Wednesday, May 23, 2012

Why Is Warren Buffett Buying Newspapers?

Warren Buffett has been rather busy with deals related to smaller newspapers lately.

Late last year, Buffett bought Omaha World-Herald:

Buffett's Berkshire Hathaway buys Omaha newspaper group

Here's what Buffett said about Omaha World-Herald in this press release:

Berkshire Hathaway Inc. Chairman and CEO Warren Buffett and Terry Kroeger, CEO of the Omaha World-Herald Company, owner of The World-Herald, six other daily newspapers and several weekly newspapers across Nebraska and Southwest Iowa announced that Berkshire will acquire the Omaha World-Herald Company.

Later in the press release...

"The World-Herald delivers solid profits and is one of the best-run newspapers in America, and we are pleased to have Terry Kroeger and his team join Berkshire Hathaway," said Warren Buffett...

Here's a Wall Street Journal article from back in April that explores the following question:

Warren Buffett Building Newspaper Empire?

Buffett has been buying up loans in the recently bankrupt newspaper publisher Lee Enterprises (LEE) and, according to the Wall Street Journal, apparently now also has a 4.1% stake in the company.

As of today, according to the company's website, Lee Enterprises publishes 48 daily newspapers (including the St. Louis Post-Dispatch) and nearly 300 other specialty publications.

In addition to Omaha World-Herald and Lee Enterprises (and already owning the Buffalo News and a stake in The Washington Post Company: WPO), Buffett did the following deal last week with Media General (MEG), an owner of a collection of newspapers.

Berkshire Buys Media General Newspaper For $ 142 million

According to the Media General press release, Berkshire will purchase all of the newspapers owned by Media General (with the exception of the Tampa group) for $ 142 million. From the press release:

The newspapers being purchased include...63 daily and weekly titles in Virginia, North Carolina, South Carolina and Alabama, in addition to digital assets, including websites and mobile and tablet applications. The newspapers also have a substantial commercial printing business.

Berkshire is also providing a $ 400 million loan and $ 45 million revolving credit line to Media General. As part of the deal, Berkshire will get a nearly 20% stake in the company via warrants. Here's what Buffett said in the press release:

"In towns and cities where there is a strong sense of community, there is no more important institution than the local paper," said Warren Buffett, Chairman of Berkshire Hathaway. "The many locales served by the newspapers we are acquiring fall firmly in this mold and we are delighted they have found a permanent home with Berkshire Hathaway."

Here is another Wall Street Journal that covers some of Buffett's recent newspaper business activity:

Warren Buffett Loves Newspapers (He Was Only Kidding In 2009)

Bloomberg Businessweek weighed in on why Buffett is getting involved in buying these kind of assets.

Why Warren Buffett Really Likes Newspapers

The following Time Magazine article also had some thoughts and background on why Buffett is buying newspapers.

Why Warren Buffett Is Buying Newspapers

Buffett said at the 2009 shareholder meeting that, when it comes to most newspapers in the U.S., "we wouldn't buy them at any price" and that they are likely to have "unending losses".

While at first these moves may seem a bit confusing (especially considering what he was saying back in 2009) I think this likely comes down to a few things:

- There's less competition in local papers so their economics are more attractive and under less pressure to deal with the digital transition.

- Clearly some financing was needed (at least in the case of Lee Enterprises and Media General) and Berkshire, with its long-term view and strong balance sheet, is in a unique position to provide it.

- While we don't have financials on Omaha World-Herald or Media General, a good guess is there is some decent free cash flow here once the balance sheet is straightened out. Their weak balance sheets almost certainly puts Buffett in a position to get deals done that are attractive to Berkshire. Lee Enterprises actually had some nice free cash flow in recent years (and also the past couple quarters of this fiscal year) but filed for Chapter 11 bankruptcy protection to refinance roughly $ 1 billion of debt.

Finally, the newspaper business is something Buffett and Munger certainly know well.


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