Warren Buffett didn’t become the greatest investor in history by letting sentiment cloud his judgment. That’s even the case with his company’s $142 million acquisition of most of the newspapers owned by Media General (NYSE:MEG) that was announced yesterday.
As BloombergBusinessweek noted, Berkshire Hathaway (NYSE:BRK.A) got the 60-plus papers including The Richmond Times-Dispatch, for a steal, paying four times EBITDA. That’s far less than the more than nine-times figure that the publisher fetched six years ago. The acquisition will give the Oracle of Omaha a stable of midsize papers to add to his portfolio that includes the Omaha World-Herald and the Buffalo News. Buffett also has been a shareholder of Washington Post Co. (NYSE:WPO) for years.
Berkshire is providing Media General with a $400 million loan and a $45 million line of credit, and he’s receiving warrants that are convertible to about 19.9% of Media General’s outstanding shares. Buffett’s company is getting a seat on Media General’s board as well.
Buffett’s acquisition shows that newspapers are becoming increasingly attractive to investors despite the drumbeat of negative — and deservedly so — headlines about the industry. The fact that papers such as the Philadelphia Inquirer and Philadelphia Daily News are selling at all is noteworthy and is helping push up the shares of some publishers.
Shares of Gannett (NYSE:GCI), the nation’s largest newspaper publisher, are up more than 19% during the past six months. McClatchy (NYSE:MNI), whose papers include the Miami Herald, has more than doubled during the same time, while Lee Enterprises (NYSE:LEE), corporate parent of the St. Louis Post-Dispatch, has surged more than 82%. This rising tide has lifted some pretty small boats, but other newspaper stocks such as New York Times Co. (NYSE:NYT) continue to languish.
“The local newspaper will be around for a while,” said Edward Attorino, an analyst with Benchmark Co. who follows the publishing industry and believes the stocks of some companies got too cheap to ignore. “They are safer than the big-city papers.”
Indeed, Buffett often waxes nostalgic about the decline of newspaper, but in the statement announcing the deal he offered some hope for the future. The Wall Street Journal noted that Berkshire has made a tidy profit from loans it has made to Lee Enterprises. “In towns and cities where there is a strong sense of community, there is no more important institution than the local paper,” Buffett said.
Market researcher Gordon Borrell, CEO of Borrell Associates, told me the papers that Buffett acquired are ideal investments because unlike major metropolitan dailies, many don’t have significant competitors. Newspapers also remain a formidable force in the local advertising market. Indeed, pure-play Internet companies have tried for years to reach this audience and only met with limited success, which has forced some to form alliances with publishers.
“Of the $91 billion spend on local advertising last year, legacy media companies controlled 91% — including half of all Internet advertising,” Borrell said in an email. “That’s because TV, radio, yellow pages, cable and newspaper companies have all charged their sales reps to sell online advertising and last year collectively sold nearly $9 billion in digital advertising. Pure-play Internet companies, meanwhile, controlled 9% of all local advertising.”
What the Buffett investment proves is that even though newspapers are dying, they’re far from dead. Their eventual demise, if it happens, is years or even decades away. Nonetheless, these stocks represent too much risk and not much reward for most investors. The one exception to the rule may be Gannett, which offers an attractive 6% dividend.
Finally, it’s important to remember that for Buffett, one the world’s richest people, $142 million is barely a rounding error.
Jonathan Berr doesn’t own shares of any stocks mentioned here. Follow him on Twitter@jdberr.