It has been widely reported that Jeff Bezos agreed to purchase The Washington Post for $250 million. As we examined the deal, we found two things surprising.

Surprise No. 1–Mr. Bezos paid $250 million for The Post without getting its realty

First, Mr. Bezos paid $250 million for The Washington Post (The Post) without acquiring the real estate. The Washington Post Company (the Post Company) owns buildings that take up the better part of a block on 15th Street in downtown Washington, D.C., a couple of blocks from the White House and the valuable K Street corridor. The Post Company also owns warehouses on the waterfront in Alexandria, VA, and despite the notoriously difficult zoning process there, such waterfront property has vast redevelopment potential. But it’s clear that Mr. Bezos isn’t getting any of this valuable real estate. In fact, he has agreed to lease space from the Post Company for two years at "commercially reasonable rates," which can be high in downtown D.C.

The real estate exclusion is set forth in the contract of sale that the Post Company filed with the SEC (available here). The Post published an article about the deal that emphasizes that the Post Company sold the newspaper to Mr. Bezos without its associated real estate. The article notes that the real estate is listed for sale and will not be retained by the Post Company, which will relocate its corporate offices to less expensive space (available here).

Bezos’ purchase of The Washington Post without its realty is surprising in comparison to other deals. Print media typically involve significant realty, so even when the print business declines, the owners salvage value from the realty. For example, it’s reported that John Henry’s deal to purchase the Boston Globe for $70 million includes the Globe’s real estate holdings in Boston. While the value of the Globe buildings and associated liabilities are unclear and so far The New York Times Company has not filed the contract with the SEC, some articles have suggested that Mr. Henry got a sufficient value of realty in that he essentially paid nothing for the Boston Globe newspaper business.

Of course, one of the savviest deals of this kind occurred in Washington, D.C. in 1984 when Mort Zuckerman of Boston Properties purchased the U.S. News and World Report (U.S. News) along with its realty in the West End of Washington, D.C., adjacent to Rock Creek Park, for $168.5 million. Boston Properties promptly tore down the U.S. News buildings and redeveloped the site with a major office complex worth many times what was paid for U.S. News.

Some commentators, including noted newspaper analyst Lou Phelps, have compared the Post and Globe deals based on the price per subscriber or ratios of price to revenue or EBITDA, without considering the realty involved (available here). However, the economics of the deals are much different if Mr. Henry got $70 million worth of real estate with the Globe, but Mr. Bezos was excluded from getting $250 million of The Post Company realty. The fact that the Post Company realty was excluded has to be considered in analyzing Mr. Bezos’s deal and it initially surprised us that he paid $250 million for a newspaper, and not buildings housing a newspaper. However, there is a second surprise in the Bezos deal that puts the price in a different context in our view.

Surprise No. 2–Mr. Bezos arguably acquired a billion-dollar media brand for $250 million

Is it possible that Mr. Bezos is so un-savvy that he would unwittingly break the mold of other print media deals and agree to buy the Post without getting its realty, thereby vastly overpaying for a media business in comparison to deal makers like John Henry and Mort Zuckerman? We don’t think so, so we took a deeper look.

In order to understand the value of what Mr. Bezos purchased, we took a closer look at the Post Company. The Post Company has a market capitalization of $4.35 billion based on its shares currently trading at around $600 each. Stock analysts on average estimate the Post Company will earn a profit of about $24 per share this year. So the stock is trading at about 25 times earnings.

The Post Company earns the bulk of its revenue and profit from its Kaplan Education division, which operates Kaplan University and test preparation services. So the Post Company is primarily a for-profit university business. Other for-profit universities include Strayer Education, which, like the Post, is based in Washington, D.C.; Devry, Inc. and Apollo Group, Inc., which operates the University of Phoenix. It’s been widely reported that for-profit universities face challenges under the current administration. As a result, for-profit university shares trade low multiples, with Strayer, DeVry and Apollo trading at multiples of 9.52, 13 and 8.41 times earnings, the average being 10.3. If the Post Company shares traded at 10.3 times this year’s earnings of $24, the Post would be trading at $247 per share instead of $600.

We considered the possibility that the Post Company has some "secret sauce" in operating Kaplan University that justifies a higher multiple than other for-profit universities. However, the Post Company’s most recent annual report shows that revenues at the Kaplan Education division declined from $2.8 billion in 2010 to $2.4 billion in 2011 to $2.2 billion in 2012. We also considered the possibility that the market values Kaplan differently because of its test preparation component. However, the annual report shows that the test preparation business is only a small part of the Kaplan division. Also, we see no barriers to other for-profit universities offering test preparation.

Of course, the Post Company also has two media businesses. It owns Cable One, a small cable television multisystem operator (MSO) with about 600,000 subscribers. By comparison, Time Warner Cable (TWC) has about 14.5 million customers. Since size matters in the cable television business, a large MSO like TWC should command a higher multiple than Cable One. In addition, TWC stock has run up considerably in anticipation of an acquisition of TWC by Charter Communications (under the control of Liberty Media and John Malone). Yet TWC trades at a multiple of 16 times earnings.

The other media business owned by the Post Company is the Post-Newsweek division, a small broadcasting company that owns six television stations. By comparison, Belo Broadcasting, a larger broadcaster that is being acquired by Gannett, trades at a multiple of 15 times earnings, even after its stock has been bid up by Gannett with a substantial takeover premium.

Even if we use a media business multiple, say 15.5, instead of a for-profit university multiple of 10, we’re nowhere close to the Post Company multiple of 24. At 15.5 times projected earnings of $24 per share, the Post Company shares would trade at $372, not $600. And it would overstate the value to use a media multiple because the Post Company business is mostly a for-profit education business. Maybe the fairest comparison is to average the for-profit university and media multiples, and use 13, in which case the Post Company shares would trade at $312.

So, about half of the $4 billion market capitalization of the Post Company we can’t account for based on the for-profit education, cable television and broadcast businesses. This suggests that the

Post brand is worth north of a billion dollars. This is a storied brand that looms large in the national and even global psyche with roots in cultural icons like Robert Redford and Dustin Hoffman in All the President’s Men, Richard Nixon and the Watergate saga. But with all that, is it reasonable to believe that Mr. Bezos acquired a billion-dollar brand for $250 million?

The contract of sale gives Mr. Bezos all rights to The Washingon Post brand. The Post Company agreed to change its name to something that will bear no relation to The Washington Post brand. It’s clear that Mr. Bezos was intently focused on the brand, while he let the Post Company exclude its valuable realty, as noted above.

One point of comparison is the AOL acquisition of The Huffington Post. AOL agreed to acquire The Huffington Post in February, 2011, for $315 million. The Huffington Post was a brand with a largely virtual operation, so the value was not based on realty. At the time AOL acquired The Huffington Post, AOL stock was on a downward spiral from $25 to $11. Subsequently, AOL stock has risen to $37. As a result, one could attribute a significant part of the AOL market capitalization of $2.83 billion to AOL’s shrewd decision to acquire The Huffington Post for $315 million.

So the second surprise in Mr. Bezos’ deal for The Washington Post may well be that Mr. Bezos was able to buy a billion-dollar brand for $250 million.