The sale of The Buffalo News and other newspapers owned by Warren Buffett's BH Media Group to Lee Enterprises is the latest consolidation move in an industry that is grappling with steep declines in advertising.
With competition from online news sources rising, newspapers – especially regional and local papers – have been struggling with the shift in advertising to digital sites, which now accounts for nearly half of all U.S. advertising revenue, according to eMarketer. Half of that digital ad revenue goes to just two companies: Google and Facebook.
"It fits in with several trends in the industry," said Rick Edmonds, media business analyst at the Poynter Institute.
Berkshire Hathaway in 2018 shifted management of all of its 30 daily newspapers, except for The Buffalo News, to Lee. That deal came just months after Buffett – a self-proclaimed newspaper fan who has owned The Buffalo News for more than four decades – told Berkshire shareholders at its May 2018 annual meeting that only the Wall Street Journal, the New York Times and possibly the Washington Post had digital models that could overcome the decline in print circulation and ad revenue.
Amid that backdrop, media companies are combining in a bid to reduce print costs and to spread the data and technology costs of building a digital business over more properties. Nearly half of all newspapers in the country have changed hands over the past 15 years, according to a University of North Carolina study.
"In many ways, this is not unexpected, in that he had assigned daily management of the newspapers to Lee," said Penny Abernathy, a professor of journalism and digital media economics and the author of the study, called “The Expanding News Desert.” "It is in keeping with the consolidation we're seeing in the industry."
GateHouse Media in November bought Gannett, which owns USA Today and other major American newspapers, in a deal that combined the nation's two biggest newspaper owners and was expected to yield $300 million in cost savings.
Alden Capital, a New York City-based hedge fund that is the nation's third-biggest owner of print publications and is known for aggressively slashing payrolls, in November acquired a 32% stake in Tribune Publishing, the eighth-biggest chain, which owns the Chicago Tribune and New York Daily News, among other papers.
While national newspapers such as the New York Times and Washington Post have been successful in signing on digital subscribers, the task has been more difficult for metro dailies.
Some digital leaders, like the Boston Globe and the Star Tribune in Minneapolis, have built big digital subscription businesses. But many local and regional newspapers have struggled to build up digital businesses that can replace the revenues that are being lost as print advertising declines. Newspaper advertising revenue dropped by 13% in 2018, according to the Pew Research Center.
As a result, about a quarter of all U.S. newspapers – 2,100 in all, most of them weeklies – have closed nationwide since 2004, Abernathy said. It also has had an impact on newsroom staffing, where 47% of all newsroom jobs at U.S. newspapers have been eliminated between 2008 and 2018, according to Pew.
To cut costs, a number of papers have stopped publishing daily, reducing their print schedules to three or four days per week.
Lee's $140 million deal to buy BH Media, with its 30 daily newspapers and more than 49 weeklies, is expected to yield $20 million to $25 million in revenue and cost savings over the next two years. Some of those savings are expected to come from synergies from the management of digital advertising and subscriber programs, as well as lower administrative costs, according to Lee, the nation's sixth-biggest newspaper publisher.
"You can see a consolidation around three large chains," Abernathy said.
The deal will give Lee a total of 81 daily newspapers and is expected to increase the company's annual revenues by 87%.
"It's a compelling transaction that positions Lee for success," said Mary Junck, Lee's chairman, during a conference call with analysts on Wednesday.
"The media landscape is evolving rapidly and that evolution will continue as audiences and advertising dollars shift from print to digital," she said. "We have proven ourselves to be flexible and nimble in rethinking and repositioning our business for a digital-first mindset."
As part of the deal, BH Media's owner, Berkshire Hathaway, agreed to provide Lee with about $576 million in long-term financing, carrying a 9% annual interest rate. That will make Berkshire Lee's sole lender and allow Lee to refinance about $400 million of its existing debt, saving it about $5 million a year in interest expense. The deal is expected to close in mid-March.