A Change in Gear from Newspapers to TV

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The investing giant Warren Buffett is again creating a buzz in the market with his interest in the newspaper industry. In May 2012, when his conglomerate Berkshire Hathaway purchased all 63 newspapers except Tampa Tribune from Media General, it had raised some doubts if Buffett had made the right decision. A subsidiary of Berkshire Hathaway, the BH Media Group purchased all newspapers of the Media General group for $142 million in cash. This included 63 daily and weekly titles in Alabama, North Carolina, South Carolina, and Virginia. The deal also includes websites, mobile and tablet applications.

There were concerns that about why Buffett has made an investment in the newspaper industry now when online media is the preferred choice of the market. But, Buffett has an altogether different view, stating that local newspapers still hold a strong foothold in the small towns where online and print media have slow growth. Also, the slow penetration of big titles like The Washington Post and New York Times gives local newspapers a fair chance to maintain their monopoly in the small town market.

But Buffett’s decision (in Nov. 12) to sell News & Messenger in Manassas, Virginia, a part of the newspapers he purchased from Media General, is again being questioned. The 143 year old newspaper with a circulation of 10,000 will print its last edition on Dec. 30.

Warren Buffett also owns a minority stake in The Washington Post and was once a part of its board. The metropolitan giant has reported its 3Q 2012 earnings up 31% year over year. The revenue increments were driven by its Television Broadcasting and Cable Television divisions. Political advertising contributed $15.6 million to the revenue.

Let’s have a look at the current market position in terms of stock growth over the time period of last one year, as well as their market caps.

<table> <tbody> <tr> <td> <p><strong>Company Name</strong></p> </td> <td> <p><strong>Stock Growth (1 Year)</strong></p> </td> <td> <p><strong>Market Cap</strong></p> </td> </tr> <tr> <td> <p><strong>Berkshire Hathaway Inc.</strong> <span class="ticker" data-id="206249">(NYSE: <a href="http://caps.fool.com/Ticker/BRK-A.aspx">BRK-A</a>)</span></p> </td> <td> <p>15.80%</p> </td> <td> <p>214.20 billion</p> </td> </tr> <tr> <td> <p><strong>The Washington Post Company</strong> <span class="ticker" data-id="206118">(NYSE: <a href="http://caps.fool.com/Ticker/WPO.aspx">WPO</a>)</span></p> </td> <td> <p>(1.95%)</p> </td> <td> <p>2.53 billion</p> </td> </tr> <tr> <td> <p><strong>Media General Inc.</strong> <span class="ticker" data-id="204422">(NYSE: <a href="http://caps.fool.com/Ticker/MEG.aspx">MEG</a>)</span></p> </td> <td> <p>9.27%</p> </td> <td> <p>108.65 million</p> </td> </tr> </tbody> </table>

Leaving behind the Buffett investment strategy, I can clearly see that selling off the newspaper segment was a fruitful decision on Media General’s part. The company can now focus more on broadcasting, under which it operates 18 network-affiliated local television stations, including the top rated WFLA (No.1 in Florida) with NBC and CBS.

Change in Business Model

The selling of all newspapers was a divestment strategy to focus purely on broadcasting. The sale of Tampa Tribune (in Oct. 2012) to the Los Angeles, California-based private equity firm Revolution Capital Group, worth $9.5 million, has completely altered its focus only on broadcasting. This change in its business model has reflected well in Media General's 3Q 2012 earnings.

Total 3Q revenues were ~$94 million (up ~42%) driven by Political Advertising and the Summer Olympics. The Summer Olympics generated ~$15.5 million, up ~24% from the 2008 Beijing games, and political advertising contributed ~$20 million in revenues. Moreover, political advertising being the highest this season, Media General has benefited through its top ranked stations. This growth in political advertising will further carry on in the fourth quarter of 2012 and is expected to generate ~$25 million, and for the year it is expected to be ~$58 million. Total broadcasting revenue was $91.9 million, and included 15.6% and 19.2% increases in local and national advertising. Auto advertising rose 45%, a positive factor for local TV stations growth, which is expected to continue. Although the viewership of local TV is being eaten by the bigger channels, sports and auto are still gaining strength.

With more focus on local news and programming, the company has expanded its morning news block starting from 4:30 in many markets, and additions of its 7 PM newscasts. It has also added Saturday and Sunday morning local newscasts, at several stations.

Cost Saving

Media General has implemented plans to reduce corporate expenses from $32 million annually to $20 million. The cost saving is planned to come through furloughs, headcount reductions, and incentive compensation expenses. It has already achieved some reduction in expenses this year. The additional elimination of 75 more positions will result in more savings in the fourth quarter.

S&P upgrade

In Oct. 2012, Standard & Poor's Ratings Services has raised their estimate for Media General because of its better liquidity position. S&P expects that the company will be able to maintain its liquidity in 2013, despite a slowdown from political advertising revenue. Also, Media General has a manageable working capital and sufficient liquidity to manage its capital spending needs over the next year.

Summing up, Media General’s divestment strategy has helped in improving its focus on key areas and has been helpful in bringing it in line with competing positions with Gray, LIN TV, Nexstar, and Belo. With the upcoming holiday season, the company is well prepared for Thanksgiving and Christmas holiday advertising opportunities.  At this level, I feel Media General offers a good buying point, backed by its strategic decisions, which are expected to help the company continue to do well in the future.

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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