Wednesday, June 6, 2012

Berkshire Discloses Stake in Lee Enterprises

Berkshire Hathaway (BRKadisclosed they own 3% of Lee Enterprises (LEE) common stock yesterday in an amendment to their most recent 13F.

It's not really all that surprising considering Berkshire's other recent deal activity involving newspapers.

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.

Based upon the 13F-HR/A, it certainly doesn't seem as if they wanted to disclose this just yet but their request to keep it confidential was denied:

THIS FILING LISTS A SECURITY HOLDING REPORTED ON THE FORM 13F FILED ON MAY 15, 2012, PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FOR WHICH THAT REQUEST WAS DENIED ON MAY 25, 2012.

No reason was given in the filing why the request to keep it confidential was denied by the SEC.

Back in December of 2011, Lee Enterprises filed for Chapter 11 bankruptcy protection in order to refinance a little less than $ 1 billion of debt.

The Wall Street Journal reported in April that Buffett bought $ 85 million of loans to the newspaper publisher. At the time it was thought that those loans were to be exchanged into junior debt and equity as part of its bankruptcy according to the Wall Street Journal.

Warren Buffett Building Newspaper Empire?

The just announced a bit more than 3 % stake in Lee Enterprises is obviously small in the scheme of things for Berkshire Hathaway. It's worth just ~ $ 1.9 million based upon yesterday's closing price. The common stock of Lee Enterprises is worth, in total, roughly $ 56 million as of yesterday but the shares are trading quite a bit higher after this announcement.

While revenue continues to decline, what's noteworthy is the amount of free cash flow the business is generating.

Free cash flow for Lee Enterprises was a bit under $ 100 million during the fiscal year that ended in September of 2011.

Free cash flow the year before that was also nearly $ 100 million.

Based upon the two most recent quarters free cash flow looked on pace to be at least that amount (not including the debt financing/reorganization costs paid and assuming that won't be a recurring cost) for the full year.

Obviously, that's quite a lot of free cash flow for a company with such a small market value.

The problem is, of course, all the debt. In January they refinanced all of their nearly $ 1 billion of debt. From their latest 10-Q:

On January 23, 2012, the Bankruptcy Court approved our Second Amended Joint Prepackaged Plan of Reorganization (the "Plan") under Chapter 11 of the U.S. Bankruptcy Code and on January 30, 2012 (the "Effective Date") the Company emerged from the Chapter 11 Proceedings.

What's interesting here is that the shareholders came out of the bankruptcy proceedings still owning a substantial portion of the company. Debt maturities were extended and holders of the debt ended up with only a relatively small ~ 13% of the shares outstanding (after the issuance of new shares of Common Stock according to the 10-Q filing).

The average weighted cost of the debt is now 9.2%.

In an earlier post, I summarized some of Berkshire's recent deal activity involving other newspapers.

Adam

No position in LEE

Some other related articles:
Buffett's Berkshire Hathaway buys Omaha newspaper group
Berkshire Buys Media General Newspapers For $ 142 million
Warren Buffett Loves Newspapers (He Was Only Kidding In 2009)
Why Warren Buffett Really Likes Newspapers
Why Warren Buffett Is Buying Newspapers
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