 7.75% at the market trough.
Consolidated Income Statement Revenues Operating Expenses Operating Income Add one time/non-cash charges Add D&A Subtract net Pension benefit EBITDA Subtract Capex adj EBIT 2008 4,461,580 4,287,372 174,208 264,400 288,131 25,651 701,088 288,923 412,165 2009E* 4,480,010 4,370,969 109,041 122,941 329,474 6,941 554,515 244,075 310,440

*2009 estimates assume continuation of 2009 trends where feasible and guess estimates where required

The 2009 numbers assume continuation of 2009 trends and is a rough estimate. Although the revenue and operating income increased due to Kaplan and Cable ONE, the operating losses in the publishing division have brought the overall results down. Again, due to the inherent difficulty in valuing the publishing business and its diffusion into the consolidated statements, it becomes difficult to value the entire business on a consolidated basis. The Company is currently trading at 6.2x 2009E EBITDA, and 11x 2009E adj EBIT. I would not value the entire business above these multiples. The other problem is that one cannot say with any certainly if 2009E really are trough revenue and operating earnings estimates.

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Sum of Parts Valuation

Below is a summary of the various moving parts: Business Margin of Safety Risks Kaplan Higher Education Brand, Quality CDR's Kaplan Other Market Position, Brand Low priced alternatives Cable ONE Presence DBS, IPTV Post-Newsweek Stations Presence, Management Secular Shifts Newspaper Publishing Presence, Niche, Quality Secular Shifts Magazine Publishing Brand Secular Shifts Sum of Parts

Value $1,368 million $605 million $2,017 million $1,061 million $86 million $0 $5,137 million

The total enterprise value of the moving parts is $5,137 million. We add to this cash, investments, net pension overfunding, and subtract debt to get $5,861 million or at 9.4 million shares, $625 per share in equity value. The Washington Post Company is currently trading at $440 per share. The sum of parts valuation has a 40% upside from the current market capitalization. It is entirely possible that the newspaper and magazine publishing divisions are worth more than the estimates provided in this report; consequently, if that is the case, I am under estimating the true value of the franchise.

Management
Warren Buffet accumulated a position in the Washington Post Company in the early 1970s and his influence on the management style, compensation policies and accounting is apparent. The Company is managed much like Berkshire Hathaway, where the Donald Graham takes a hands off approach and the CEOs of various divisions (and there are many) make decisions as they see fit. The various CEOs have the right incentives to focus on long term value creation. Due to the growing nature of many of its businesses, the Company has been and is heavily involved in acquisitions. As with any business, some acquisitions work and some do not. A trait of a good Company is that it does little things better than the competitors, and an investor can expect that from the Washington Post Company. The Company itself does not play the Wall Street game and is generally underfollowed by the street. Kaplan itself is underfollowed by investors interested in the for-profit education business. The Graham family controls the majority voting shares (Class A) in the Company giving them complete control. The incentive compensation is a mix of restricted stock and stock options, to reflect the mature as well as growing nature of its businesses respectively. The compensation however is very competitive, as shown by their rewards to Kaplan executives. The company regularly pays a dividend and opportunistically buys back stock, with a moderate decline in shares outstanding due to dilution from stock options. Although the ROIC figures have been decent historically (10-12%), given the low asset base for most of their businesses, they mean very little for an investor going forward.

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Conclusion
Although the company has a prudent board and an intelligent management, the rise in the rate of CDRs cannot be ignored. It is quite ironic that such discrepancies occurred under such conservative leadership. The Company could be worth substantially more if CDRs were not an issue. Although I have, but valuing a business with a high probability of permanent loss of capital at a lower valuation is akin to assuming a high discount rate for a Russian equity - it does not work. I personally will not invest in the Washington Post Company, even at a lower price, as Kaplan Higher Education is at a serious risk of losing Title IV funding. Cable ONE and the Post Newsweek Stations stand on the opposite side of the same court. TV stations headwinds are generally Cable ONEs tailwinds. The TV stations, even as they decline, should provide a steady source of free cash flow for many years. Psychologically, publishing is an old business, but in this new economy, the newspaper and magazine divisions are still in an experimental stage in finding a profitable business model. The extent of losses is not known and that makes this space more of a speculation than an investment. The market, however, is made by differing opinions and if an investor thinks Kaplan Higher Education is not at a risk of violating government rules, that business then should be worth 12-15x adj EBIT and the Washington Post Company would have a substantial upside.

