At the annual meeting of Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB) shareholders in 2009, Chairman and CEO Warren Buffett said something that unnerved a lot of reporters, particularly those in the press box there to hear it, like Bill Freehling at The Free Lance-Star, a daily local newspaper in Virginia with a circulation of about 50,000.
Buffett was asked about his thoughts on newspapers. At the time, as they still are now, print publications all across the country were in danger. Many were going out of business, and it was believed — as it still is, to a degree — that print media was dead; the Internet had come and killed it.
“For most newspapers in the United States,” Buffett said at the 2009 meeting, “we would not buy them at any price. They face the potential of unending losses.”
It was a harsh but fair diagnosis of an industry that many investors began perceiving as simply a black hole for dollars. Readers had left for greener — at least, more immediate and easier to access — pastures. With the readers went the advertisers, with the advertisers went the revenue, and with the revenue went the investors.
But despite his diagnosis, Buffett did not simply walk away from the industry. As stock prices declined, Buffett’s finely tuned radar for value must have started beeping, and he guided Berkshire Hathaway through the purchases of several dozen local newspapers from around the country, with a heavy concentration in the southeast following a deal with Media General (NYSE:MEG).
In May 2012, when the deal with Media General was announced, the company had suffered a 31 percent decline in revenues and a 90 percent decline in stock price in the preceding four years. Circulation had evaporated, and — as the story goes — so did the advertisers. Mix in rising costs for printing materials and labor, and the rest of the story writes itself. Debt began piling up, and most investors wanted nothing to do with the company.
In this case, though, “most” didn’t include Buffett, who gobbled up 63 newspaper properties from the company for $142 million and a $445 million loan extension. Or, in other words, for next to nothing.
The decision to make the deal confused many observers, though. If Buffett’s thinking on the industry is accurate — that newspapers “face the potential of unending losses” — then making the investment violates one of his own principles: do not operate any business doomed to unending losses. It’s just bad news all around.
But Buffett explained his thinking and justified his position in a 2012 letter to shareholders. When he wrote the letter, Berkshire Hathaway had acquired 28 daily newspapers in the last 15 months alone. Berkshire Hathaway now owns a veritable army of local reporters and editors.
Buffett argued in the letter that although the outlook for the newspaper industry in general is bleak, there is one area where publications can shine: “in the delivery of local news.”
Buffett explained, “If you want to know what’s going on in your town — whether the news is about the mayor or taxes or high school football — there is no substitute for a local newspaper that is doing its job. A reader’s eyes may glaze over after they take in a couple of paragraphs about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbors will be read to the end. Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents.”
So there it is. Local papers hold a monopoly over the beating hearts of communities. From this perspective, the purchases look much more compelling, and Buffett argues that with the right management and strategy, the papers can either become outright profitable or be sold for a gain.
“Charlie and I believe that papers delivering comprehensive and reliable information to tightly-bound communities and having a sensible Internet strategy will remain viable for a long time,” Buffett wrote.
This may not be a recipe for outsize success, but it does appear to be a recipe for survival. It may be easy to think that Buffett was wearing his heart on his sleeve with the string of newspaper deals — and perhaps, there’s a dash of sentiment to it — but the investor has made a sensible, if not compelling, financial case for the decisions.
“At appropriate prices — and that means at a very low multiple of current earnings — we will purchase more papers of the type we like,” Buffett said in the 2012 letter.