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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.
Breaking down Warren Buffett’s Media General deal
I was in the press box at Berkshire Hathaway’s annual meeting three years ago when CEO Warren Buffett uttered words that caused many assembled reporters concern.
Responding to a question about his thoughts on newspapers, Buffett said, “For most newspapers in the United States, we would not buy them at any price. They face the potential of unending losses.”
Yet late this week Buffett’s company announced that it will be purchasing all the newspapers that are part of Richmond-based Media General Inc., other than the one in Tampa, Fla., for $142 million cash. That means a Berkshire subsidiary, BH Media Group, will own papers in Richmond, Lynchburg, Charlottesville, Prince William County and Culpeper, to name just a few.
The deal includes 63 daily and weekly papers in Virginia, North Carolina, South Carolina and Alabama as well as their digital assets and commercial printing business. The Media General deal comes on the heels of Berkshire’s purchase of The Omaha World–Herald Co.’s newspapers late last year for $200 million.
To Warren Buffett and Berkshire Hathaway, which has tens of billions of dollars to invest, that amount of money is almost akin to pocket change. But it’s still a substantial amount to plunk down. So why the about-face from the Oracle of Omaha?
The answer likely lies in Buffett’s head and heart.
At his heart, Buffett is a newspaper guy. As a teenager he delivered The Washington Post, in which his company remains a substantial investor. He helped oversee coverage at his local newspaper in Omaha in the 1970s that earned a Pulitzer Prize. Berkshire owns The Buffalo News. He reads numerous newspapers every day and has said they are an important part of American democracy.
Buffett therefore continues to invest in newspapers probably at least in part because he loves them and wants to see them survive even if their competitive advantages have declined in the digital age. That’s good news for the papers Berkshire is buying, as one of Buffett’s primary business principles is that he doesn’t close subsidiaries unless they are hemorrhaging cash.
“In towns and cities where there is a strong sense of community, there is no more important institution than the local paper,” Buffett said in announcing the deal. “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.”
But let’s get real: Buffett didn’t become one of the richest men in the world by making decisions only with his heart. He is a savvy investor who knows how to spot a good value.
Buffett’s Media General deal doesn’t mean he has changed his opinion on the prospects of newspapers. It just means he thinks relative to the price he is paying, the newspapers will be able to generate an acceptable return on his investment.
In addition to buying the 63 newspapers, Berkshire will provide Media General with a $400 million loan that matures in May 2020—seven years after Media General’s existing bank debt was set to mature, a deadline that was probably largely responsible for the sale.
Buried at the bottom of the press release announcing the deal are the terms of that financing: The loan will have an interest rate of 10.5 percent.
In other words, by the time the loan matures, assuming Media General makes all the interest payments, Berkshire will have received almost all of its $400 million back already. In 2020 Berkshire could probably refinance the loan if necessary. As a kicker, Berkshire gets warrants to own 20 percent of Media General’s remaining television-focused business as well as a seat on its board.
Media General certainly gave up a lot in the deal. But facing potential bankruptcy if it couldn’t refinance its debt, the company probably believed the sale was its best option. Investors seemed to agree, sending the stock price up by about a third the day of the announcement.
Buffett’s mentor many years ago was Benjamin Graham, who practiced a strategy called cigar-butt investing. The name came from the idea that he could pick up beaten-down companies and puff out enough cash to make them worth the price. Buffett later abandoned that philosophy, deciding instead to buy great companies for a fair price rather than fair companies for a great price.
Though newspapers continue to make money, nobody in the business is arguing it’s anything like the glory days when they were essentially a monopoly. Hence Buffett’s most recent deal seems like a nod to his mentor’s investment beliefs, and one that he can feel good about in his heart.