The swap of Berkshire’s equity interest in their newspaper portfolio for credit to Lee Enterprises Inc. (NYSE:LEE) in 2020, has been seen as an exit in disgrace of their newspaper interests by Warren Buffett and Charlie Munger, believers in a “forever” holding period for quality private investments. This restructuring is clearly a reversal of strategy, as the outlook for newspaper investment changed over time.
History with publications. Warren Buffett’s involvement with the newspaper publishing sector tracks its historical success. Buffett started in the newspaper business at the age of 13, delivering The Washington Post on a paper route. By the age of 16, Buffett was covering three routes, selling two rival papers, and had added the sale of magazine subscriptions and calendars to houses along his paper route. Business was booming, newspaper circulation was high and increasing.
Purpose and Profits
Involvement in Publications: Both Buffett and Munger also were early shareholders in publication companies. Berkshire had already acquired an interest in the Sun Newspapers of Omaha when they started acquiring shares in the Washington Post Company (later renamed Graham Holdings) in early 1973. Buffett wrote a letter to Katherine Graham in June, talking about monetary value AND stewardship:
By the end of 1973, held over 10 percent of the non-controlling “B” shares and joined the board.
Share price reaction: The Washington Post was owned by Financier and former chairman of the Federal Reserve, Eugene Meyer, and his family, until in 1971, eight years after her husband Philip L Graham passed away, Katherine Graham took the company public. Shortly after listing, the share price reacted negatively to the publication of the Pentagon Papers, and then the Watergate scandal, as Bob Woodward and Carl Bernstein started reporting in mid-1972, and the share price continued to spiral downward, as the White House counter attacked with misinformation, through Nixon’s popular re-election, despite record-breaking results in 1973, until the spectacular end with President Nixon’s resignation in August 1974.
Purpose: The investment by Berkshire and the letters to Katherine Graham, leaves no doubt to Buffett’s support for the Washington Post Company and its willingness to hold the government to account. The Supreme Court decision in 1971 on the First Amendment right to the Freedom of the Press, left open the possibility of government censorship without specifying the conditions under which the First Amendment might permit it. The opinions clearly rejected the argument that press freedom is absolute.
Value bought: Berkshire acquired The Washington Post Company stake for $10.6 million in 1973, while Buffett at the time believed it had a 4X higher intrinsic value, but this wasn’t merely a “cigar-butt” trade, Buffett bought it for its financial performance and purpose. Nor a quick win, as the share price declined as much as 40% from Berkshire’s first acquisition price, nor was it designed to buy influence of the editorial process… And, in the end, Buffett’s involvement brought significant financial value to Graham Holdings.
Allocate Capital: Buffett advised the owner of the Washington Post company, Katherine Graham, in a memo in 1975, how to allocate capital and resources. Buffett warned that employment and pension decisions taken today would greatly influence pension costs of the future, and directed the pension fund to be managed internally… and later also to buy back shares.
Graham Holdings subsequently launched its own pension investment policy and eventually, over 11 years under the direction of Katherine Graham, Graham Holdings bought back close to 40 percent of its shares, thereby releasing huge value and increasing Buffett’s proportionate stake. Buffett left the board in 2011, leaving with it an overfunded pension surplus.
Newspaper Industry Views
Other publication investments: Blue Chip Stamps (later fully consolidated under Berkshire Hathaway) purchased shares in the Buffalo Evening News, in 1977, the same year that Munger launched a $2.5m bid for the Los Angeles Daily Journal via the New America Fund. Munger held onto his Daily Journal Corporation shares after the New America Fund disbanded in 1986 and distributed its shares to owners of the fund. Munger still holds a stake.
The Sector Changes: It is clear that Buffett and Munger were aware of the negative growth of the newspaper publishing industry, but despite that, continued to invest selectively in the sector. Buffett was effusive in 1986:
“Newspapers are a marvellous business. It’s one of the few businesses that tend towards a natural, limited monopoly. Obviously, it competes with other advertising forms, but not with anything exactly like itself. Show me another business like that – there isn’t one”. – Warren Buffett (1986)
Buffett and Munger were never wildly bullish on the whole newspaper publishing sector. Buffett was largely dismissive on industry prospects, 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 (2009)
New Focus: Despite cautious views on the whole newspaper sector, Berkshire started buying more locally focused community newspapers, with strong customer retention and comparatively strong cash flows, arguing they would be more resilient to digital disruption.
Acquisitive Spree: 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 a $150m cash transfer).
