UPDATE: Osmium has kept buying. In a Sept 18 disclosure, the US firm said it owned 11.6 per cent of NZME.
San Francisco-based Osmium Partners had been watching NZME for three years before it decided to invest, founder and managing partner John Lewis says.
A Monday NZX filing revealed that on September 1, Osmium crossed the mandatory disclosure threshold. It had built an 8.8 per cent stake over a series of trades, buying shares at prices between 25c and 40c.
NZME - publisher of the NZ Herald - was at 44c in midday Friday trading, valuing the company at $86.5 million, and Osmium's stake at $7.6m.
So what led the investment management firm to finally pull the trigger and buy close to 9 per cent of the media company?
"Coming into the fourth quarter, I thought this would be a very rough time, but NZME pivoted rapidly and pulled out a win," Lewis says.
"Ebitda was up, and it was guiding to more profit in 2021."
On August 25, NZME reported a 5 per cent increase in operating earnings to $28.9m as rapid restructuring efforts and new online initiatives including premium subscriptions (which doubled in the six months to June 30) and OneRoof, helped to offset Covid-19's impact on advertising. The board said dividend payments could resume after June 30 next year. Shares jumped 48 per cent in a session to 42c.
"A lot of great businesses are built in times when others are going in reverse," Lewis says, contrasting NZME's profit and subscriber growth with Bauer's decision to up sticks in NZ.
Lewis said Osmium was attracted to NZME's combination of newspaper, digital and radio assets.
NZME shares soar on dividend talk, digital subscriptions climb above 80,000
"The NZ Herald is the New York Times of New Zealand. There will always be a market for quality journalism, whether it's in print or online," Lewis says. Management had been executing well in the company's digital transition, he adds. "OneRoof seems to be getting a lot of traction." NZ's low Covid numbers also appealed.
More broadly, he says NZME fits the criteria his firm has been using since 2002 to identify money-makers.
"We are long term holders of what we consider to be high-quality businesses," Lewis says.
"We have a process that we call the 'Osmium 8', which looks for a low business valuation, ability to grow earnings over time, a strong track record of capital allocation, reasonable barriers to entry, a superior user experience, attractive underlying economics, a good balance sheet, and strong board that is fair with shareholders."
NZME is Osmium's first investment in New Zealand, and its first in a media company - although Lewis has been monitoring the sector for years.
Jarden research analyst Arie Dekker, has an "outperform" rating on NZME, and raised his 12-month price-target to 47 cents following the half-year report.
Lewis prefers not to reveal any target, but says at 44c his firm considers NZME to be "substantially undervalued."
Osmium has at times rattled cages. In 2004, the Wall Street Journal chronicled a clash between Lewis's fund and Troy Group over a bid to take the company private.
And last month, Osmium joined a number of other investors in penning an open letter calling for "drastic change at the top" at Leaf Group - a US company that includes a number of home, wellness and lifestyle brands - alleging $1m in stock and cash bonuses awarded to its CEO were "egregious" at a time when the company's shares were down and rank-and-file staff taking pay cuts.
NZME has recently felt the influence of investors. On June 11, chairman Peter Cullinane resigned suddenly ahead of the annual shareholders meeting. He told the Herald he felt it "appropriate to step down" because he'd lost the support of Australian fund-manager shareholders.
But Lewis describes Osmium as "an engaged rather than activist" investor. It only got on the front foot when something was severely out of balance at a company. The managing partner said he had no issues he needed to engage over with NZME or its board. He had spoken with chief executive Michael Boggs, but purely in a fact-finding mode.
The potential return of the dividend was not an immediate hook. Lewis said when a company was trading at a low multiple to ebitda, Osmium preferred free cash to be used for a share buy-back.
Jarden's Dekker sees potential for the dividend resumption to be brought forward FY2022 to FY2021, given progress parring down debt.
Despite the headwinds facing the media industry, "NZME has been producing strong free cash flow in recent years with net debt nearly halved over the last two years to $55 million at June 30," he says.
"We see NZME able to sustain a 3 cents per share dividend while continuing to invest around $12 million capex annually in the business and still pay off debt."