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Summary:

The Oracle of Omaha acquired his hometown newspaper in January and just snapped up dozens more in a $142 million deal. This is supposed to be the fastest declining industry in America. What is Warren Buffett up to?

Warren Buffett

The Oracle of Omaha acquired his hometown newspaper in January and just snapped up dozens more in a $142 million deal. This is supposed to be the fastest declining industry in America. What is Warren Buffett up to?

Here’s why the deal makes a lot more sense than it appears:

A “three corner pool shot”

This week’s deal makes Buffett’s company, Berkshire Hathaway, the proud owner of the Richmond Times-Dispatch and 62 other daily and weekly papers in Virginia and the South. Most of the titles, like The Goochland Gazette and The Bland County Messenger, have small circulations in the range of 5,000 – 25,000.

The Oracle himself explained the deal this way:

“In towns and cities where there is a strong sense of community, there is no more important institution than the local paper. 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.”

Buffett can wax sentimental all he wants but he is still the same hard-nosed businessman who was tough enough to stick it to Goldman Sachs. Like any of his deals, this is all about money.

“This deal is like a three corner pool shot that accomplishes several things at once,” says Ken Doctor, a media analyst.

Doctor notes that the deal includes an enormous loan and credit line to the newspapers’ former owner, Media General, in which Berkshire Hathaway will earn 10.5 percent. Buffett’s company also obtained stock warrants that will likely pay out handsomely as Media General works on becoming a full-time broadcasting company.

But what of the newspapers themselves? Doctor says that Buffett got them for a steal, noting that they sold on average for about $2 million a pop — or the price of an expensive home in each of the towns where they’re printed.

Small town papers make money

The story of the catastrophic decline in newspapers has been driven by metropolitan papers like the Washington Post  (on whose board Buffett sat for years) where ad rates plummeted while readers embraced digital alternatives.

The experience of small towns and counties has been different. In these places, a lack of print and online competition has allowed newspapers to hold onto some of their traditional monopoly power.

“In these communities, the local paper is the sole source of everyday news — from high school sports, local events or obituaries,” says Gordon Crovitz, former publisher of the Wall Street Journal and founder of digital subscription service, Press+.

This lack of competition has not only meant a slower decline in their print operations, but also a longer time period to make the transition to digital. While some metropolitan papers have rushed in a panic from one ill-advised paywall strategy to another in an effort to stay alive, smaller papers have had the luxury of a wait-and-see approach. In the meantime, digital subscription strategies have become more refined.

Crovitz claims that 70 publications have recently jettisoned the “free online” offer for print subscribers in favor of charging 25 percent and then letting readers opt-out of the digital part of the package.  He says that 90 percent of the customers elected to keep paying more.

What all this means for Buffett is that he can treat his newspaper fleet as a longer term investment that will pay off in three to five years. Most of the papers will likely deliver a modest profit from print while Berkshire Hathaway coaxes them into a digital strategy in which a growing share of revenue comes from subscription rather than ads (Doctor predicts subscription-based revenue will soon rise from 30 to 50 percent). The company can then cut away many of the printing, distribution and other legacy costs associated with newspapers.

Buffett being Buffett

Going into the newspaper business is a strange proposition for most investors but not for Buffett. This week’s purchase is consistent with a number of his investment mantras, including sticking to what he knows.

Buffett knows this business well from owning the Buffalo News and sitting on the board of the Washington Post, but also has more personal experience in the industry such as using $5000 from his savings as a paper-boy to launch Berkshire Hathaway. He also claims to read five newspapers a day.

Buffett also has a history of squeezing value out of traditional or troubled industries that scare off many investors. In recent years, for instance, he has bet big on airlines, autos and railroads.

There is also the question of scaling. According to Doctor, Berkshire Hathaway has long excelled at finding large scale efficiencies and the company now has enough newspapers (it also has six Nebraska papers in addition to the Omaha World-Herald) to make that happen.

Finally — and this is only speculation — some might wonder if Buffett, who has been close to the Obama Administration, might enjoy owning dozens of media outlets in swing states Virginia and North Carolina in an election year.

Join us for paidContent 2012: At The Crossroads on May 23 in NYC to discuss these issues and lots more.

  1. Come on…buying a newspaper so that Obama gets 4 more years? Nice speculation, that’s a terrible way to end a “story”

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    1. Brad Phillips Thursday, May 17, 2012

      I agree, this speculation is total bull and was a terrible way to end this article.

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    2. Actually, it was one of my first thoughts as I started reading this article.

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      1. Thanks for the comments.. My gut feeling is that this is more of a business investment than a political one.. Warren Buffett is no Randolph Hearst.. But the reality remains that papers are still a form of power

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  2. Probably USA will turn off Internet soon and newspapers will become the ony source of information…

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  3. Being from Richmond and occasionally having to read the Times-Disgrace, I welcome the change.

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    1. What change do you believe will be welcomed. Has Buffett
      given any Idea?

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  4. Internet, dude. Newspapers are so, yesterday.

