Buffett to buy 63 newspapers | Hacker News Reader

Buffett to buy 63 newspapers

omaha.com

70 pointsdanso45 comments

This seems like a pretty good deal if you go beyond the headlines of Berkshire investing in a declining industry.

1. All the newspapers Berkshire Hathway is buying are modestly profitable according to Poynter Institute. They didn't buy the Tampa Tribune newspaper which is struggling.

2. Berkshire is also loaning $400 million to Media General at 10.5% interest. And providing a $45 million credit line. The interest on that loan will go a long way towards paying for the newspapers.

3. And on top of this, Berkshire is getting stock warrants equivalent to almost 20% of Media General. Media Generals stock prices are already up by 33%.

In essence, Berkshire has put in $600 million which will earn them about $60-80 million per year (from newspaper revenue and interest on the loan.) Gives them 20% of a media company with a market cap of $90 million and room to rise higher. And leaves with a $400 million loan which has to be paid back to them eventually.

This is a bloody genius deal.

Obviously the devil's in the details. But it seems more like fair company at a great price than great company at a fair price. The latter is what Berkshire is known for.

If it's the former type of a deal it's interesting: Maybe prices are so good he couldn't resist. Maybe these newspapers do represent a great "company."

Berkshire has been doing quite a bit of the first category too lately. They have such a gigantic cash pile that they can operate as kind of a private-sector bailout fund, bailing out companies that, with Berkshire financing, could survive past a rough spot, and extracting excellent terms as a result (because the companies are often in a short-term position that gives them little room to refuse the offer). For example, their 2008 investment-with-some-loan-characteristics to Goldman Sachs in the middle of the financial crisis had a similar interest/equity structure, where they were granted special 10%-dividend-paying shares.

they can operate as kind of a private-sector bailout fund,

Or, as we used to call it: Buy low, sell high.

That's not really what they're doing, though; it's buying on special, negotiated terms, with bond-style percentage-of-investment payouts in return.

Maybe it is because of that stock/bond blurring you mention. There's really no such thing as a great stock.

This page has some interesting commentary on the purchase:

http://www.businessweek.com/articles/2012-05-17/why-warren-b...

"As recently as six years ago, newspaper companies sold for more than 9 times Ebitda (earnings before interest, taxes, depreciation, and amortization). Bank of America Merrill Lynch’s Stephen Weiss writes today that Buffett’s company paid around 4 times Ebitda for the Media General assets."

I suppose you could say he's buying a very sick golden goose. He may not be able to save the goose, but at 4 times Ebitda he only needs to collect a few last eggs to get his money back. And who knows... maybe the goose can be saved.

The non-obvious thing is that if 6 years ago Ebitda was '100' and today it is around '10' then Mr. Buffet would have paid 40 rather than 900. Comparing the Ebitda makes you think the cost was 45% of 6 years ago, but if Ebitda has fallen in this period then, as in my example, the price is just 4.5% of 6 years ago.

If these businesses are able to survive the next few years and get to grips with all the new mediums of publication then Ebitda may well return to the levels of 6 years ago and then Mr. buffet would be sitting very pretty indeed.

Does anyone have the comparative Ebitda figures?

That's a good point. Worst case, in 9 months I'm sure we'll see the details in the shareholder's letters (http://www.berkshirehathaway.com/letters/letters.html).

I'm not sure economics is the right angle. This is an (re)election year, and these newspapers are all in "Virginia, North Carolina, South Carolina, Alabama and Florida." Think what you want from that.

Eh, that's only two and a half swing states (Actually, NC is probably less than a half swing state). If he was trying to influence the election, it'd be more efficient to fund a super pac. Priorities USA would be the obvious choice.

Buffett is a hands off manager, and if he started tinkering with editorial policies, word would get around. He's no Murdoch.

Value investing: the last few puffs in the cigar butt. http://www.valuebull.com/Cigar+Butts

Hopefully (for Buffett), it will turn out better than that famous example where he bought into a business in a declining industry (textiles).

http://en.wikipedia.org/wiki/Berkshire_Hathaway#History

The greatest thing about Buffett is his willingness to change his mind.

