Originally written on 24 May ’12, updated subsequently.
Last week’s announcement that Warren Buffett’s World Media Enterprises Inc., is acquiring 63 daily + weekly papers across Southern USA from Media General for $142m has created significant buzz across news blogs and commentary sites.
This is Buffett’s 2nd deal in the newspaper space of late – previously in Dec’11 he announced the acquisition of Omaha World-Herald, and other dailies / weeklies for $200m (including $50m in debt). And these are not the only newspapers that Buffett owns / has stakes in. Since 1977, Berkshire Hathaway, Buffett’s holding co has owned The Buffalo News, and since 1974 has had a stake in The Washington Post Co (11% then, now around 21% thanks to buybacks).
For a man who decried the perverse economics of the newspaper business as recently as 3 years ago – In the 2009 Berkshire Shareholders meeting, he said “For most newspapers in the United states, we would not buy them at any price…They have the possibility of going to just unending losses.”, this is indeed strange behaviour. Or is Buffett seeing something that we aren’t?
While Buffett’s acquisitions have resulted in him owning a couple of 100,000+ daily circulation papers (Omaha World-Herald, Richmond Times-Dispatch), the rest of the newspapers acquired are all under 100,000 copies / day, many in the 25-50,000 daily circulation range or lower, and some weeklies. Buffett’s focus is in picking up stakes in a segment of the US newspaper industry called Community Newspapers.
Community Newspapers are typically newspapers in small towns (typically with daily circulation under 25,000; often many have circulation below 10,000 and are not even printed daily). These are papers such as Guadalupe County Communicator, Big Horn County News etc.
Incidentally, this small-town newspaper segment is now amongst the best performing slice of the US newspaper industry. The high profitability of Gannett has been built on owning such sub-25,000 circulation monopoly newspapers. When we hear disaster stories in the US newspaper industry, it is typically in the newspapers in the 100,000 – 500,000 circulation range in mid-sized metros such as The Baltimore Sun, The Kansas City Star, The Detroit Free Press etc
John Morton, US newspaper guru says “In general, smaller newspapers are worth more in relative terms than large papers…a newspaper in a small–to medium–market tends to be worth more on a relative basis than a big–city paper…Big cities tend to have more media outlets competing for advertising, and big–city newspapers are more likely to have onerous union contracts.”
The Competitive Advantage of Small-town Papers
Most US small-town papers are local monopolies – they are the only ones covering local issues, games, neighbourhood gossip, etc. There is genuine reader pull and affection for these papers (many of whom have been around for a long time), and therefore local residents are willing to pay for such content.
On the revenue front, there is no craigslist that is siphoning away classifieds revenue – which accounts for about 30% of the advertising revenue at these smaller papers. Additionally these papers see a lot of advertising that is regulatory / legal in nature (foreclosure filings etc). Note “papers with ad pages to spare, positively groaning with legal announcements like foreclosure listings and regulatory filings, the kind that have long fattened newspapers in county seats like Pinedale.”
A Perfect Example of Value Buying
Buffett understands a good deal, whenever he sees one. His investing philosophy is centred around identifying mispriced assets (or cigar butts as Ben Graham called them, either due to sentiment or a misperception.
Media-General is certainly such a mispriced asset. Racked with debts of over $ 350m (deferred once in the past, and coming due for payment soon), and with close to 50% of revenues coming from newspapers, it is priced (4.7x EBITDA ) well below what a comparable media asset in another segment would have been valued at.
By buying into a segment of the newspaper industry that is profitable and imbued with competitive advantages, but mistakenly tarred with the same brush as the competitively weaker metro papers, Buffett is indulging in a textbook example of value buying. It is in the same vein as his previous buys of Amex and Washington Post when they had fallen in investors’ eyes, racked by regulatory or business-cycle troubles.
To sum up, when Buffett sees a bargain, he cant resist! And that is precisely what he is doing here!
Since then, Buffett has announced further deals in this space, including a 3.2% stake in Lee Enterprises, and the acquisition of 2 small Texas papers.
Berkshire’s newspapers are held under 3 entities The Buffalo News, World Media Enterprises Inc., and Omaha World-Herald Co. The latter two are organized under the BH Media Group, headed by Terry Kroeger. I have indulged in some internet research and back of the envelop calculations to arrive at an estimate of the size of Buffett’s fast-expanding newspaper empire.
|Entity||Revenues (2011)||Op Profit (2011)|
|The Buffalo News||$102m||$9m|
|World Media Enterprises Inc.,||$224-239m||$16-17m; EBITDA of $30m|
|Omaha World-Herald Co||$130-140m||$19-21m|
Source / Assumptions
- The Buffalo News data is public information. See here.
- World Media Enterprises – essentially Media-General’s newspaper revenue ($299m) less estimated rev for The Tampa Tribune ($60m from SeekingAlpha to my estimate of $75m)
- Omaha World-Herald Co – now this is more a back of the envelope guesstimate! There is no public data available on Omaha World-Herald Co (OWH) revenues – I estimate it basis Buffalo News (BN) revenues. The logic is as follows – OWH has a daily weekday circulation (135K)10% lower than BN (153K). The Sunday circulation is nearly 30% lower at 170K to BN’s 234K (all from public sources; for OWH see and for BN see.
Now Sunday brings in at least 50% of a newspapers’ revenue. So if for BN we assume that BN earns $50-60m for Sunday, then a likely estimate for OWH’s Sunday revenues will be $35-40m, which means overall revenues of $70m. Now there are six other daily newspapers in OWH’s fold, and there is not too much data on these. Let us assume these are really small circulation dailies and assign revenues of $5m each, totaling to $30m. In addition there is a direct marketing operation called World Marketing Inc. Let us assume all this totals to $110-115m for the co that Berkshire acquired.
Now Buffett said that OWH delivers solid profits and is one of the best-run newspaper companies in America. Now that should mean that at the very least it delivers profit margins superior to BN, perhaps more going by the fact that Terry Kroeger, the Chief Executive of OWH has been tapped to run BH Media. So let us say that OWH enjoys profit margings of 15%. On $110-115m revenue, operating profits should come to $17-18m.
Since then OWH has acquired 2 smaller Texan papers – Waco’s Herald-Tribune (34,000 weekday circ and 39,000 sunday) and Bryan-College Station Eagle (24,000 circ). At a third of BN’s weekday circulation (and perhaps a fifth of its Sunday circulation), we can estimate revenues of $20-25 for the two papers. Profitability might be higher due to lower costs. So let us say 15% as before. That makes OWH now a $130-140m revenue entity with $19-21m operating profit.