Did Warren Buffett Just Save the Newspaper Industry?

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Warren BuffettMost Americans know Berkshire Hathaway chairman Warren Buffett as "the greatest investor in history." But history itself may remember Buffett as the man who saved the newspaper industry -- the man who, in the darkest hour when newspapers were dying off to be replaced by the Internet, opened up his incredibly large wallet and made sure newspapers would survive.

Last week, Buffett moved to save a failing Media General (MEG), paying $142 million to buy 63 struggling newspapers from the media conglomerate. The deal, expected to close one month from now, will expand Buffett's media empire (which currently consists primarily of minority stakes in The Washington Post (WPO) and Lee Enterprises (LEE)) and give him outright control over such storied names as the Richmond Times-Dispatch and the Winston-Salem Journal.

Buffett also bought his hometown paper, The Omaha World-Herald, last year, and he owns a few Iowa and Nebraska papers, as well as The Buffalo News in New York.

He's also positioned to profit from Media General -- or, if necessary, take over what's left of it -- having agreed to extend a $400 million term loan and a $45 million revolving credit line to keep the rump-company afloat. In addition to collecting on the loans, Buffett's Berkshire Hathaway (BRK.A) (BRK.B) received warrants to acquire 19.9% of Media General's shares at an unspecified strike price.

Meet the Next Rupert Murdoch

So what is Buffett up to? Is Media General a prelude to Buffett's building a media empire that will counterbalance News Corp (NWS)? Are we -- not to put too fine a point on it -- witnessing the birth of the next Rupert Murdoch?

Yes and no. Yes, because it's pretty clear that Buffett and Berkshire are embarking on a concerted effort to build a media business. They've even established a subsidiary to keep track of all the new holdings: "BH Media Group."

But no, it's not likely that Mr. Buffett has designs of supplanting Mr. Murdoch as the No. 1 media figure, or even of playing a liberal yin to Murdoch's conservative yang.

Addressing the suspicion head-on in a recent memo to his new papers' editors and publishers, Buffett assured them that they will retain full editorial independence under his ownership:

I have some strong political views, but Berkshire owns the paper -- I don't. And Berkshire will always be non-political. We have more than 600,000 shareholders of all stripes and I do not use Berkshire's resources, directly or indirectly, to speak for them.


Buying Time for the Newspaper Industry

But if Buffett's not buying a megaphone for his political views, what is he up to? The answer is scattered throughout his memo to the publishers in several key statements:

Times are certainly far tougher today than they used to be for newspapers. Circulation nationally will continue to slip and in some cases plunge.

That's hardly a news flash.

We must rethink the industry's initial response to the Internet. The original instinct of newspapers ... was to offer free in digital form what they were charging for in print. This is an unsustainable model ... We want your best thinking as we work out the blend of digital and print that will attract both the audience and the revenue we need.

And this is key. Beset upon from one side by cheap, virtual "news" operations like Yahoo!, Google, and Huffington Post, which stole away their readers, and on the other side by Cragislist, Cars.com, and LinkedIn, which siphoned off their ad revenues, newspapers have been scrambling to find a sustainable business model -- and failing. Buffett's entrance into the industry however, will change all that. Under Berkshire's ownership:

Your paper will operate from a position of financial strength. Berkshire will always maintain capital and liquidity second to none. We shun levels of debt that could ever impose problems.
In other words, Buffett is taking his $200 billion company, its $37.8 billion bank account, and the nearly $13 billion in annual free cash flow it generates, and using them to backstop the newspaper industry -- to buy them enough breathing room so that they have time to think and figure out a way to conduct business in the Internet age. In so doing, he has given them a fighting chance at survival.

Let's wish him well in that. Let's hope that years from now -- many years, hopefully -- when history finally gets around to writing an obituary for Warren Buffett, it won't begin with praise for "the world's best investor." Let's hope it reads: "Warren Buffett, the newspaper boy who grew up to save the newspaper industry ..."

Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of LinkedIn, Google, and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Google, and LinkedIn.


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