Warren Buffett won’t be the saviour for American newspapers that some romantics have believed he would be. In fact he has in fact swapped around 110 plus underperforming titles and news websites for a $US576 million loan to the buyer, Lee Enterprises that will enable the latter to buy the Berkshire Media Group and restructure its finances via a $US576 million loan with a fat interest rate of 9% a year (The Fed Thursday morning left its rate steady at 1.75% to 2%).
Buffett’s sale of the newspapers, therefore, becomes a profit-making financial transaction and undermines the made point that the investor buys but doesn’t sell his businesses (shares yes, but nor parts of the Berkshire empire).
For Buffett to risk damaging that image tells us a lot about how weak the newspapers in the media group were. That he managed to turn these losses and dud assets into a high-interest rate loan also tells us a lot about the desperation of some companies – eg Lee – to remain afloat in the media.
The high-interest rate follows the old dictum in finance, ‘the higher the rate, the higher the risk’. Buffett has quit an increasingly terminal risk investment in print for a financial asset with easily understood rules and a nice fat return.
While the likes of Amazon’s Jeff Bezos has waded into the newspaper sector, saving the Washington Post – the Post ironically was a paper once partly owned by Buffett as he supported his friends and the paper’s owners, the Graham family for years. But when they wanted to sell, he quit as well, leaving the paper to its own devices until Bezos swooped in 2013 with $US250 million.
Buffett also ignored the sales and flipped out of other big-name papers such as the Chicago Tribune, The New York Daily News, the LA Times and magazines such as Time.
Buffett was nowhere to be seen when the Post was sold – his small newspaper group had been assembled a decade or so ago and several years of falling revenues and profits had convinced him not to invest any more money in new acquisitions. Last year he told Yahoo that newspapers ‘are toast” and that ‘they will all disappear”.
“It went from monopoly to franchise to competitive to … toast.” Buffett, however, identified The New York Times, The Washington Post and News Corp’s The Wall Street Journal as newspapers that are likely to live on
Now after years of standing against his own, hard-nosed, but accurate reality, Warren Buffett has thrown in the towel on his small newspaper business and departed the sector. Berkshire Hathaway Media Group (BHMG) comprises 30 daily newspapers with print and digital operations, as well as more than 49 paid weekly publications with digital sites and 32 other print products.
BHMG reported revenue of $US373.4 million in revenue in 2019. Besides the Buffalo News, other titles include the Omaha World-Herald in his home town, the Winston Salem Journal in North Carolina and the Richmond Times-Dispatch in Virginia.
The buyer is Lee Enterprises which is an Iowa-based local news provider and advertising platform covering 50 US media markets. Lee has been managing the Berkshire papers since 2018 – a move designed to lessen the financial load on Berkshire. Now Buffett has exchanged the dying papers for something he understands better – high priced debt with a return higher than the rate of inflation.
Lee will pay $US140 million in cash and Berkshire will provide it with about $US576 million in long-term financing at a 9% annual interest rate. That will allow Lee to refinance its existing debt and clean up its balance sheet and making it a more viable owner of the Berkshire media outlets, thereby making Buffett’s loan more secure.
Buffett said Lee was his only choice for the sale.“We had zero interest in selling the group to anyone else for one simple reason: We believe that Lee is best positioned to manage through the industry’s challenges,”. Lee says the deal will nearly double its audience, lift revenue by 87% and immediately boost earnings. Berkshire will become Lee’s sole lender, allowing it to avoid the fees associated with refinancing and to de-lever faster.
And Berkshire will get more than $US51 million a year from that big fat loan to Lee, which is more than Berkshire has been making from the newspapers for years.
Financial alchemy, gold from a media millstone.
