Rupert Murdoch may be bidding $5 billion for Dow Jones and its flagship property, The Wall Street Journal, but one long-time media expert views this takeover bid as a one off for the dying newspaper business, viewing pixels and bandwidth as the big winners for media investors.
“When [Murdoch] wants something, he doesn’t care what it costs,” says Dennis Leibowitz, managing partner of media-focused hedge fund Act II Partners. “In the case of Dow Jones, even though it is obviously a very high multiple for a newspaper company, [Murdoch] looks at it in global terms as a franchise.”
Leibowitz explains that even though $5 billion is a “ridiculous” price to pay for Dow Jones, Murdoch’s market cap is over $70 billion, so if he overpays by $1 billion, it isn’t a big deal for him. “But it doesn’t mean anything in my mind for the newspaper business…. It is the financial brand that is important.”
Leibowitz, who has been shorting the newspaper business for years, believes that the growth in the media space will be in Internet, cable and telecom stocks. And so far, he’s been right. Act II, which currently has $160 million in assets under management, is up 16.8% this year (net of fees), and 82.5% since its inception in March 2002.
The hedge fund is a niche, sector-focused fund, but it invests across 18 different sub-areas, and even has a 10% carve-out for private equity.
“Although it is a sector fund, it is about as broad a sector fund as you can get,” says Leibowitz. In the extremes, the sub-sectors range from video games to RBOC [Regional Bell Operating Company], so that has been a great asset on the defensive side, because if something happens in one of our industries it doesn’t knock out the whole portfolio.”
While the investor-base in the fund has grown steadily over the past five years—the General Electric pension fund is the largest investor at 20%—Leibowitz is stepping up marketing efforts, and his goal is to double assets under management by year-end.
Shorts: Best And Worst
Leibowitz, who was a sell side analysis for 38 years, including at Donaldson Lufkin & Jenrette and Credit Suisse First Boston, before founding New York-based Act II, becomes animated when discussing individual stocks. When asked what he thinks of Vonage, Leibowitz smiles.
“Vonage has been our best short of the year,” he says, explaining that, much like Tivo, Vonage came up with a good product but it was quickly commoditized by the big boys, who can bundle services and offer them at a steep discount. “[Tivo] just can’t compete with cable’s ‘triple-play’ telephone, internet and television packages.”
But while proud of his positive picks, Leibowitz isn’t shy about revealing some of his less stellar calls.
“The worst short we ever had was Martha Stewart,” he says. “We bet correctly on the fundamentals, but the stock went up hugely because of popular press support.” But after costing the fund almost a point in 2004, the hit from shorting Martha proved a valuable lesson. “We instituted a very strict policy on covering shorts that we were losing money, even if we were convinced we were right fundamentally.” Ironically, no sooner had Leibowitz covered the Martha Stewart shorts than the stock took a tumble.
This year, the fund was tripped up by Amazon.com because of a heavy short interest and better than expected numbers in the first quarter, but Leibowitz points out that the fund is still way above the main indices, with the Standard & Poor’s 500 and NASDAQ-100 both gaining 4.5% through April and the Dow Jones Industrial Average rising by 4.8%.
As for Google, “We just missed it, basically,” he shrugs, adding that his firm’s specialty is in the less-covered, medium-sized companies, rather than the mega-cap titans of the media space.
On the flip side, Leibowitz is going long on internet-related stocks, specifically advertising companies such as 24/7 Real Media and ValueClick.
“We have played the shift from old media to new media by buying internet advertising agencies and selling newspaper stocks,” he says. “We’ve also been short radio since day one.”
While internet growth is running close to 30% per year, there is still a large gap between the advertising dollars that go to the Internet versus the amount of time spent in cyberspace.
“The Internet represents 6-7% of advertising, but it accounts for 15-20% of the time spent on media,” he says. “It is now becoming an integral part of big brand advertisers’ budgets.”
He is also busy making telecom plays, specifically in the mobile phone space, where he predicts carriers have prospects for above average growth due to all the non-voice services, such as video, that are coming to mobile phones.
About 15% of the fund’s current portfolio is in firms that derive their revenue from non-domestic-focused sources, with the largest holding being Nextel International—a U.S. firm that is based entirely overseas. The second largest holding is ValueClick, with the third being Liberty Capital.
Domestically, Act II has played several of the rural wireless carriers, such as Rural Celluar, which is not as far along in terms of coverage and video capability.
As for cable versus the tradition telephone industry, Leibowitz says cable is in a much stronger position.
“Multiples are at very low levels despite double-digit profit growth…. In fact the multiples are a lot higher than the telephone companies who are showing no growth, because while they are showing growth in wireless and data they are losing primary telephone lines at a very rapid rate,” he says. “We think the cable companies have been oversold because of fears of competition.”
Private Equity Carve-out
While primarily a log/short equity fund, Leibowitz has tapped into his long-term relationships with media executives to find promising private companies in which to invest.
The first of Act II’s private equity investments, StubHub—an online site for sporting and entertainment tickets—proved to be a lucrative bet. The fund initially invested $500,000 in StubHub, which was sold in January to eBay for approximately $300 million, netting Act II $3.5 million—or seven times its initial investment.
The Next Act
Despite strong returns and an already solid investor base, Act II has its work cut out for it when it comes to reaching its goal of managing $300 million by year-end.
Michael Didier, director of client relations at the firm, explains that with the 10,000 hedge fund out there, it’s really a battle to rise above the noise. “But our performance this year has helped us get the word out,” he says.
Yet, despite the competition, Act II may have already overcome its biggest hurdle.
“A sell-side analyst is met with some skepticism when it comes to his or her ability to manage a fund,” says Leibowitz. “I think I’ve proven that I can.”
By Deirdre Brennan