A “three corner pool shot”
This week’s deal makes Buffett’s company, Berkshire Hathaway, the proud owner of the Richmond Times-Dispatch and 62 other daily and weekly papers in Virginia and the South. Most of the titles, like The Goochland Gazette and The Bland County Messenger, have small circulations in the range of 5,000 – 25,000.
The Oracle himself explained the deal this way:
“In towns and cities where there is a strong sense of community, there is no more important institution than the local paper. 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.”
Buffett can wax sentimental all he wants but he is still the same hard-nosed businessman who was tough enough to stick it to Goldman Sachs. Like any of his deals, this is all about money.
“This deal is like a three corner pool shot that accomplishes several things at once,” says Ken Doctor, a media analyst.
Doctor notes that the deal includes an enormous loan and credit line to the newspapers’ former owner, Media General, in which Berkshire Hathaway will earn 10.5 percent. Buffett’s company also obtained stock warrants that will likely pay out handsomely as Media General works on becoming a full-time broadcasting company.
But what of the newspapers themselves? Doctor says that Buffett got them for a steal, noting that they sold on average for about $2 million a pop — or the price of an expensive home in each of the towns where they’re printed.
Small town papers make money
The story of the catastrophic decline in newspapers has been driven by metropolitan papers like the Washington Post (on whose board Buffett sat for years) where ad rates plummeted while readers embraced digital alternatives.
The experience of small towns and counties has been different. In these places, a lack of print and online competition has allowed newspapers to hold onto some of their traditional monopoly power.
“In these communities, the local paper is the sole source of everyday news — from high school sports, local events or obituaries,” says Gordon Crovitz, former publisher of the Wall Street Journal and founder of digital subscription service, Press+.
This lack of competition has not only meant a slower decline in their print operations, but also a longer time period to make the transition to digital. While some metropolitan papers have rushed in a panic from one ill-advised paywall strategy to another in an effort to stay alive, smaller papers have had the luxury of a wait-and-see approach. In the meantime, digital subscription strategies have become more refined.
Crovitz claims that 70 publications have recently jettisoned the “free online” offer for print subscribers in favor of charging 25 percent and then letting readers opt-out of the digital part of the package. He says that 90 percent of the customers elected to keep paying more.
What all this means for Buffett is that he can treat his newspaper fleet as a longer term investment that will pay off in three to five years. Most of the papers will likely deliver a modest profit from print while Berkshire Hathaway coaxes them into a digital strategy in which a growing share of revenue comes from subscription rather than ads (Doctor predicts subscription-based revenue will soon rise from 30 to 50 percent). The company can then cut away many of the printing, distribution and other legacy costs associated with newspapers.
Buffett being Buffett
Going into the newspaper business is a strange proposition for most investors but not for Buffett. This week’s purchase is consistent with a number of his investment mantras, including sticking to what he knows.
Buffett knows this business well from owning the Buffalo News and sitting on the board of the Washington Post, but also has more personal experience in the industry such as using $5000 from his savings as a paper-boy to launch Berkshire Hathaway. He also claims to read five newspapers a day.
Buffett also has a history of squeezing value out of traditional or troubled industries that scare off many investors. In recent years, for instance, he has bet big on airlines, autos and railroads.
There is also the question of scaling. According to Doctor, Berkshire Hathaway has long excelled at finding large scale efficiencies and the company now has enough newspapers (it also has six Nebraska papers in addition to the Omaha World-Herald) to make that happen.
Finally — and this is only speculation — some might wonder if Buffett, who has been close to the Obama Administration, might enjoy owning dozens of media outlets in swing states Virginia and North Carolina in an election year.
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