Warren Buffett's BerkshireHathawayInc is boosting its bet on the newspaper industry, with a deal to buy the majority ofMedia General Inc's papers for $142 million in cash.
The deal announced Thursday, May 17 means Buffett will have a stable of about 25 daily newspapers across the country, turning the chairman of the ice-cream-to-insurance conglomerate into one of the country’s biggest publishers as well.
Berkshire will also lend Media General $400 million and provide a $45 million credit line. Media General will issue warrants for approximately 4.6 million Class A shares, representing 19.9 percent of its existing shares outstanding.
Media General’s stock soared 38.2 percent to $4.34 in mid-day trade, touching its highest level in six weeks. The company said in February it was exploring the sale of the papers.
Its 63 daily and weekly newspapers scattered throughout the U.S. Southeast, includingthe Richmond Times-Dispatch, will be operated underBH Media Group, a new subsidiary of BerkshireHathaway. The sale does not include newspapers in Media General’sTampadivision, which will be sold separately.
ThePoynter Institute’sRick Edmondssaid that without theTampapaper, the group Berkshire bought is probably "modestly profitable."
Berkshire already ownsthe Buffalo News, the Omaha World-Herald Co and a stake in theWashington PostCo. The conglomerate also reportedly holds a small stake in the recently reorganized newspaper chain Lee Enterprises.
With the Media General deal, Buffett will own, outright or in large part, three of the top 10 newspapers in the country by market penetration, according to thePew Research Center.
But none of the papers that Berkshire owns directly are in the top 25 nationwide by circulation, according to the Audit Bureau of Circulations, which one analyst said fits with Buffett’s strategy.
"BerkshireHathawayis clearly (taking) a vote of confidence in small-town local newspapers. They didn’t buy the big city newspaperTampa Tribune, which is struggling," said Benchmark Capital analystEdward Atorino.
"They’re basically giving Media General a lease on life here. This is chump change but BerkshireHathawaydoesn’t fool around. I don’t think BerkshireHathawaydoes anything where they’re going to lose money."
Media General is the latest newspaper company with a heavy debt load to turn to a mogul for help. TheNew York TimesCo took a $250 million loan with about 14 percent interest from Mexican billionaireCarlos Slim, which the company has since paid back. Slim also received warrants in the deal.
‘REASONABLE’ INVESTMENT
Buffett is paying slightly less for the Media General papers than he paid late last year for his hometown paper, the World-Herald. That deal included six other dailies and several weeklies inNebraskaandIowa.
That deal raised eyebrows, as it looked to some to be more like a rescue of a local business with a clouded financial picture than a long-term investment. Many also pointed to his highly skeptical comments in his 2007 letter to shareholders.
"When an industry’s underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance," he said in discussing the shrinking profits at his first newspaper holding,the Buffalo News.
But Buffett was adamant that the World-Herald deal was "reasonable," and told shareholders earlier this month they were likely to see him do more.
"We may buy more newspapers. I think the economics work out OK," Buffett said at Berkshire’s annual meeting on May 5.
One Berkshire investor said the deal fits Buffett’s value model, which has drawn him into acquisitions from railroads and chemical companies to jewelers and alcohol distributors.
"Buffett sees the transition away from free content as an ultimate boost to profit margins. The companies are very undervalued if they attain even low single-digit earnings growth. I would compare this to his purchase of gas pipelines in the Enron fire sale in 2002," saidBill Smead, chief investment officer ofSmead CapitalManagement inSeattle.
The new holding entity,BH Media Group, also includes the World-Herald papers.Terry Kroeger, formerly CEO of the World-Herald Co, is president of the group.
It was not clear where or whetherthe Buffalo Newsfits into the new entity. Buffett’s assistant was not immediately available to comment.
With the nearly 20 percent stake in Media General, Buffett also gets a foot back into the broadcast television business, an industry he knows well. After the newspaper sale, the remaining Media General will be mostly a TV company, with a number of NBC affiliates.
In the 1980s, Buffett helped Capital Cities finance its purchase of the ABC television network and for years remained one of its key shareholders.
