It appears that Warren Buffett (Trades, Portfolio) has found another use for his ever-growing cash pile at Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial).
According to a statement published Jan. 29, the conglomerate has agreed on a deal to sell a portfolio of its newspapers, weekly publications and websites to news provider Lee Enterprises (LEE, Financial) for $140 million in cash.
Berkshire is also providing $576 million of long-term funding at an interest rate of 9% for Lee to acquire the BH Media Group as well as The Buffalo News.
BH owns the print and digital operations of 30 daily newspapers and 49 paid weekly subscriptions with digital sites. The subsidiary was formed in late 2011 when Buffett rolled his media interests into one central entity. Around the same time, Berkshire spent $142 million acquiring Media General, which added dozens of local-focused daily and weekly titles to the newly formed BH Media.
Newspaper owner
What's fascinating about this transaction is the fact that Buffett has been a newspaper owner for many decades. Indeed, Berkshire has owned the Buffalo News since the mid-1970s.
Buffett has always had a soft spot for the newspaper industry because he started out in the business world with a newspaper route. Over the years, he built this single route into a distribution network, employing other boys to help him up his delivery quota.
Another reason why this transaction is notable is that Buffett rarely sells businesses. Buffett has made it known in the past that when he buys a business, it is for life. This is because he wants to attract the best managers. The only way to do this is to give them complete autonomy without the threat of being sold on to another conglomerate if they underperform or do not meet expectations. Selling businesses sends the wrong idea to managers.
However, this will be the second business that he has sold in the past 30 months. In February of last year, Berkshire agreed to sell one of its workers' compensation insurance companies, which it acquired 13 years before to eliminate conflict of interests. Before this sale, Berkshire itself had not sold a business since the 1980s (lthough individual business divisions under the Berkshire the umbrella had).
Still, reading through Buffett's comments on this latest deal, it seems as if he has thought carefully about the transaction, and he's not just dumping the business for the sake of making a quick buck.
A market leader
Lee has managed BH's publications under an agreement since July 2018, and according to the statement issued announcing the deal, both Buffett and his right-hand man have admired the work of Lee for the past four decades:
"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. No organization is more committed to serving the vital role of high-quality local news, however delivered, as Lee," Buffett's statement said.
This deal seems to be favorable to both parties. Lee might be paying a high interest rate on Berkshire's money, but this is no ordinary creditor. Berkshire's sizeable balance sheet and long-term focus mean that it is unlikely to pull the plug when the going gets tough.
The deal will also increase Lee's portfolio of daily newspapers to 81 from 50 at present. The company should be able to achieve substantial economies of scale as part of this change.
Meanwhile, Berkshire is going to offload its struggling media assets to a trusted buyer that has a good reputation in the media world. The group can also deploy some of its massive cash pile at a desirable rate of interest. This deal is likely to generate a much better return for Berkshire's shareholders than the media assets considering the current state of the newspaper industry.
Disclosure: The author owns shares of Berkshire Hathaway.
Read more here:
- Warren Buffett and the Circle of Competence
- Rare Early Interview From Warren Buffett
- Warren Buffett's 1974 Advice on Market Selloffs
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