He started out by investing in "cigar butt" companies that were often valued at huge discount to their book value. Then he changed: bought lots of Coke stock.

He said he was not able to predict the outcomes of technology companies and therefore was very unlikely to invest in the sector. Then he changed: bought lots of IBM stock.

He has stated in a number of his letters to Berkshire Hathaway shareholders that the newspaper business has lost its "moat", its competitive advantage. Now he's changed: buying a huge number of local media properties at an incredible discount.

Buffett's adaptability, patience, and willingness to change tack is what makes Berkshire Hathaway such a powerhouse. As his partner Charlie Munger said of their performance over the last 40 years: "if you stripped out the top 20 bets we've made then our performance is a joke". They've made big bets on lots of distressed assets. This bet is relatively tiny compared to Berkshire's size. They are look for more "elephants" like the Burlington North railway.

He didn't change his mind about being unable to predict the outcomes of technology companies at all. In fact, he reinforced that very statement in discussing having purchased IBM.

He bought IBM because, in his own words, he no longer considers it an unpredictable technology company (subject to changing trends), but rather a company that services infrastructure, like a plumber. He sees an IBM that is no longer highly subject to unexpected shifts in technology. They're more like Accenture than the IBM of 1980 at this point.

He didn't change, IBM did. It's why you won't see him doing very many more tech investments. Intel is a far more curious investment on his part than IBM, but it was a piddling investment compared to IBM.

He was right about newspapers, and he's breaking his own rules. He'll buy almost anything at the right price, and that's the case here, he's buying a cigar butt.

The greatest thing about Buffett is his unwillingness to change. It's his dedication to not changing his principles that has kept him from blowing up as most do over such a long duration. Instead he tries to follow the same strict capital allocation rules that work over and over and over again, and always will.

His principles have changed several times as I have outlined. His core investment philosophy has not.

- Stick to what you know. - Price is what you pay; value is what you get. - Bet big. - Focus, do not diversify.

He is only buying local newspapers with strong local distribution.

He's betting that they will fair better in the long term as people go to the Internet for the big stories while they buy a newspaper for all the local news.

Good idea I think.

That's a great point.

Are there any startups tackling the local news problem?

There are but it is quite difficult.

The other thing is that the bigger newspapers made a lot of money through national advertising, sales sections and deceased notices. These things are becoming less relevant. With Craigslist and Facebook etc.

He's probably hoping that investors dump their whole newspaper portfolio and he can pick up all the profitable smaller papers while selling the bigger ones such as the Tampa one at a short term loss as part of the long term plan.

He wrote a good article about end of life businesses and how they can be a good investment, but not to reinvest money into them. I'll have a look and see if I can find it. Local newspapers

AOL is making probably the biggest concerted push at the moment with its Patch platform. It's an interesting idea, but probably still to soon to say how everything will turn out...

There is no local news problem. Local news exists to sell advertising...and there's hundreds and hundreds of companies attacking that space.

There is some demand for local news on the part of readers, though, which is what causes these papers to survive (and be able to sell ads). The newspapers aren't really producing the highest-quality output, but they retain some readership, because some number of people want to read about what happened in their 80,000-person town's city council meeting yesterday, what the sirens around 3rd and Main were all about, etc., etc.

I haven't yet seen a startup tackle that aspect, of producing some kind of local information source that people will want to read. It's at least a demand-side problem, in that a lot of people want that information, and current information providers are producing a fairly low-quality version of it. Whether it's monetizable, I suppose, is another story.

My anecdotal and experiential evidence says that while there are people who want that information, it's a pretty small number so you can't exactly make money directly from them.

And the people who look at that info have zero intent to spend money, so advertisers have zero interest in appearing alongside it.

http://www.patch.com/ might be what you're asking about. I can't comment on how well they perform.

He's betting that they will fare better in the long term

There's always a market for good writing. The question is how to monetize.

