In June, we wrote about Berkshire's recent newspaper investments. We followed up that report with a deep dive of the newspaper portfolio of Berkshire's newspaper investees. In our second report installment we were interested in examining further the newspaper portfolios of the companies that Warren Buffett and Berkshire Hathaway (BRK.B, BRK.A) has invested in the past and has invested in recently. In this report we will examine the recent performance of Berkshire's newspaper investments, regardless of whether in the form of public equity, outright ownership or debt with an equity kicker.
BH Media Group and the Buffalo Evening News: Berkshire owns the Buffalo Evening News and it was the only newspaper fully owned by Berkshire for almost 35 years. We've already established how the paper is a regional metro area broadsheet newspaper that is serving a city that has seen steady population erosion since 1930 and its suburbs have not been able to make up the declines seen in Buffalo proper. For whatever reason, Berkshire is keeping it separate from its BH Media Group organization. Berkshire set up BH Media Group to oversee the 63 newspapers it acquired from Media General (MEG) as well the Omaha World-Herald (which was acquired last year).
The Washington Post Company (WPO): Berkshire owns 23.4% of WPO and has been WPO's 2nd largest shareholder since 1973. Buffett tutored Katherine Graham and her son Donald on how to run a business to maximize shareholder wealth and Katherine Graham was Buffett's ticket to high society. Because of Buffett's involvement, we see that WPO has handled the shakeout in the news industry better than other firms who did not have the vision to diversify into higher-value content like for-profit education as well as the television business. While The Washington Post may be the name of the parent company, the flagship newspaper and its Post-Newsweek Media community papers only account for 14% of the company's revenue. Unfortunately for WPO, the growth from its cable television has seemed to reverse itself and register a 3.3% decline in division operating profits for Q3 2012 versus Q3 2011 and a 4.33% YTD 2012 decline versus YTD 2011 levels.
Source: Washington Post Q3 2012 10-Q
WPO's Kaplan Higher Education subsidiary was formerly WPO's high-flying star performer but is now a broken growth company. Kaplan is facing industry related headwinds thanks to lower student enrollments and government reforms of the industry, which explains the 90% decline in its year-to-date operating income versus the prior year's comparable quarter. WPO's Newspaper Publishing division saw its revenues decline by 4.33% from $143.5M in Q3 2011 to $137.3M in Q3 2012 (YTD 2012 decline of 6.85% versus YTD 2011 levels). The division benefited from a $3.1M (13%) increase in year-over-year revenues from its online media properties but this was more than offset by an 11% decline in print advertising revenue. Average daily circulation declined by 9.2% for The Washington Post for the first nine months of 2012 versus 2011 levels. The division's loss most than doubled in 2012 versus 2011 due to its revenue declines and increased costs for severance expenses. WPO managed to increase its total operating income by 8.1% in Q3 2012 versus Q3 2011 thanks to a 1% expense reduction and revenue growth from its broadcasting divisions offsetting its revenue declines at Kaplan and its Publishing arms. Buffett made two mistakes with his WPO investment:
- Failing to sell out in 2004 when WPO's share price was within $.50 of $1000
- Damaging his marriage to Susie Buffett by having an affair with WPO's publisher Katherine Graham. At least Buffett admitted his regret to what he did.
Gannett Co. (GCI): Berkshire still owns $29M of Gannett, which represents 74bp of GCI's outstanding market cap. We think Gannett is actually one of the better print media companies out there. Granted that's not saying much. Still, we have to take note that Gannett is expected to exceed $500M in free cash flow. Considering that its market cap is only $3.93B, we can take note of this 12.72% free cash flow to market price "yield" as well as its 4.7% dividend yield. Gannett saw mixed performance recently as strength in its digital and broadcasting businesses was more than offset by continued weakness in its publishing business. We can see why Gannett has its fans; after all it has diversified out of print media and gets 30% of its revenue from high growth media content areas. However it still has to deal with the declines of the print media business, which still brings in over 70% of the company's revenue.
(Click to enlarge) Source: Gannett Q3 2012 Earnings Release
Gannett saw its total revenue increase by 3.4% year-over-year in Q3 2012 on the strength of its broadcasting operations. Broadcasting revenues grew by 36% year-over-year and more than offset declining publishing revenue. Publishing revenue declined by 3% in Q3 2012 as 5.6% revenue growth in publishing circulation revenues was offset by a 6.6% decline in publishing advertising revenue. The bad news is that the company's revenues are benefiting from non-recurring events, such as political spending for American elections and the Olympics and will continue its declining trend next year. The company also spent $63M on acquisitions in 2012 but the company saw a 17% year-over-year decline in net cash flows from operations even with these boosts to revenues and cash flows. GCI's YTD 2012 publishing revenue declined by 5.9% versus H2 2011 levels.
Source: Morningstar Direct
Media General (Broadcast Television Only): MEG kept the broadcast television operations (Buffett owns a 19.9% equity position in MEG through penny warrants in exchange for a $445 loan and credit line) and it benefitted from the 2012 elections to generate a 42% year-over-year increase in broadcast television revenues in Q3 2012 (24% YTD). Local gross time sales increased nearly 16% to $47.4 million. National gross time sales grew 19.2% to nearly $25 million. The largest advertising category, automotive, increased 45% due, in part, to comparisons against last year's weak spending following Japan's tsunami and to the strength of Olympic advertising this year. Other key categories growing in the quarter were financial, grocery, travel, telecommunications and medical. Advertising categories that declined in the most recent quarter on a year-over-year basis included restaurants and department stores. Media sold its Tampa Tribune media properties to the Revolution Capital Group private equity group in October for $9.5 million subject to working capital adjustments and other specified items that resulted in net proceeds of approximately $2 million in cash. MEG estimated it took a loss of $24.3M on the sale of the Tampa Tribune to RCG for Q4 2012.
