Research

Berkshire Hathaway’s (BRK.A, BRK.B) Newspaper Investments Part I

Q2 2013 Update

berkshireWe have been analyzing and evaluating the newspaper companies that Warren Buffett and Berkshire Hathaway (BRK.A , BRK.B) has invested in the past and has invested in recently over the last twelve months.  We have analyzed and evaluate each firm’s past performance, breakdown of each firm’s business operations mix and most recent highlights.  Berkshire’s newspaper operations include BH Media ((newspapers Berkshire owns outright), The Washington Post Company (WPO) and Gannett (GCI).  In this report we will examine the recent performance of BH Media Group, The Washington Post Company and Gannett.

BH Media Group and the Buffalo Evening News:  Berkshire owns the Buffalo Evening News   and it was the only newspaper fully owned by Berkshire for almost 35 years.  We’ve already established how the paper is a regional metro area broadsheet newspaper that is serving a city that has seen steady population erosion since 1930 and its suburbs have not been able to make up the declines seen in Buffalo proper.  For whatever reason, Berkshire is keeping it separate from its BH Media Group organization that it established in order to oversee the 63 newspapers it acquired from Media General (MEG) as well the Omaha World-Herald (which was acquired last year).  From December 2012 to February 2013, Berkshire bought the Tulsa World and the Greensboro, NC News & Record while shuttering the Manassas, VA News & Messenger.  BH Media Group now owns 69 newspaper publications, including 29 daily newspapers and added The Roanoke Times to its stable of newspaper properties in May.  The division saw year-over-year revenue growth due to bolt-on acquisitions of other newspaper publications.

The Washington Post Company:  Berkshire directly owns 23.3% of WPO and has been WPO’s 2nd largest shareholder since 1973.  Buffett tutored Katherine Graham and her son Donald on how to run a business to maximize shareholder wealth and Katherine Graham was Buffett’s ticket to high society.  Because of Buffett’s involvement, we see that WPO has handled the shakeout in the news industry better than other firms who did not have the vision to diversify into higher-value content like for-profit education as well as the television business.  WPO’s flagship newspaper and its Post-Newsweek Media community papers only accounts for 13% of the company’s revenue, down from 46% in 1993.

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Source: Washington Post’s 1993 Annual Report and Q1 2013 10-Q Report

WPO’s Newspaper Publishing division saw its revenues decline by 57bp from $139.2M in Q2 2012 to $138.4M in Q2 2013.  The division benefited from a $3.9M (15%) increase in year-over-year revenues from its online media properties but this was mostly offset by a 4% decline in print advertising revenue ($2.2M).  Average daily circulation declined by 7.1% for The Washington Post in Q2 2013 versus Q2 2012 levels.  Operating losses widened by $2.2M year-over-year due to declining revenue and increased pension expenses as part of the division’s Voluntary Retirement Incentive Program.  WPO closed the sale of its Everett, WA community daily newspaper publication (The Herald) to the Sound Publishing subsidiary of Black Press Group Ltd in March.  Black Press received most of The Herald assets and liabilities but certain land and buildings that were worth $10M and other assets and liabilities were retained by WPO.

WPO has formally expressed interest in selling its headquarters building located in Downtown Washington, DC and introduced an online paywall this summer.  In July, Amazon.com Founder Jeffrey Bezos announced that he would purchase WPO’s Newspaper Publishing division for $250M.   The deal does not include the company’s headquarters on 15th Street NW (the building has been for sale since February) or Foreign Policy magazine, the Web sites Slate and the Root, the WaPo Labs digital development operation, or Post-owned land along the Potomac River in Alexandria.  Once the sale of the Newspaper Publishing division is complete, WPO will change its corporate name.

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Source: Washington Post Q2 2013 8-K Earnings Release

WPO’s best performing divisions in Q2 2013 were its broadcast TV division and its cable television division, which continues the trend we’ve seen from last year.  WPO’s TV broadcasting division saw revenue growth of 4% and operating income growth of 9% in Q2 2013 as growth in advertising demand across many product categories, incremental advertising revenue growth from the NBA finals broadcast at the division’s ABC affiliates in Miami and San Antonio and increased retransmission revenues.  This was partially offset by a $5.3 million decline in political advertising revenue. WPO’s cable television operations saw 5% revenue growth and 16% operating income growth due to rate increases for many subscribers in June 2012, partially offset by a decline in basic video subscribers as the cable division focuses its efforts on churn reduction and retention of its high-value subscribers.