Other Publishing deals: Berkshire also, in April 2012, 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 quickly (by June 2012) also acquired common shares in Lee Enterprises. An initial 3.2 percent stake was nearly doubled by August 2012, and in 2013, Berkshire Hathaway refinanced $94 million of Lee’s acquisition debt.
Media Growth: Berkshire then bought into Media General Inc (the holder of 63 daily and weekly newspapers and a profitable TV station business) in May 2012. The deal saw Media General issue warrants corresponding to 4.6 million shares (for an effective 19.9% stake) and the transfer of $142 million in cash, a $400 million loan (at 10.5% interest) and a $45 million credit line, from Berkshire. The companies were structured into the BH Media Group division of Berkshire Hathaway.
These smaller newspapers had a near-monopoly on local and community news, and people were still willing to subscribe to them. But even for its own newspapers, circulation was falling, only slowly offset by increasing subscriptions.
Change: Munger had already steered The Daily Journal to grow into the regulatory disclosure market. Berkshire also acquired the US press release agency, Business Wire, which focuses on Regulatory Disclosures, in January 2006. Demand steadily increased, but during the 2008-09 Financial Crisis, advertising demand for foreclosure notices surged and so did profits of the Daily Journal. Some excess profits were allocated into the industry to transform the business profile of the Daily Journal…
Munger and the Daily Journal:
Although already active in technology software and services before the surge in activity, The Daily Journal accelerated the acquisition of Legal Tech companies, and that business segment, the Journal Technologies unit, now generates close to 70% of Daily Journal revenues.
- In 1999, the Daily Journal acquired 80% of Choice Information Systems, Inc. for $6.67m.
- In 2012, New Dawn Technologies were acquired for $14m.
- In 2013, ISD Corporation, providing “case management software systems and related services”- bought for $16m.
In addition to overseeing the legal technology acquisition drive, Munger was also influential in directing the Daily Journal board to make equity investment allocations outside of the publishing sector, in his signature concentrated style, transforming value.
Transformations: Many of the newspaper stakes were bought for discounted prices, and didn’t always immediately generate any cash flows, but Berkshire was willing to accept losses on the publications as they looked to secure their competitive positions. Buffett and Munger invested to create long-term value, and repositioning often resulted in increased cash flows despite downturns across the market.
Consolidation of Holdings: Graham Holdings sold the Washington Post paper to Amazon (Jeff Bezos) for $250 million, in 2013, and the year later, Berkshire swapped their 1.6 million (21 percent) Graham Holdings shares (Berkshire would retain a tiny portion) in exchange for the Miami TV station WPLG, a few Berkshire A shares (worth around $400m at the time) and $327.7 million in cash. The total estimated value of this tax-free swap was around $1.1 billion (not bad for an investment initially costing less than $20m).
Other acquisitions: Berkshire went on in 2013 to purchase Tulsa World, the Greensboro News & Record (North Carolina), Roanoke Times (Virginia) and Press of Atlantic City (New Jersey). Despite anticipating negative circulation growth, Buffett and Munger continued to build Berkshire’s media empire. Berkshire reported:
“Circulation of our print newspapers will continue to fall, a certainty we allowed for when purchasing them.” – Warren Buffett (2016)
Initial Consolidation: Berkshire and Lee Enterprises agreed in 2018 to allow Lee to manage BH Media Group’s newspaper and digital operations covering five years, for a minimum payment by LEE of $5 million p.a. and a profit share above $34 million EBITDA.
“The world has changed hugely and it did it gradually. It went from monopoly to franchise to competitive to . . . toast,” – Warren Buffett (2019)
Further Consolidation: Shortly thereafter, 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 print products. The acquisition significantly increased the capacity of LEE enterprise, but was almost entirely vendor financed.
By the numbers: The published price was $130 million in cash 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 agreement of 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 9% annual interest).
Digging Deeper: Berkshire effectively swapped management control of the assets to LEE, for a fixed payment (with incentives structured to favour increased profitability). LEE will pay around $60 million annually ($50 million in interest and $8 million in lease payments) over the 25 year life of the loan (depending on the structure of capital repayments). Cash flows imply a net present value close to $1 billion.
Verdict: This was a masterful deal for Berkshire, keeping them in the newspaper business (they still own Business Wire), without requiring management oversight, and continue to receive (as primary creditor to LEE) secure cash flows! The Berkshire team brought in a good team of experienced partners to oversee the publishing business, while Berkshire retains cash flow exposure at least until 2045.
