Investor Signals Discontent with Dallas Morning News Parent Company

On the heels of a dismal fourth quarter in 2018, one institutional investor in Dallas Morning News parent company A.H. Belo has signaled its discontent with the decisions the company has made with a letter filed with the Securities and Exchange Commission on Monday.

Minerva Advisors, an investment management firm based in the Philadelphia suburb of Bala Cynwyd, Pennsylvania, filed the letter with the SEC, saying that the company should go private, and “has no business remaining publicly traded.”

D Magazine’s Eric Celeste first reported on the 13D letter, which outlines several grievances Minerva has with A.H. Belo Corporation (AHC). A 13D filing can be filed with any person or entity that has at least 5 percent ownership of a company’s common stock. It’s frequently used by so-called “activist” investors to signal displeasure with a company when previous dialogue has proven unfruitful.

Think of it as a warning shot.

Minerva president David Cohen outlined his firm’s issues with A.H. Belo, which included board compensation and other decisions the publishing company has made.

“As the struggles of the print business have intensified and all of the company’s non-DMN newspapers were sold, it has become clear to us that, in an era of elevated public company governance costs, AHC has no business remaining publicly traded,” Cohen wrote. “We have previously conveyed that opinion to management, but the company instead responded by embarking upon an ill-conceived effort to diversify into digital marketing, a highly competitive business in which AHC had no apparent competitive advantage.”

Cohen said they asked Belo executives to return some of the cash on the balance sheet to investors, but that they were told that it was needed to keep the company liquid.

Last month the company announced a quarterly dividend to be paid June 7. Investors of record on May 17 will be paid an 8 cent per share dividend, the announcement said.

“Until recently, we have viewed these differences in opinion as variations in business judgment. The filing of the company’s 2019 proxy statement, however, has changed our perspective,” Cohen said. “Given that insiders are protected by their ownership of super-voting B shares which allow them to control A.H. Belo despite owning only 12.8 percent of its shares, we realized that we were going to have to be patient until they realized the strategic error they were making.”

“It never entered our minds that the shareholders would have to continue to stand in line waiting for the cash they own while the Board paid out (or committed to pay out) meaningful sums to the managers and to themselves.”

Minerva’s letter also outlines several items they felt were important to report, including:

“The six outside board members own about 208,000 shares of stock, worth about $800,000 at the current market price. Their combined Board fees for last year were over $800,000. This raises some doubt in our minds as to how much belief they have in AHC stock as an investment. The majority of these directors are described in their biographies as investors and they presumably had access to capital with which to buy shares if they felt compelled to do so. Their reticence to invest speaks volumes. None of them is described as having media or digital marketing experience.

Among the benefits of board membership is participation in AHC’s Incentive Compensation Plan, in the form of Restricted Stock Unit awards, which are supposed to align the interests of insiders with those of actual shareholders. These units typically vest over time, but on December 10, the Board accelerated the vesting of its own units and cashed themselves out at the then current market price. Given how poor AHC’s fourth quarter was (and how late in the quarter it was when they cashed out), they benefited from this timing and avoided the losses associated with holding the stock. This opportunity was not available to outside stockholders. Perhaps there is a good reason for the directors to give up the potential upside associated with future ownership of the stock, but it is definitely not explained in the proxy. For 2019 and beyond, the directors have given up all non-cash compensation, in favor of cash increases. At best, the signal they are sending about the company’s future is unfortunate. If the Board is trying to protect shareholders from additional dilution, a more aggressive stock buyback would be more impactful and send a clearer message.”

Cohen also mentioned former CEO James Moroney’s salary, noting that when he retired last May, he received his full cash bonus for the entire year based on meeting certain objectives, “causing us to wonder how ambitious they were if they could be fulfilled in fewer than five months.”

A look at SEC records shows that Moroney sold 3,145 shares Tuesday, at an average price of $4, for a yield of around $12,500. The transaction leaves him with 283,164 shares of stock worth about $1.1 million. However, it appears that Moroney has been divesting himself of AHC stock slowly since January, selling shares 17 times for a total of 105,953 shares for (by our calculations) $438,813.70. It also appears that all the transactions were done when share prices were at least $4.