WPO’s Kaplan Higher Education subsidiary was formerly WPO’s high-flying star performer but is now a broken growth company.  Kaplan is facing industry related headwinds thanks to lower student enrollments and government reforms of the industry, which explains how Kaplan’s adjusted profits declined by nearly 100% in 2012 versus 2011 and suffered $111.6M in asset impairments.  WPO’s Kaplan, Incorporated division was able to increase its operating income by $20M on the strength of reduced corporate expenses as well as revenue growth from its Kaplan Test Preparation Business and International operations.  Kaplan Inc.’s revenue excluding KHE grew by 2.8% year-over-year. Although Warren Buffett endured a negative total return of 45.25% on his WPO shares since it peaked at $999.50 on December 30, 2004, at least he is earning a 159% yield on his original cost of $6.15/share and his shares have increased at a compounded annual growth rate of 12% excluding dividends received.

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Source: Morningstar Direct

Gannett Co: Berkshire sold its 1.7M position in GCI during Q2 2013.  We think GCI is actually one of the better print media companies out there.  Although that’s not saying much due to the secular declines in the industry, Gannett was still able to generate $562M in free cash flows during the last twelve months.  This represents a free cash flow yield of 9.7% and GCI sports a dividend yield of 3.24%.  GCI missed its Q2 2013 adjusted analyst EPS expectations by $.01 due to incremental revenue declines and expense growth.

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Source: Gannett Q2 2013 Earnings Release

We were starting to warm up to GCI ourselves as it has diversified out of print media and gets 30% of its revenue from high growth media content areas.  However it still has to deal with the declines of the print media business, which still brought in 69% of the company’s revenue in Q2 2013.  We believe that reducing the share of revenue that comes from print media operations was part of the reason why GCI recently announced its $1.5B acquisition of Belo Corporation (BLC).  We were surprised that GCI’s share price jumped by 25% in pre-market trading on June 13th because it paid a rich price for BLC.  GCI paid $2.2B in cash and assumed debt for Belo, which was 15X TTM tax-adjusted investor cash flows, which will decline in 2013 due to the absence of revenues from federal election campaigns.  Although only 8% of BLC’s revenue in 2012 was from political advertising, BLC’s revenues in 2012 were flat relative to 2008 and 2004 levels.  While investors may have been excited about GCI’s acquisition of BLC, the terms of the deal caused our interest in GCI to wane.

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Source: Belo 2008-2012 Annual Reports and Morningstar Direct

GCI saw its total revenue decrease by 30bp year-over-year in Q2 2013 on the strength of its broadcasting operations.  Broadcasting revenues grew by 3.2% year-over-year and its Digital revenues grew by 2.9%.  Publishing revenue decreased by 1.7% in Q1 2013 as circulation revenue growth was more than offset by advertising revenue declines.  GCI saw 6% revenue growth in publishing circulation revenues, which was offset by a 5.3% decline in publishing advertising revenue. GCI also incurred $26.2M in non-cash asset impairments, efficiency-driven facility consolidation and workforce restructuring charges, up from $14.8M in the prior year’s period.  The company also spent $81M on acquisitions in FY2012 & H1 2013 and this helped the company generate a 9% year-over-year increase in free cash flows excluding changes in working capital assets and liabilities.

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Source: Morningstar Direct

In conclusion, we can see why Warren Buffett has not given up on the newspaper business.  Warren Buffett is not the only famous investor investing in the newspaper business as every major publicly traded newspaper chain has at least one notable value investor that holds a significant equity stake.  Berkshire owns nearly six dozen newspaper publications outright, has equity and debt stakes in one company that publishes newspapers (Lee Enterprises (LEE)) and two companies that have sold or are selling its newspaper publishing operations.  WPO only generated 14% of its revenue from newspapers before announcing the sale of its newspaper division to Jeff Bezos, GCI’s success in 2012 was due to its TV broadcasting operations and Media General (MEG) sold off all of its newspapers to Berkshire.  Our upcoming report will analyze and evaluate Berkshire’s MEG and LEE holdings. We are surprised that Berkshire has sold off all but 88K shares of its entire equity stake in Lee Enterprises considering that Lee’s EBITDA margin is higher than its peers and because Lee has been making steady progress in paying down its debt even with the burden of higher interest rates.  At least Berkshire reiterated its commitment to Lee by refinancing its legacy Pulitzer debt.

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Past performance is not necessarily indicative of future results. All investments involve risk including the loss of principal. This report is confidential and may not be distributed without the express written consent of the original author and does not constitute a recommendation, an offer to sell or a solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made by means of delivery of an approved confidential private offering memorandum.

Investments may currently or in the future buy, sell, cover or otherwise change the form of its investment in the companies discussed in this letter for any reason. The author hereby disclaims any duty to provide any updates or changes to the information contained here including, without limitation, the manner or type of any of the investments.

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Disclosure: Analyst(s) covering this company owns common shares in LEE.

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