While the digital transformation of LEE’s publications have been slow, at least now owner and manager incentives are aligned, and Berkshire can continue to focus on Capital Allocation, their core skill, and one that should be a core strength of all management teams.
Backing of Lee Enterprises
The shift to allow management of a non-core asset, like the newspaper business for Berkshire Hathaway, could be seen as an easy one for ordinary companies, but Berkshire is not an ordinary company, and do not just “retire” employees, or end businesses when they are no longer generating exceptional cash flows. The backing of LEE requires further analysis.
“No organization is more committed to serving the vital role of high-quality local news, however delivered, as Lee. I am confident that our newspapers will be in the right hands going forward and I also am pleased to be deepening our long-term relationship with Lee through the financing agreement.” – Warren Buffett (2020)
Not only does LEE’s directors and executive officers own more than 10% of the Company, strongly aligning their interests with those of all shareholders, but the group is well underway to in its successful transformation into a digital-first enterprise, for example, delivering a 65% growth in digital-only subscribers in 2021. And continues to show a high commitment to the critical social function newspapers should have.
In Buffett’s 1975 memo to Katharine Graham, he warned about the pitfalls of pension promises and the importance of an investment policy.
“There probably is more managerial ignorance on pension costs than any other cost item of remotely similar magnitude. And, as will become so expensively clear to citizens in future decades, there has been even greater electorate ignorance of governmental pension costs.”
At the time, many state and local governments embarked on Defined Benefit pension structures, and later policy decisions mandated increased fixed income holdings as investments. Many that were struggling to meet their obligations to retirees in the 1980s, were bailed out by Keynesian monetary policies, that drove lower interest rates.
Geopolitical decisions to escalate the ongoing tensions between Russia and the West, and earlier decisions to liberate energy markets have pushed prices higher, which along with unprecedented fiscal and monetary stimulus during the cyclical downturn of the pandemic, have led to sharply increased inflationary pressures.
Many pensions have now been wiped out by policy decisions and lavish promises. With escalations still sought by all parties, in addition to the fall-out from the aggressive Liability-Driven Investment schemes, the pressures of higher interest rates on pensions (whether funded or unfunded) that by policy is structured to mostly hold fixed interest rate securities will continue.
Capital Allocation puzzle: When the non-core equity allocations, made in Feb 2009, of the Daily Journal showed significant unrealised gains on investments, and the investments comprised more than 70% of total assets, the SEC questioned and argued that the firm didn’t qualify to invest in shares as it wasn’t an investment holding company.
The Daily Journal’s counsel responded:
“The board recognises that this decision would be contrary to the conventional (but questionable) notion that the least risky way to preserve corporate capital for the long-term benefit of stockholders is to invest it in government bonds at interest rates approximating zero, notwithstanding rising inflation”. – Daily Journal Board
The SEC ultimately took no action. The unrealised gains on the investments portfolio (as market prices change) have meant that the price of the company’s stocks on some days have overtaken the value of the entire company. While Munger recently stepped down as chairman of the Daily Journal, but will retain a Board seat and continue to hold responsibility for the group’s investment securities portfolio.
Conventional Risk: Conventional policies are designed to minimize volatility, but have encouraged a shift away from long-term investing, to low yielding assets (like cash, and cryptocurrencies, and certain fixed interest securities) that over a period of higher inflation are guaranteed to lose investors money. A good CEO seeks to avoid following conventional wisdom, ignore the hype and try to understand the fundamentals of your assets.
With high public and private debt levels, escalating geopolitical tensions, and policy decisions restricting the outlook for a suitable response to the current spike in inflation, many pensions structured for “safety” could turn out to be exactly the opposite.
Asset Allocation: The example of Buffett and Munger to responsibly exit businesses with smaller value (in their portfolio) and (that at the same time) face a challenging market, plus the reallocation of short-term excess profits to transform businesses away from a low-return declining sector, should serve as a lesson for policy-makers and CEOs.
It is key for CEOs to start to learn about fundamental long-term investment and purpose!
Lessons: Invest in your most promising business sectors, or use excess cash to grow your business through careful smaller scale acquisitions into meaningful size. Compare the earnings yields of companies (both for business acquisitions, and for investments) with fixed interest rate securities and yields on other financial instruments, and opportunistically allocate to good long-term investments.
In the end … “Don’t take my advice. Or anyone’s advice. Trust yourself.”
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