The headline on the Washington Post says it all: “Warren Buffett buys newspapers. Is he nuts?”
Overnight, Buffett’s investment vehicle Berkshire Hathaway announced it would spend $142 million to buy 63 daily and weekly newspapers from a company called Media General Inc.
Buffett is a long-time media investor; and Berkshire Hathaway holds a large stake in The Washington Post Company and the Oracle of Omaha sat on its board for many years.
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But buying into newspapers such as the Winston-Salem Journal in North Carolina and the Dothan Eagle in Alabama – as well as their digital assets like websites and apps – doesn’t seem like the smartest idea in the world, particularly when you consider the swathes of local newspapers in the US that have been forced to shut in recent years.
But Buffett appears to be selling this deal as being something close to a social service.
“In towns and cities where there is a strong sense of community, there is no more important institution than the local paper,” Buffett said in a statement released overnight.
“The many locales served by the newspapers we are acquiring fall firmly in this mould and we are delighted they have found a permanent home with Berkshire Hathaway.”
That sentiment reminded me of something we’ve seen in the last few years as Gina Rinehart bought into the media sector with investments in Fairfax Media and Ten Network.
She’s never really explained her media investments, save for the line that Hancock Prospecting was “interested in making an investment towards the media business given its importance to the nation’s future”.
While Buffett and Rinehart have used similar sentiments to describe their media investments, their motives appear to be quite different.
Where Rinehart appears to be looking for a greater say in Australia’s political, social and business debates, Buffett’s play is about money.
As Andrew Edgecliffe-Johnson points out in the Financial Times, Buffett is getting profitable assets at a good price.
“The titles he is buying are forecast to generate $30 million in earnings before interest, tax, depreciation and amortisation (EBIDTA), so he is getting them for 4.7 times EBIDTA. Even if EBIDTA slumps further, to $20 million, he would be buying for 7.1 times.”
It could also be a property play, as some analysts have argued. Berkshire picks up 21 properties as part of the deal – these too will have value, even if they are no longer used for their current purpose of putting out newspapers.
Buffett has even hinted he could be interested in buying more small media groups, noting it’s a market where there are few buyers whose cheques don’t bounce.
It certainly is a counter-intuitive bet and, relative to Berkshire Hathaway’s market value of $200 billion, a tiny deal.
But it’s only three years since Buffett said newspapers had “potential for unending losses”. I’m not exactly sure what’s changed.