Buffett says goodbye to his struggling newspaper business

By Katherine Chiglinsky and John J. Edwards IIIWarren Buffett has seen some of his businesses decay before. There was Berkshire Hathaway Inc.’s namesake textile operation, which shut down in 1985. A shoe manufacturer was folded into another business two decades ago, after being bludgeoned by globalization.The latest to go: newspapers.Buffett’s agreement to sell BH Media and the Buffalo News to Lee Enterprises Inc., announced Wednesday, marks a rare divestiture after he spent years snapping up local newspapers. In recent years, he’s lamented the changing economics of the publications and admitted that he wasn’t sure how to make the papers succeed. Now, it’ll be up to Lee to turn the business around.“To make that transition from print to digital, they need a focused player like Lee to put their shoulder to the wheel and make it happen,“ said James Armstrong, who manages about $825 million, including Berkshire shares, as president of Henry H. Armstrong Associates. “Berkshire really can’t contribute in terms of management effort to that.”Buffett, who got a job delivering papers as a teenager and invested in the industry to capitalize on its one-time local advertising stronghold, said last year that most newspapers are “toast.” BH Media, which owns papers across the country, has been cutting jobs for years to cope with declining ad revenue. The deal cements the ties between Buffett’s company and Lee, which has been managing BH Media’s papers since 2018.“We had zero interest in selling the group to anyone else for one simple reason: We believe that Lee is best positioned to manage through the industry’s challenges,” Buffett said in a statement Wednesday.Lee’s LoanLee, which owns papers including the St. Louis Post-Dispatch, agreed to buy the businesses for $140 million in cash. Buffett’s company will loan Lee the money for the purchase of 49 weekly publications and 31 daily papers, including Buffett’s hometown Omaha World-Herald and Buffalo News, which he’s owned for more than four decades. Lee’s shares jumped on the news, rising 67 per cent to $2.10 Wednesday.Berkshire is lending Lee $576 million at a 9 per cent annual rate with a 25-year maturity and no performance covenants for the purchase of the business and refinancing of other debt. Excluded from the sale is BH Media’s real estate, which Lee is leasing under a 10-year agreement.“To have a 25-year maturity with no covenants is unique, and that tells you Buffett is giving them a lot of runway to accomplish this transition from print to digital,” Armstrong said in an interview. The real estate agreement means “Lee can never profit from liquidating these enterprises and selling off the land.”Falling CirculationIn 2018, Buffett acknowledged that he was surprised that the decline in demand for newspapers hadn’t let up and that his company hadn’t found a successful strategy to combat falling advertising and circulation. That same year, US newspaper circulation dropped to its lowest levels since 1940, according to the Pew Research Center.Buffett has long said that he prefers to hold onto businesses. The newspaper deal, however, is Berkshire’s second divestiture in less than a year, including the sale of an insurance business in late 2019. At other times, Buffett has chosen to shutter a struggling business. The textile operations, which formed the basis of the $550 billion conglomerate, closed because it was “inappropriate,” he said, to keep funding a business that appeared to have unending losses.Berkshire still operates and holds other old-fashioned businesses, including door-to-door vacuum-cleaner business Kirby Co. and encyclopedia publisher World Book. Some underperforming businesses in Berkshire’s manufacturing, service and retailing groups could be better off with deals structured similarly to the Lee agreement, creating efficiencies and making Berkshire a creditor instead of an equity holder, said Christopher Bloomstran of Semper Augustus Investments Group LLC.There are a number of opportunities “that ought to be a candidate for this kind of a deal,” said Bloomstran, who oversees more than $250 million as president and chief investment officer of Semper Augustus, declining to name any specific operations.What Bloomberg Intelligence Says“Berkshire Hathaway’s agreement to sell its newspapers is a message that it will eschew companies in fading business models.”-- Matthew Palazola, senior P&C insurance analystBuffett has longstanding ties to the newspaper industry. He previously owned the Omaha Sun, which won a Pulitzer Prize for its investigation of Boys Town, and struck a deal to buy the World-Herald in 2011. The billionaire investor also had a long friendship with and was a business coach to Katharine Graham, and was a director at her Washington Post Co.Berkshire’s deal with Lee “increases the likelihood of survivability for the combined enterprise,” Bloomstran said. “You’re buying this shrinking business, combined, a lifeline, and you’re buying them more years than they probably otherwise would have.”Industry in CrisisAside from a few bright spots, such as the largely thriving New York Times Co., the newspaper business is in crisis across the US McClatchy Co. -- which owns about 30 papers, including the Miami Herald and Charlotte Observer -- is fighting to avoid bankruptcy as it contends with pension obligations and debt. The Salt Lake Tribune became a nonprofit last year, after failing to find a profitable business model.As print advertising has cratered in recent years amid the rise of social media, Craigslist and search ads, private equity firms and hedge funds have swooped in to take advantage of newspapers’ steady though dwindling revenue streams.New Media Investment Group Inc., controlled by private equity firm Fortress Investment Group LLC, bought USA Today owner Gannett Co. last year to form the largest US newspaper chain. The deal spurred apprehension in journalism circles given New Media’s reputation for newsroom layoffs, though the new Gannett leadership pledged to avoid widespread job cuts.Buffett acknowledges the cultural and economic shifts that have hit his sprawling conglomerate over the years. When asked about the impact 5G wireless technology might have on Berkshire’s businesses, he said it’s up to the manager of each operation to understand how the business will play out.“The world is going to change in dramatic ways,” Buffett said last year at his annual shareholder meeting. “We welcome change and we certainly want to have managers that can anticipate and adapt to it. But sometimes we’ll be wrong. And those businesses will wither and die.”

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