Warren Buffett to buy Media General newspapers

(Reuters) - Warren Buffett's Berkshire Hathaway Inc is boosting its bet on the newspaper industry, with a deal to buy the majority of Media General Inc's papers for $142 million in cash, making him one of the largest publishers in the United States.

The deal announced Thursday means Buffett will have a stable of about 25 daily newspapers across the country.

Buffett is staking his claim in an industry dogged by plummeting advertising revenue and readers who are choosing digital formats over paper and ink. Newspapers, once the toast of investors looking for stable cash-generating companies to park their money, have lost favor over the last several years.

The move is a classic turn for the chairman of the ice-cream-to-insurance conglomerate who is always on the hunt for a good value. He told his Berkshire shareholders in May that he was going to spend more money on newspapers because he still views them as the primary source for local information.

Berkshire will also lend Media General $400 million and provide a $45 million credit line. Media General will issue warrants for approximately 4.6 million Class A shares, representing 19.9 percent of its existing shares outstanding.

Media General's stock soared 38.2 percent to $4.34 a share in midday trade, touching its highest level in six weeks. The company said in February it was exploring the sale of its papers.

Its 63 daily and weekly newspapers are scattered throughout the U.S. Southeast and include the Richmond Times-Dispatch. They will be operated under BH Media Group, a new subsidiary of Berkshire Hathaway. The sale does not include newspapers in Media General's Tampa division, which will be sold separately.

The Poynter Institute's Rick Edmonds said that without the Tampa paper, the group Berkshire bought is probably "modestly profitable."

When the Media General deal is complete, Buffett's stable of daily papers will have a total weekday circulation of around 800,000.

Berkshire already owns the Buffalo News, the Omaha World-Herald Co and a stake in the Washington Post Co. The conglomerate also reportedly holds a small stake in the recently reorganized newspaper chain Lee Enterprises.

With the Media General deal, Buffett will own, outright or in large part, three of the top 10 newspapers in the country by market penetration, according to the Pew Research Center.

But none of the papers that Berkshire owns directly are in the top 25 nationwide by circulation, according to the Audit Bureau of Circulations, which one analyst said fits with Buffett's strategy.

"Berkshire Hathaway is clearly (taking) a vote of confidence in small-town local newspapers. They didn't buy the big city newspaper Tampa Tribune, which is struggling," said Benchmark Capital analyst Edward Atorino.

"They're basically giving Media General a lease on life here. This is chump change, but Berkshire Hathaway doesn't fool around. I don't think Berkshire Hathaway does anything where they're going to lose money."

Media General is the latest newspaper company with a heavy debt load to turn to a mogul for help. The New York Times Co took a $250 million loan with about 14 percent interest from Mexican billionaire Carlos Slim, which the company has since paid back. Slim also received warrants in the deal.

'REASONABLE' INVESTMENT

Buffett is paying slightly less for the Media General papers than he paid late last year for his hometown paper, the World-Herald. That deal included six other dailies and several weeklies in Nebraska and Iowa.

That deal raised eyebrows, as it looked to some to be more like a rescue of a local business with a clouded financial picture than a long-term investment. Many also pointed to his highly skeptical comments in his 2007 letter to shareholders.

"When an industry's underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance," he said in discussing the shrinking profits at his first newspaper holding, the Buffalo News.

But Buffett was adamant that the World-Herald deal was "reasonable," and told shareholders earlier this month they were likely to see him do more.

"We may buy more newspapers. I think the economics work out OK," Buffett said at Berkshire's annual meeting on May 5.

One Berkshire investor said the deal fits Buffett's value model, which has drawn him into a wide range of acquisitions -- from railroads and chemical companies to jewelers and alcohol distributors.

"Buffett sees the transition away from free content as an ultimate boost to profit margins. The companies are very undervalued if they attain even low single-digit earnings growth. I would compare this to his purchase of gas pipelines in the Enron fire sale in 2002," said Bill Smead, chief investment officer of Smead Capital Management in Seattle.

The new holding entity, BH Media Group, also includes the World-Herald papers. Terry Kroeger, formerly CEO of the World-Herald Co, is president of the group.

It was not clear where or even whether the Buffalo News fits into the new entity. Buffett's assistant was not immediately available to comment.

With the nearly 20 percent stake in Media General, Buffett also gets a foot back into the broadcast television business, an industry he knows well. After the newspaper sale, the remaining Media General will be mostly a TV company, with a number of NBC affiliates.

In the 1980s, Buffett helped Capital Cities finance its purchase of the ABC television network and for years remained one of its key shareholders.

(Additional reporting by Supantha Mukherjee in Bangalore; editing by Viraj Nair, Jeffrey Benkoe and Gunna Dickson)

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