Cohen mentioned this as well, adding that “this sends another very negative message to current and potential shareholders.”

The 13D also mentions Dallas Morning News publisher Grant Moise and Belo & Company president Timothy Storer’s compensation. The latter’s compensation has been $1 million, and in 2018, he received his performance bonus of 55 percent of his target, as well as restricted stock units that were cashed out and traded.

“He was also the recipient of the Board’s largesse with regard to his RSU’s which were cashed out in the same manner as the Board’s units, for roughly $400,000,” Cohen wrote. “Worse yet, Mr. Storer traded future RSU’s which were contingent on performance during 2020 and 2021 for a $1 million cash payment in January of 2019.”

Moise also received an RSU cash-out, Cohen said, but for $130,000, and over the past two years he has been compensated $2 million total.

In last months’ conference call for the 4Q 2018, AHC revealed a 4Q net income of $151,000, or a penny per fully diluted share, compared to a $12.8 million net income in 2017. For the entire year, the company reported a net loss of $5.4 million.

Dallas Morning News 4Q 2018 total revenue was $47.1 million, a decrease of $9.4 million or 16.6 percent compared to Q4 2017. For the full year, total revenue was $180.3 million, a decrease of $37 million.

In January, the Dallas Morning News announced the layoffs of 43 employees, 20 from the newsroom. At the time, LA Times reporter Matt Pierce took note of the recent raises AHC execs had received.

Layoffs are hitting journalists the Dallas Morning News today. Meanwhile, newly released corporate filings show their company’s top executives have gotten some nice raises in recent years. https://t.co/Ntyh2AYZi5 pic.twitter.com/2ELOekLi05

— Matt Pearce 🦅 (@mattdpearce) March 28, 2018

During that conference call, Cohen grilled A.H. Belo execs on the costs associated with the company being publicly traded and hinted even then that he felt the company should go private.

“I came to a number which was certainly over $2 million and $2 million isn’t that much compared to adjusted operating income of $15 million or $20 million, which we use to generate,” he said. “Two million compared to $5 million of adjusted operating income, that’s pretty substantial and I am just not sure I agree that historically, there were some benefits of being public. I am just not quite clear on what the value is as being public right now.”

Both chairman, president, and CEO Robert Decherd and senior vice president Katy Murray insisted many of those expenses would occur whether the company was public or private, and Murray disputed Cohen’s math.

“I’ve been very supportive and I think The Dallas Morning News is an incredibly important piece of the Dallas media environments and it’s a civic institution,” Cohen said, after alluding to Moroney’s stock sales. “I don’t think that as a public company, that the health of that civic institution can be assured and in fact, you are working across purposes to what’s held by being public.”

According to most recent information CandysDirt.com could find, Minerva increased its investment in AHC stock by 2.5 percent in the fourth quarter of 2018, bringing its total investment to 964,669 shares — a roughly $3 million stake. That buy was also noted when news came of the Dallas Morning News layoffs, with many prognosticating what the buyout could mean.

In light of the 13D, it seems that perhaps the move could’ve been, in part, to improve the firm’s position to ensure that it had enough of a share of the company to be able to file the report.

The Dallas Morning News reported that Minerva owns about 5 percent of the company’s stock.

Other stockholders include Parthenon LLC, which owns 183,884 shares as of the last quarter. Penn Capital Management owns 311,574 shares, Renaissance Technologies owns 830,449 shares, and North Star Investment Management owns 1,283,607 shares.

By most accounting we found, roughly 60 percent of the company is owned by institutional investors like Minerva and hedge funds. Insiders account for 12.8 percent of stock ownership.

According to the Dallas Morning News, Decherd declined to comment, only saying that “the company does not comment on matters of this type.” Minerva has also declined further comment.

Shares of A.H. Belo closed at $3.96 Wednesday evening.

Minerva 13D filing by Bethany Erickson on Scribd

James Moroney Stock Sale by Bethany Erickson on Scribd