Warren Buffett stands to make more by selling Berkshire Hathaway's newspaper portfolio to Lee Enterprises than holding it.
Long before he became the globally renowned “Oracle of Omaha,” Warren Buffett worked as a newspaper delivery boy. In 2012, he revealed that he delivered half a million newspapers as a teenager [Berkshire Hathaway]. Over seven decades later, Buffett’s love affair with newspapers seems to have ended.
On Wednesday, Berkshire Hathaway (NYSE:BRK.A) announced that it will dispose of its newspaper business [Global Newswire] held under the BH Media Group umbrella. The move will see 30 dailies and other publications sold at a price of $140 million to Lee Enterprises (NYSE:LEE).
The Warren Buffett-led investing conglomerate acquired 28 of these titles in the early 2010s at a cost of $344 million. Berkshire Hathaway’s newspaper business generated $15 million in profits in 2019, according to Business Insider.
On the surface it may seem like a bad deal. Who sells a profitable business for a price that’s at least $204 million lower than what it was acquired for? There’s more to it though.
Berkshire Hathaway could actually make more money on the deal than it would have if it continued its hold on to the newspaper business.
How is that, you ask? Well, Berkshire Hathaway is financing Lee Enterprises’ acquisition costs and its existing debt!
Berkshire Hathaway will lend $576 million to Lee Enterprises. The 25-year loan will be offered at an annual interest rate of 9%.
If the loan reaches maturity without Lee Enterprises renegotiating or defaulting, Berkshire Hathaway stands to collect $51.84 million in interest payments every year for two and a half decades. That easily beats the $15 million in profits that BH Media Group has been generating.
Over the total of 25-year loan period, Berkshire Hathaway will have collected $1.296 billion in interest, according to Business Insider. Assuming profits were constant in the declining business, which is highly unlikely, that beats the $375 million Berkshire Hathaway would have generated based on 2019’s profits (assuming the best-case scenario).
This isn’t the only way Buffett will continue to make money off assets he has already sold. The investing conglomerate will lease BH Media Group’s real estate to Lee Enterprises for a period of ten years. The news organization will pay $8 million annually for the real estate. The figure could go down after one year. Lee Enterprises will be responsible for maintenance and other expenses incurred on the real estate over the lease period.
It remains to be seen whether that’s a good deal for Lee Enterprises. After the announcement, LEE jumped 67%. On Friday, the stock was down 1% following a sharp correction during the previous session.