Retransmission fees increased 80% as a result of contract renewals that reflected competitive market rates and reached $9.4M. MEG's TV websites generated $2.6B in advertising revenues during the quarter and this was a 20.7% increase. MEG's TV websites advertising revenue was driven by Local Advertising (Up 28%). Unique visitors and page views from mobile devices each increased by 68% in the third quarter, while unique visitors from desktops grew 13%. Political advertising revenues were $33M YTD and are expected to reach $50M for FY 2012. The company has generated $11M in free cash flows on a recurring basis in the first nine months of 2012. We can see why Media General had to sell its newspapers as it had spent $1.04B in cash net of cash acquired to acquire four TV stations in 2006. The company had spent $611M of its cash and borrowed $430M to acquire the TV stations and the combination of the debt and revenue declines from 2006-2012 forced the company to sell its papers at a whopping loss to Berkshire.
Source: Morningstar Direct
Lee Enterprises (LEE): Berkshire also received 3.22M shares of Lee Enterprise's common stock when it bought $85M worth of Lee Enterprises loans which were to be exchanged into junior debt. Berkshire recently sold 2M shares of its Lee stock. We break Lee Enterprises down into two different companies as follows:
- Lee Publications Inc, which we assign its 47 Daily News serving small communities and micropolitan areas and its 300+ weekly newspapers.
- Pulitzer, Inc, which we assign its four largest metro-area broadsheet dailies, including the 50% owned Arizona Daily Star and the Wisconsin State Journal
We believe that investors who consider Lee for their portfolio should use this framework in order to have an open-mind with regards to the company's prospects. This way, they will arrive at a full, fair and balanced opinion with regards to evaluating the company. That's precisely the framework we used when evaluating it for our portfolio book. Lee Enterprises's revenue for its most recent quarter (Q4 2012 for LEE) registered a 2.6% versus its Q4 2011 levels due to the inclusion of an extra fiscal week in Q4 2012 as the company uses a 52 week fiscal period rather than a 365 calendar day fiscal period. Excluding the impact of the additional fiscal week of operations in 2012, total revenue decreased approximately 4.5%. Operating expenses, excluding depreciation, amortization and unusual matters, increased 2.9% in Q4 2012 and decreased by 3.3% adjusting for the impact of the additional fiscal week of operations in 2012.
Lee's FY2012 revenue declined by 2.3% and its 50% owned affiliates also saw similar YTD revenue declines as well. Free cash flows were $14.6M in the quarter and this exceeded the $7M in Q3 2012 and the $14.4M in Q4 2011. The company also paid $10.15M in debt face value during the quarter and another $18.6M after the end of its FY 2012. We were impressed that Lee's Q4 2012 FCFs were slightly higher than its Q4 2011 FCFs even though Lee had to pay $10.8M in increased cash interest expenses associated with its prepackaged bankruptcy. One piece of good news for Lee shareholders is that Lee's usurious 15% 2nd Lien Term Loan Agreement can be redeemed on January 30th, 2013 at 102% of principal and we believe that Lee's management needs to have a sit-down with the 2nd Lien holders with regards to refinancing this usurious loan in order to free up additional cash flows for debt retirement. Lee's management will also need to become more vigilant with regards to refinancing its debt in order to avoid having to file prepackaged technical bankruptcies.
Even though Berkshire Hathaway's BH Media Group does not include the Buffalo Evening News and Berkshire's investments in the marketable securities of newspaper publishers, we have taken the liberty to include those holdings when analyzing BH Media Group. We organized our evaluation of Berkshire Hathaway's BH Media Group into two categories of holdings that we attribute the assets two. The first category relates to Berkshire's legacy newspaper investments in the Washington Post Company, Gannett and the Buffalo Evening News. With the exception of the Buffalo Evening News, Berkshire's legacy newspaper holdings were in the former of public company ownership shares and all three holdings published large, left-wing metro area daily broadsheets. Berkshire's most notable recent newspaper investments were the Omaha-World-Herald, Media General's newspapers and $85M in Lee Enterprises's 2nd Lien debt. These operations Berkshire either owns outright, through debt with an equity sweetener or both. These operations are primarily community papers (with the exception of the Omaha, Richmond and Winston-Salem papers) serving small suburbs, towns and villages.
We can see what the living legend of investing Warren Buffett saw in Lee Enterprises and why he wanted to keep his equity position secret, regardless of what he did with the stock he received from his 2nd lien term loan investment in that company and regardless of the fact that his purchase of Lee 2nd lien terms from Goldman Sachs was in the news. Our thesis is that while Lee is a turnaround project, it is still generating positive free cash flows and using those cash flows to pay down debt. Because the company took on $1.5B in debt to acquire legacy Pulitzer in 2005, we believe that Lee would be seeking to use the cash flows to pay down debt even if it wasn't required to under its 1st term loan indenture terms. A potential positive catalyst for Lee would be the potential for it to refinance its $175M in 2nd Lien Term Loans at 15% into a more reasonable level next year.
Additional disclosure: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.