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Why Warren Buffett shifted his holdings in newspapers.

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At the age of 13, Warren Buffett started in the newspaper business, delivering The Washington Post on a paper route. He got up at 4:30 am each morning, and by the age of 16 was covering three routes, selling two rival papers, and had added the sale of magazine subscriptions and calendars to houses along his paper route.

In early 1973, Buffett started acquiring shares in the publisher of that newspaper, the Washington Post Company (later renamed Graham Holdings) and by the end of the year, held over 10 percent of the non-controlling “B” shares. The holding company held the newspaper, Newsweek magazine and five TV and radio stations. Buffett joined its board in 1973 and in 1975 sent a memo {https://futureblind.com/tag/washington-post/} to its proprietor, Katherine Graham, setting out details on how to manage its pension fund. The company launched a pension investment policy, bit most importantly, bought back close to 40 percent of its shares at these low prices and over the next 11 years. Over the years, Buffett continued to increase his stake and only left the board in 2011.

In 1977, Berkshire purchased the Buffalo News. That same year, one of Charlie Munger’s previous law partners was hired to oversee the sale of the Los Angeles Daily Journal. Charlie launched a bid of $2.5 million via the New America Fund and ended up with Daily Journal Corporation shares when the shares in that fund were distributed to owners of the fund in 1986. The profits of this business was boosted as demand for Regulatory Disclosures of foreclosure notices during financial crisis. Munger still holds his stake.

And in January 2006, Berkshire bought the US press release agency, Business Wire, which focuses on Regulatory Disclosures. But despite these news and newspaper acquisitions, Buffett’s views on the newspaper business was largely dismissive, saying in 2009.

“For most newspapers in the United States, we would not buy them at any price … They have the possibility of nearly unending losses … I do not see anything on the horizon that sees that erosion coming to an end.” – Warren Buffett

It was a focus on community newspapers, generating cash flows, that ostensibly drove a “change in tack” a few years later, as Berkshire started buying stakes in newspaper companies. Berkshire bought the Omaha World Herald (and 5 smaller daily papers, the Council Bluffs [Iowa], Daily Nonpareil and World Marketing [a direct mail company]) in 2011, for $200m (the deal involved $150m in cash).

A few months later, in 2012, Berkshire made two other newspaper deals in quick succession. In April 2012, Buffett bought $85 million of debt in Lee Enterprises Inc. (then owner of the St. Louis Post-Dispatch and 47 other daily U.S. newspapers) and by June, Berkshire Hathaway disclosed it had bought common shares in Lee, for an initial 3.2 percent stake, which was increased (nearly doubled by August) that year. The next year Berkshire Hathaway refinanced $94 million of Lee’s Pulitzer acquisition debt.

In May 2012, Buffett bought into Media General Inc (the holder of 63 daily and weekly newspapers and a profitable TV station business). The deal saw Media General issue warrants corresponding to 4.6 million shares (or an effective 19.9% stake) to Berkshire and the deal included $142 million in cash, a $400 million loan (at 10.5% interest) from Berkshire and a $45 million credit line. The deal excluded certain of the Media General papers and was structured under a newly created holding entity within Berkshire, the BH Media Group.

In 2013, Graham Holdings sold the Washington Post paper to Amazon (Jeff Bezos).

Then in 2014, Berkshire did another deal with Graham Holdings. In a swap of assets, Berkshire received the Miami TV station WPLG, some Berkshire shares (worth around $400m at the time) and $327.7 million in cash, from Graham Holdings. In exchange, Berkshire swapped 1.6 million (21 percent) of Graham Holdings’ shares back to the firm (Berkshire would retain a tiny portion of Graham Holdings shares).

In 2016, Berkshire reported that ““Circulation of our print newspapers will continue to fall, a certainty we allowed for when purchasing them.”

In June 2018, Berkshire and Lee Enterprises agreed to allow Lee Enterprises to manage BH Media Group’s newspaper and digital operations covering five years, for a minimum payment of $5 million p.a. and a cut of profits above an EBITDA of $34 million.

Less than two years later, in early 2020, Berkshire announced the “sale” of BH Media Group and The Buffalo News to Lee Enterprises. The “disposal” comprised 30 daily newspapers in 10 states plus 49 weekly publications with digital sites, as well as 32 other additional print products.

The published price tag was $130 million for the assets and liabilities of BH Media Group, $10 million for the shares in The Buffalo News, Inc (“Buffalo News”) and included $12 million of cash at closing of the Purchase Transaction. It also included an annual lease payment of $8 million for the 68 properties used in the BH Media Newspaper Business (initial term of 10 years) and a loan of $576 million (charging a 9% annual interest).

The cash flows to Berkshire is material over the 25 year life of the deal. With cash generation at Lee Enterprises of roughly $50m pre capex (around $10m), Lee Enterprises should be able to afford to pay the $576 million loan in annual payments around $23m in “a straight line” over the 25 year life of the loan (pre-payments, or chunky payments make our calculations tricky).

If so executed, Berkshire could net close to $880 million in cash flows over the life of the transaction. If the loan and lease are repaid with a bullet payment (so refinanced only at the end of its 25 year life) the cash flows to Berkshire are closer to $1.5 billion (this is not feasible, as the deal terms calls for excess cash flows to be deployed as capital repayments of the debt).

Berkshire’s paper stakes were bought for discounted prices, and generated significant benefits over their life. This exit is a great deal for Berkshire, shifting their printing focus to almost exclusively being Regulated Disclosure assets and provides a “safe-hands” suitable exit of the challenging part of this industry.