Warren Buffett for years spoke proudly of his long list of print newspaper holdings at annual meetings, even as the industry overall saw major declines in readership and profits. Now that's changing. Buffett, nicknamed the Oracle of Omaha and regarded as one of the most successful investors of his era, is exiting the newspaper business entirely. Berkshire Hathaway Inc. (BRK.A) has agreed to sell its holdings in this industry to Lee Enterprises Inc. (LEE) for $140 million in cash. The transaction includes the sale of Berkshire's media property, called BH Media Group (BHMG). The unit owns 30 daily newspapers and their websites, more than 49 paid weekly publications with digital sites, plus 32 other print products. Lee also is obtaining The Buffalo News, which is owned separately by Berkshire.

As part of the transaction, Berkshire also is extending approximately $576 million of long-term financing maturing in 25 years to Lee Enterprises at an annual interest rate of 9%. This extension of credit will finance the acquisition, refinance about $400 million of existing debt on Lee's books, and leave Berkshire as Lee's sole lender.

Significance For Investors

Buffett's decision to sell comes as Berkshire is coming under enormous pressure from investors to boost its stock performance, which has drastically lagged behind the broader market in recent years. Shares of Lee Enterprises have fallen in both the last year and the past 5 years, reflecting the difficulty of the newspaper business.

Key Takeaways

  • Berkshire Hathaway is selling its newspaper holdings to Lee Enterprises.
  • Lee already is managing most of those papers for Berkshire.
  • Berkshire is financing the deal, and will become Lee's sole lender.

Profile of Lee-Berkshire Deal

Lee Enterprises has managed the newspaper properties owned by Berkshire through its BHMG subsidiary since July 2018. In 2019, the Berkshire newspaper unit recorded revenue of $373.4 million and adjusted EBITDA of $47.4 million.

The acquisition does not include cash, real estate, and permanently attached equipment owned by BHMG. Instead, Lee will enter into a 10-year lease for BHMG's real estate, at a cost of $8 million annually, payable monthly. Lee will assume all ongoing operating and maintenance costs on these properties. Also, lease payments may be reduced to the extent that these properties are sold off.

Lee Raises Bet on Newspapers

When the transaction closes, Lee Enterprises will expand its holdings of daily newspapers from 50 to 81, nearly doubling its total audience size. Lee also owns more than 200 weekly and specialty publications serving 50 markets in 20 states. The combined daily print readership of its current newspapers averages about 3 million.

Lee expects to increase revenue by 87% and adjusted EBITDA by 40%, while lowering leverage to 3.4x before synergies. These synergies, including both reduced costs and increased revenues, are anticipated by Lee's management eventually to reach between $20 million and $25 million annually. Meanwhile, the financing provided by Berkshire as part of the deal is estimated to reduce Lee's annual interest expense by about $5 million.

While Buffett has described himself in the past as a newspaper "addict," and indicated as recently as 2012 that he might be interested in buying more, in 2019 he appeared to turn pessimistic, saying that most newspapers are now "toast."

Looking Ahead

The deal between Berkshire and Lee Enterprises still faces regulatory approvals. Increased concentration in the ownership of news outlets is a concern, but the declining health of the newspaper industry suggests that consolidation is increasingly an economic imperative.