Why Did Warren Buffett buy Small Town Newspapers and not New York Times (MEG, NYT, WPO, GE, GS)

It would seem that in a damaged industry such as print journalism, investors would seek refuge in the flagship franchises such as The New York Times (NYSE: NYT) and The Washington Post (NYSE: WPO).  One of the world's richest men, Carlos Slim, has done so with a number of investments in The New York Times.  But arguably the greatest investor of all time, Warren Buffett, just bought a number of small newspapers from Media General (NYSE: MEG) for the portfolio of Berkshire Hathaway (NYSE: BRK-A).

Why no one is ever sure why Warren Buffett does what he does, he loves cash flow and abhors debt.  As part of this deal, Berkshire Hathaway will earn 10.5 percent lending money to Media General.  This is about the dividend amount Buffett earned from Goldman Sachs (NYSE: GS) when he bought $5 billion worth of preferred stock back in 2008 at the nadir of The Great Recession.

Newspaper stocks have been pounded by the twin blows of The Great Recession and the Internet.  From that, it makes sense that Buffett would invest in The Fourth Estate.  Writing in The New York Times on October 16, 2008 in his op-ed entitled,  "Buy American.  I am" Buffett stated that, "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now."

Buffett did not buy any newspaper stocks at that time: he bought Goldman Sachs and General Electric (NYSE: GE).  In waiting almost four years, Buffett was able to see which newspaper publishers would survive; and also be able to gauge the effectiveness of the franchise of each.

Neither The New York Times nor The Washington Post have a lucrative franchise, odd as it may seem.  A well-established community papers, of which Buffett is buying many, has a number of advantages.

The first is primacy.  The New York Times is not the most popular newspaper in New York City.  It is not the most well-read business publication either.  In addition, it is very, very expensive.  There is no classified advertising cash flow to buy into for an investor.

The Washington Post is on the decline, too.  It has done away with the separate business section.  Newsweek was a debacle.  If it was not for the Kaplan, Inc, the educational subsidiary, it is questionable as to what form of existence The Washington Post would endure.  The other newspaper in Washington, DC, The Washington Times, is a mere shell of its once former self, too.

Small city and small town newspaper offer strong classified advertising incomes, both print and digital.  In addition, the Internet will never replace the local newspaper for community news.  By buying so many newspapers, Buffett can affect a roll-up type strategy.  This will reduce costs through buying power.  Expenses will be reduced through synergy.  In addition, with many of the newspapers in the same region, there will be overlaps to increase revenues and decrease expenses.

Investors have always been excited about monetizing the information stream generated by a newspaper.  It has not happened yet, which is why Buffett was able to buy so low and did not move until recent.  What has worked for newspapers is reducing costs.  Newspapers have adapted though layoffs and reductions in pulp expenses by printing less on smaller pages.  Right there, staff and paper, are the two biggest cost centers for a newspaper.

Other areas Buffett will be able to replicate is sharing stories.  A major story like an election does not need a different reporter for each issue.  Wire stories can be utilized more under one control center.  But you cannot cut your way to prosperity.  More must be earned by newspapers, particularly to please Warren Buffett. 

Classified ads can be carried in the 63 newspapers that will be a part of Berkshire Hathaway.  A vacation home does not have to be carried in just one paper.  Nor a help-wanted ad.  Ironically, the Internet is helping print journalism here as advertisers can design much more effective ads then before.  This cannot be accomplished with single location papers such as The Washington Post and The New York Times.