Although this seems like a weird move it's my guess that he is betting on at least one of those papers being the long time survivor after a consolidation of the market.

For $142 million he should be able to make money one way or another.

But this is of course my (very un-educated) guess.

I think you're right. A purchase of this size is bound to be able to new a few wins, even if it's via consolidation.

And who knows, maybe iTunes/Amazon has convinced him that "content" has a future.

I wish him luck. The Washington Post has a larger market, effectively no print competition, and still clearly has trouble. These days it feels like the old USA Today when I pick it off the porch.

I guess he just bought 63 news websites, with staff on ground to run them.

Could be a bad buy or a good buy. I think the good buy angles come if he can help ensure that all those local newspapers make sure to get a web/mobile foothold. Combine the best of both worlds: the boots on pavement and faces-in-faces they already have, and the focus on the local communities and culture, combined with making their content available both in newsprint AND on desktop web and on mobile web. It'd be relatively cheap to build and operate a per-newspaper website these days, especially at the kind of traffic levels those newspapers would likely have. Salaries for news staff and the cost of print operations would prob be so much higher the web/mobile parts would be just noise in the cost structure.

I live in a small market served by one of the papers involved. Their website is the hub for local and state news in a way that simply doesn't compare with a large market.

One of the changes to the newspaper business is that I can get national and international stories from the NYT or Post at no cost and at my leisure. Big story reporting has become commoditized.

What has value is news that I can't get anywhere else and which is likely to effect people I know personally - like school board decisions or changes to the speed limit on local road or the city council considering the milage rate.

e.g: http://www2.oanow.com/news/2012/may/17/schools-working-new-c...

So just 2,5 million $ a pop. Not sure how much a newspaper is usually worth, but 2,5 million sounds like a steal. Even if the paper thing does not survive, you have skilled staff and teams.

What's a skilled news staff good for when you don't have a paper anymore? If you can't sell their product, they are just a cost center.

You can run a website. Surely there will still be demand for local news? Unless you generate all reports from Twitter and Instagramm, who is going to report on local news?

Why does Bill Gates participate in that newspapers buying event (see video at the bottom of that article)?

he's on the Board of Berkshire and is often thought as future Buffett replacement as CEO.

Does Gates think about himself as future CEO of Berkshire Hathaway?

That's ... unexpected. To leave his own baby to run someone else's company...

Buffett is really smart guy. But this acquisition is weird. At the time when "journalism is a dying breed" and newspaper industry failing to generate substantial revenues due to the "Internet Tidal Wave" of past decade, why is he buying good ol' newspaper company?

From the article- "He said newspapers need to resolve problems with high production and delivery costs and the practice of making their products available for free over the Internet."

Buffet is the epitome of a contrarian investor. He's buying precisely because he thinks the popular opinion about the dying newspaper industry is exaggerated, and he can get a good deal for his money.

Because a newspaper is not a bunch of dead trees. It's the brand, the community history, the reporting. Take those, + scalable internet model and you can probably do decently.

Buffett is not above buying cigar-butt companies. Even though he moved away from the strategy his mentor followed (Graham), he does see the value of it.

When you have a huge pile of cash, all you need is a conservative return.

What's the long term strategy here?

I head the online strategy and development for a leading media company in Pakistan. Some years back we were approached by IBM for their portal solutions. Our competitors were already using IBM portal solutions at the time and were in a leading position which gave others a compelling reason to switch over. We didn't end up switching over but if we had, it's likely the third major player in the market would also have capitulated to keep up. IBM would have been in a good consulting position either way even if they got 2 out of 3.

It's very likely that the this investment and the IBM investment have a link. It certainly makes sense from a strategic point of view and would benefit everyone involved.

Buffett should understand by now that it's bad to be getting into the buggy business when the automobile shows up on the scene. He's obviously looking to get one last puff out of the classic cigar butt scenario, but he lost big on that type of gamble with Berkshire Hathaway textiles (obviously BRK is no longer under threat of a modest bet like this putting a dent in their company).

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