Turns Out Warren Buffett Won’t Be The Billionaire Who Saves Newspapers Either
Circa 2012, one of the most popular lines among American newspaper journalists went something like this: “Newspapers can’t be that terrible of a business if Warren Buffett, the smartest investor in the world, wants in.”
That was the year that Buffett’s Berkshire Hathaway bought 63 newspapers from Media General for $142 million. As The Philadelphia Inquirer’s Will Bunch put it: “The fact that Warren Buffett thought newspapers were a good investment was always a huge psychic boost for journalists.”
@KevinNewmanCTV @PeteAbe If Warren Buffett believes newspapers are a potential growth area, it has to be true, right? #Optimistic
— Brent Jolly (@Brent_T_Jolly) August 8, 2013
Well, that line lost whatever punch it had retained this morning when Berkshire Hathaway announced it was selling its papers to Lee Enterprises for $140 million. Buffett famously doesn’t like selling any of his assets — his preferred time period for holding a stock is “forever” — so this one comes with more sting than other newspaper dealings.
Today only reinforces the fact that mergers and acquisitions are the No. 1 strategy of the fast-declining daily newspaper industry. Cutting costs by getting bigger is the only real plan the industry is collectively behind.Lee’s acquisition is far smaller than GateHouse’s November purchase of Gannett — the No. 2 chain buying the No. 1, and taking its name — but it serves the same purpose: a rapid elimination of “duplicative” costs, what the British like to call redundancies. In the New Gannett case, the company aims to save $400 million or more through headcount and other reductions. Here, the savings are more modest, forecast by Lee to be in the $20 to $25 million range —appropriate to the smaller scale, with fewer newspapers sold and most in smaller markets.
First published at Harvard’s Nieman Journalism Lab on Jan. 29, 2020
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Faced with unending print revenue declines — long deep in advertising and now increasing in circulation — top industry executives have identified M&A as their best strategy to remain profitable businesses in the next several years.
This is a broad, if short-term perhaps, win-win. Lee adds scale, finds “synergies,” and refinances its pesky debt, all in one deal. It will now operate 81 dailies, up from 50. The role that Lee — one of only a handful of publicly traded newspaper companies, but a small one — would play newspaper industry’s ongoing Consolidation Games was been unclear. We now have a relatively simple, elegant answer: Lee has bought time.
The Wall Street Journal headlined its piece today “Warren Buffett Is Giving Up on Newspapers.” “Warren Buffett Throws in the Towel on His Newspaper Empire,” Bloomberg put it.
Good attention-grabbers, but they underplay how much today’s sale is just the next logical step for Buffett.
Buffett commented on the industry in his first annual shareholder letter after the Media General deal, in 2013:
Newspapers continue to reign supreme, however, in the delivery of local news. If you want to know what’s going on in your town — whether the news is about the mayor or taxes or high school football — there is no substitute for a local newspaper that is doing its job. A reader’s eyes may glaze over after they take in a couple of paragraphs about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbors will be read to the end. Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents.
But there was nothing about newspapers in his 2014 or 2015 letters. They popped up again in 2016 — but not in a good way. (In a section headlined “Important Risks”: “Circulation of our print newspapers will continue to fall, a certainty we allowed for when purchasing them.”) He was also saying things like:
Newspapers are going to go downhill. Most newspapers, the transition to the internet so far hasn’t worked in digital. The revenues don’t come in. There are a couple of exceptions for national newspapers — The Wall Street Journal and The New York Times are in a different category. That doesn’t mean it necessarily works brilliantly for them, but they are a different business than a local newspaper.
But local newspapers continue to decline at a very significant rate. And even with the economy improving, circulation goes down, advertising goes down, and it goes down in prosperous cities, it goes down in areas that are having urban troubles, it goes down in small towns – that’s what amazes me.
A town of 10 or 20,000, where there’s no local TV station obviously, and really there’s nothing on the internet that tells you what’s going on in a town like that, but the circulation just goes down every month. And when circulation goes down, advertising is gonna go down, and what used to be a virtuous circle turns into a vicious circle.
