Buffett - Our job is to reign supreme in matters of local importance
In towns and cities where there is a strong sense of community, there is no more important an institution than the local paper. -- Warren Buffett
Billionaire, and arguably the best investor of all times, Warren Buffett, is buying another Texas newspaper, the Tribune-Herald. It is a small newspaper with a daily circulation in the range of 35,000 to 40,000. Details of the transaction have not yet been disclosed, however it is expected that it will be completed by the end of July. The announcement came from Buffett's company, Berkshire Hathaway, Inc. (BRK.B), a publicly-owned investment manager. Moreover, the company has made public that it plans to buy around 60 media general newspapers for a sum of around $140 million. This is on top of the investment that Buffett has already made in The Washington Post and Buffalo News.
Despite the fact that the newspaper industry has suffered on Wall Street, Buffett keeps on adding small town newspapers to his portfolio. The big question, however, is if Buffett is really buying all these newspapers because he cares about the "strong sense of community," or is he buying them for monetary reasons.
First of all, as part of the deal, Buffett's company will extend a loan to Media General (MEG), and in return, earn 10.5% in interest. On top of that, Berkshire Hathaway has also purchased the former owner's stock warrants. Moreover, in small towns, local newspapers are likely to do well in the absence of print and online competition and maintain their monopoly. In these smaller communities, a majority of people depend on the local paper for their source of news and information. The absence of competition for these small town papers means a relatively slower decline in their print operations, as compared to bigger names like the New York Times and Washington Times, and also a longer time period to make the transition to digital. This means that Buffett is probably making these investments with a view to hold them long term, while his company remodels their businesses.
In a letter to all his newspaper editors and publishers, Buffett wrote, "I've loved newspapers all of my life and always will." He then goes on to talk about his childhood days and how he used to deliver papers. So maybe there is more to this recent buying spree than just money; maybe he feels a certain emotional attachment to the newspaper industry. Moreover, Buffett's purchases in the newspaper industry shouldn't come as a surprise, since he knows this business well. For those who didn't know, he once owned Buffalo News and sat on the board of The Washington Post. His company has a history of finding economies of scale and synergy, and now they have purchased enough newspapers to make that happen. For instance, a major story like an election does not need a different reporter for each issue. Also, classified ads can be carried in the 63 newspapers that will be a part of Berkshire Hathaway's portfolio.
Majority of the stocks in the newspaper industry have performed poorly, as seen in the graph below, with the exception of the Gannett Company (GCI).
The Internet is usually blamed for the industry's troubles. Many newspapers have gone out of business and some are close to shutting down. Most papers have started putting their content on the web for free, but this hasn't proved successful for most. The industry is finally starting to realize that it can't survive solely on online advertising. The Wall Street Journal has successfully limited most articles to subscribers for years. However, it was only when the Financial Times and the Times started charging for content, that other papers started putting up "pay walls." There are thousands of bloggers and tweeters giving away their opinions for free, but the quality of most of this type of online content is low. That still leaves the conventional press with an advantage. The Gannett Company is a collection of local newspapers, TV stations and the mid-market USA Today. It is one of the few firms of its type, which has managed to remain profitable, trading on a PE ratio of seven and a dividend yield of 6%. Its decision to finally put up a pay wall in February should help it reverse falling sales. In the midst of poorly performing industry, GCI could provide investors some good value. The New York Times (NYT) has a powerful brand. Although it is still making a loss, its pay wall, which allows readers to look at 10 articles a month, has been a success. With shares down over the last few years, it could even become a takeover target for Buffett if he expands further into the newspaper market. Whether or not his recent investments in newspapers will be successful, remains to be seen.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.