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  5. OK, on to serious commentary. Borrell Associates has been saying for 2 years — to much criticism — that newspapers will bounce back. That prediction (which we thought would happen last year) is starting to come true, though it’s actually predicted to be more of a flattening than a bounceback. While they grow ad revenues over the next five years, they actually lose market share. Still, all the trimming since 2008 has made them a leaner, and thus more profitable, business. I suspect Buffett is looking at history, in particular radio in the 1960s, and thinking that newspapers represent a very stable cash-flow opportunity. Radio declined heavily throughout the 1950s as TV gained popularity, but then redefined itself as a drive-time, music and talk-radio medium and did just fine. Newspapers have redefined themselves as well. The size of newspapers Mr. Buffett is buying are perfect: Dominant newspapers in midsize markets with very little competition from smaller suburban newspapers. They have a strong market niche, and I don’t suspect we’ll see the death of newspapers (with the exception, perhaps, of large metros) anytime soon.

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  6. It’s great to see an American owning newspapers in the US since the MSM is owned almost exclusively by dual citizen.

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  7. You didn’t even mention that he used to own a weekly in Omaha called The Sun and that it won a Pulitzer Prize during his ownership. See Wikipedia– The Omaha Sun was a weekly newspaper from December 27, 1951 to August 31, 1983. It was owned in the 1970s by investor Warren Buffett. The staff of The Sun Newspapers of Omaha, NE was awarded a Pulitzer Prize for uncovering the large financial resources of Boys Town, Nebraska, leading to reforms in this charitable organization’s solicitation and use of funds contributed by the public.

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  8. While we can argue about short to medium term profitability of local papers, the long term does not look good for them. Internet is not only the dominant media that will kill paper distribution off in 5-10 years as older generation is being replaced with digital-savvy consumers. Internet is also a media that allows anyone (including all the commenters on this article) to publish news with no entry barrier. And digital aggregators like Patch create a strong alternative to local news. I don’t get Buffet on this move. He may get a modest profit given how low price he had to pay but this is not the business you want to be in if you want to keep minting the coins for the shareholders for years to come.

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    1. What you don’t understand is the great cash flow from old media products. Newspaper subscribers pay you 3 to 12 months in advance. That lets you keep a large amount of cash around to invest. Buffett doesn’t seem to have any problem finding profitable places to put cash. 10-year Treasury bills are paying 1.7% right now. 5% return for 10 years from the newspapers seems like a pretty good alternative.

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    2. There may be no barrier to entry into the field, but that doesn’t automatically create useful news that people will want to read. I think Patch is a good example of a newcomer into the market, working to grow their business, but they are basically a newspaper (just lacking the printed product). Newspapers across the country are multi-media companies and as the article pointed out, they are covering the news that no one else is (local government, local sports, etc.).

      Commenters and commentators may come to the internet, but without quality content and trust within the community they will not pose a threat to the position of newspapers (at least for mindshare among readers).

      The younger generation is digitally savy, but as they settle into communities (having children and buying homes) I believe we will see them falling into the same grove as the older generation, reading the newspaper (maybe not in print, but on a tablet or online where their presence can still be monetized).

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    3. AS the article says ..Buffett’s company also obtained stock warrants that will likely pay out handsomely as Media General works on becoming a full-time broadcasting company.I still see Buffett and Immelt and Obama’s influence in this deal.Media broadcast can control even more what people are watching. Obama Pal Jeff Immelt GE(NBC) now owning majority in Comcast. they I believe will one day control the political content as well.
      Comcast is creating its own content rather than distribution. They will own it.FCC is doing nothing about Progressive take overs of all Media in the country.
      Also the sale does not include newspapers in Media General’s Tampa division. They are already Progressive Rags.

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  9. David Merkel Friday, May 18, 2012

    EBITDA is 50MM/yr. He didn’t pay $142MM for $MEG, he paid $542 MM because of the term loan. That’s a price/EBITDA of 11 times, and that is not cheap.

    Also, EBITDA is falling, which means the multiple should be extra low. Also note the deeply negative tangible net worth: -$23/share. There are TV & data assets here, but I don’t think they compensate enough.

    This was not done to make money. This was done because he has a soft spot in his heart/head for newspapers.

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  10. This is such a bad idea. I know it looks great on the surface, and probably will keep Buffet’s as rich as ever, but this spells disaster for small-town newspapers.

    Of course, this is seen from the perspective of someone who did not swallow the digital koolade. The reason the big-city papers went bust is because their assets were tied to the toxic credit-default bubble of the early 2000′s. When the money dried up, suddenly they were under tremendous pressure to digitize ahead of schedule. A feeding-frenzy ensued, and those who could not get online quickly enough–or chose poor digitization strategies–were swallowed by sharks.

    Now the speculators have lifted their bloody snouts from the trough, and they see these smaller papers doing just fine. So what do they do? They bundle them with bigger media entities, and make off like bandits. I gotta hand it to Buffet for being the first to see it, because soon, like carpetbaggers in Atlanta, the rest of the vulture capitalists will soon swarm in and swallow up all these local papers that communities do indeed rely on.

    And what will happen to these bastions of truth, once the greed destroys another once-lucrative market? Bah! You mark my words: local papers will start getting flushed before the decade is out. And of course, the bastards will tell you it’s all about new media, while they tweet from their golden toilets.

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