I still love newspapers! You’re talking to the last guy in the world. Someday you’ll come out and interview me, and you’ll see a guy with a landline phone, reading a print newspaper.
That the sale is to Lee is no particular surprise: In June 2018, Berkshire Hathaway Media largely turned operating control of its 31 dailies over to Lee. That was a first step in gaining some efficiency in scaled management. It was also a clear acknowledgment by Buffett, a longtime newspaper owner and booster for the industry, that he no longer believed the print newspaper business could be turned around. By April 2019, he was telling interviewers most of the industry was “toast.”
Buffett saw newspapers as a business that, in the hands of experienced operators, could still throw off cash — that the decline of the business could be managed both profitably and with its public service principles maintained, if still tattered by newsroom cuts. He didn’t buy the major metro papers that were taking the biggest hits; he bought papers in smaller cities where the local daily still felt connected to the community and still lacked much of the competition the bigger fish faced.
Dothan, Alabama; Florence, South Carolina; Waco, Texas; Danville, Virginia. Berkshire Hathaway’s biggest newspaper markets were Buffalo, Tulsa, and Omaha. One attempt to suss out what Buffett was looking for in a newspaper noted what most of his had in common: a circulation of 30,000 or less in a town with a population of 75,000 or less.
Buffett, a former member of The Washington Post’s board, has longstanding ties to Lee, as well as to its now-chair Mary Junck. That relationship paved the way for both the 2018 agreement and today’s sale.
As with the purchase that brought most of these papers to Berkshire Hathaway — that 2012 deal with Media General — BH managed to gain some ancillary financial benefits in the transaction.
As part of this deal, Berkshire Hathaway lends Lee $576 million. That money both finances this purchase and lets Lee to do what it’s found difficult to do over the past year: refinance its roughly $400 million in debt. That makes Berkshire Hathaway Lee’s only lender — a generally more friendly one than private equity or most others who might lend money to a newspaper chain in 2020.
Lee will pay the not-insignificant interest rate of 9 percent. Note, though, that’s significantly lower than the 11.5 percent that Apollo Global Management got to finance the Gannett/GateHouse merger. (There’s also a real estate leasing deal accompanying the acquisition.)
Berkshire Hathaway’s newspapers were always immaterial to its broader financial fortunes, of course: The Bryan-College Station Eagle doesn’t mean much to a company valued this morning at $551 billion. But Buffett’s newspaper investment didn’t turn out so bad in the end. He bought Media General’s papers in 2012 for $142 million; he’s selling his papers (which do include some additional, non-Media General properties) for $140 million today. He was almost certainly able to pull profits out of them every year in between.
He’ll make 9 percent annually on the loan to Lee. As part of the 2012 deal, he also loaned $400 million (at 10.5 percent!) to Media General, which made BH good money — including a $43.8 million in a prepayment premium. It also got penny warrants for about 20 percent of Media General’s shares, which after execution were worth about $85 million just a year later.
Warren Buffett knows how to make money, in other words — even in an industry on the way down. He’s a value investor, not a growth investor. Which makes sense, given that the original company Berkshire Hathaway — the one Buffett bought in 1965 and converted into his astonishingly large holding company — was a declining textile business based in New Bedford, Massachusetts. As he would describe that business years later:
“The northern textile business in which all of our capital resides is destined for recurring losses and will eventually disappear.” That development, however, was no death knell. We simply adapted. And we will continue to do so.
Today’s deal nonetheless reduces the number of major newspaper chains, a count now dwindling quickly. Gannett and Berkshire Hathaway have both left the scene in just a few months. (Gannett’s name lives on, but it’s ex-GateHouse people running things.) Tribune Publishing or MNG Enterprises is likely to be next, and McClatchy’s coming financial reorganization will likely make it a deal target too. Warren Buffett has found his exit; others are left looking.