In 2006, I blogged extensively about the newspaper business decline. By then, newspaper stocks had dropped precipitously from 2004. I read and discussed it extensively. Comments ranged from a former newspaper editor - "what would people read in the toilet?" to my children - "you mean people actually pay for old news?" The best comment came from Warren Buffett who, like myself, grew up delivering newspapers. He said, "if there were no newspapers, would they need to be invented?" With his epiphany, I closed out my newspaper research process and saved myself much agony.
I was surprised that he continued to purchase newspapers as their prices dropped even further. Unable to resist a bargain, a fan of newspapers and aided with a flush balance sheet, I imagine that Chairman Buffett was unable to contain himself - despite the profound insight he shared. Further, once in a business, rarely does he give up. But he did on Tuesday.
Lee Enterprises (LEE) announced that it had purchased 40 newspapers from Berkshire Hathaway (BRK) for $140 million - all of it financed by BRK. In addition, BRK was financing another $400 million for LEE (all of LEE's debt) at 9% for 25 years with no fees or performance contracts. This structure is extraordinary - akin to selling something "to someone for part of whatever he can make on it." It does express that 1) in Buffett's opinion, there is little value to the local newspaper model and 2) Buffett stands behind his commitment to do all he can to help local news by selecting high grade people to find a new sustainable model.
Perhaps LEE can innovate to create an app or a Google or Facebook based revenue stream. It's unclear and the markets did not really respond. LEE traded at $40 per share in 2004, $31 in 2006 and is now at $2. The P/E is exceptionally low and the support is there, despite high leverage. Clearly there is a model for digitally important local news, but who will find it?
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