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Bibliography
Newspaper Publishing [1] [2] [3] [4] USA Today vs. Washington Post vs. New York Times Washington Post Signals Shift With a New Editor - NYTimes.com WaPo shutters three bureaus - Michael Calderone - POLITICO.com Is the Huffington Post Killing the New York Times and the Washington Post? - Conor Clarke [5] The Washington Post: History of The Post [6] NYTimes.com to Offer Subscription Service - New York Times [7] Charlie Rose: Future of Newspapers; [8] Charlie Rose: A conversation about print Journalism in the digital age [9] Charlie Rose: Arthur Sulzberger [10]WAPO ranks No.3: http://www.niemanlab.org/2009/02/top-15-newspaper-sites-of-2008/ [11]Times to Stop Charging for Parts of Its Web Site - New York Times [12]Murdoch Says News Corp. Will Charge for Newspaper Content Online - New York Times [13]Media Executives Plan Online Service to Charge for Content - NYTimes.com [14]Layoffs at Newsweek - Michael Calderone - POLITICO.com [15]How to Save Your Newspaper - TIME [16]Wharton: Web vs. Print [17]Updated: Washington Post Online, Print Operations Will Merge Jan. 1, 2010 | paidContent [18]Bing trying to get exclusive on FoxSmart blog maverick [19]Rupert Murdoch: Journalism and Freedom - WSJ.com Cable [1] [2] [3] [4] [5] [6] [7] Cable ONE - Package Bundles Comcast, CableVision, TimeWarner 2008 10Ks and 2009 3Q 10Q Satellite vs. cable, DirecTV vs. Dish HD programming - CNET Reviews - CNET.com Satellite TV Vs Cable: Comparison of Dish Network vs. Cable Television Home Guide An Interview With Cable Pioneer John Malone - WSJ.com CableOne users forum - dslreports.com Washington Post: Net Neutrality Kills Puppies - Oh, did we forget to mention we own a cable company? - dslreports.com [8] Cable or Satellite conundrum PC World

Kaplan [1] [2] [3] [4] University World News Straightliner: College for $99/month Boston university Online Program You Tube Video: New Players, Different Game: Understanding the Rise of For-Profit Colleges and Universities by William G Tierney, Guilbert C Hentschke [5] What to look for in an Online College [6] Top 5 Online Colleges

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[7] College Board - Student Pays [8] Apollo Group, Strayer Inc., DeVry 2008 10K, 2009 3Q 10Q [9] Princeton Review: http://ir.princetonreview.com/index.cfm [10]Why Barron's Is Wrong About For-Profit Education Stocks -- Seeking Alpha [11]Education Management IPO Gets an A+ -- Seeking Alpha [12]20+% Growth Rate For Students Over 25 Participating in Post Secondary Education Until 2015-2020 Timeframe: Target Market For Education Stocks - Yahoo! Finance [13]Stanley Kaplan, Pioneer in Preparing Students for Exams, Dies at 90 - Obituary (Obit) NYTimes.com [14]Kaplan Inc. News - The New York Times [15]Undergraduate tuition and fees and room and board rates for full-time students in degree-granting institutions, by percentile of charges and control and type of institution: 200001 through 200708 [16]College Navigator - University of Phoenix-Online Campus [17]Fast Facts NCES Fast Facts [18]College Navigator - Kaplan University Network TV [1] Article on Threats: http://tvbythenumbers.com/2009/02/28/todays-threat-tobroadcast-tv-networks/13686 [2] Future of Broadcasting: http://www.nytimes.com/2009/11/21/business/media/21network.html [3] John Malone and network affiliates: http://www.tvnewscheck.com/articles/2009/11/23/daily.5/ [4] Comcast Memo: http://blog.comcast.com/nbcucommitment/ [5] http://www.thewrap.com/article/1206?page=2 Network to Cable WPO General [1] The Washington Post Company - Investor Relations [2] What Members are saying about The Washington Post Company (WPO) [3] WPO Please Act Accordingly PAA Research Report [4] Washington Post Co. (WPO) Stock - Latest Articles -- Seeking Alpha [5] Newspaper Circulation: Less Really Is Less -- Seeking Alpha [6] Donald Graham - Not Boasting, Even Though He Could - New York Times [7] Interview: Don Graham, CEO, Washington Post Co.; Katharine Weymouth, CEO, WP Media | paidContent [8] BBC NEWS | Business | Don Graham's debt to Warren Buffett [9] Yahoo Newspaper Consortium Adds Boston Globe And St. Petersburg Times | paidContent [10]@ UBS Media Week: WaPos Graham: Having Conversations About Online Pay; Backs Comcast-NBCU Deal | paidContent [11]Top 15 of 2008: The leading regional newspaper sites shuffle their ranks Nieman Journalism Lab [12]Magazine M&A and Magazine Finance - Media M&A - Publishing Finance Resource @ FolioMag.com [13]Dirks, Van Essen & Murray: Newspaper mergers, acquisitions, and brokers

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