Buffet loved the newspaper business: monopolies, fat margins and predictability. But that changed with the advent of the internet. Perhaps those days are returning as the industry consolidates and digital newspapers make high profit margins.
Lee Enterprises is a media company that owns and operates newspapers, websites and digital marketing services in small to medium-sized markets in the United States. The company’s revenues are primarily generated through advertising and subscriptions. Lee Enterprises has faced challenges in recent years from the decline in print media advertising and circulation, as well as increasing competition from digital media platforms. However, the company has made efforts to diversify its revenue sources, including acquisitions and investments in digital marketing services. Currently, Lee Enterprises owns 77 daily newspapers and approximately 350 specialty publications in 26 states.
LEE even bought the Omaha World-Herald and The Buffalo News from Berkshire in 2020. “We had zero interest in selling the group to anyone else for one simple reason: We believe that LEE is best positioned to manage through the industry’s challenges” , Buffett. He added that he and his investment partner, Charlie Munger, “have known and admired the Lee Organization for over 40 years”. As part of this transaction, Buffet took over all of LEE’s debt and refinanced it with favorable terms (more on this later). Enough chit chat, lets move to the “Why”.
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Thesis
My thesis is that LEE will have a digital business with higher margins around 2025. In most cities, they are the only newspaper and therefore have pricing power. Also, the TAM for the digital business is higher as more people can afford to pay $5-15 per month instead of buying a physical newspaper. The inflection point is the point where digital revenues exceed print revenues, so the company generates a lot of cash flow.
So let us focus on a couple of things in 2025:
- Digital revenue > Print revenue
- Beating management expectations
- Pay down debt each year => lower EV
Digital vs Print numbers
We will attempt to quantify these 3 points.
Management is guiding for $435 million of digital revenue by 2026, reducing cash costs and 2.5x EBITDA leverage target in 2026.
Digital Revenue
In Q3 of 2022, LEE had 532 million digital subscribers. From 2015, these subscribers have grown at a > 70% CAGR, and from 2019 approximately a 50% CAGR. Using a 20% CAGR until 2026 yields 1324 million digital subcribers in 2026, where management is aiming for 900 million. Currently, the average monthly revenue per subscriber is $7.3 dollars. Let us be conservative and assume that this does not increase with inflation but stays at 7.3. Then we arrive at a conservative 116 million of digital subscription revenue. Keep in mind that with current growth, the management target is achieved around the beginning of 2024 ( 3 years early ).
LEE is guiding 310 million digital advertising revenue in 2026, which implies a 14% CAGR. Again, in 2022, this revenue stream grew at 27% mainly driven by their digital marketing solution which grew 74%.
If we combine these 2 digital revenue streams, we arrive at a very conservative digital revenue of 426 million in 2026.
Print Revenue
The total print revenue has 2022 revenue of 550 million, and has historically been declining at 10% a year. Let us say that this revenue gets cut down by 200 million in 2026, to be 350 million.
Cash costs
Now onto the costs, currently cash costs have declined 35% from 2017 to 2022 to 693 million. Where a part (40 million) has to do with the business transformation process, and most of the rest is related to the print business. Let us say that they reduce these costs with another 30% from 2022 to 2026, while the print business (and its costs) withers away. We arrive at 485 million of cash costs. This is not taking into the account debt repayment and therefore lowering annual interest payments.
Rough valuation
Current EBIT margin is about 13% and has been contuously improving. Let us say this margin is 18% in 2026. Since 2026 is far past the inflection point, which is somewhere around 2024. The margins should be substantially higher. We arrive at total revenue of 350+426 = 776 and 2026 EBIT of about 140 million.
Thus, since lower debt => lower EV and since current market cap is around 100 million. This means LEE is trading at around 0.7x 2026 Price/EBIT but taking into account debt, the range is 2x to 4x 2026 EV/EBIT. Valuing LEE as a newspaper, we would use a low single digit Price/EBIT multiple, but seeing it as SAAS company in 2026, an analyst could apply 10-15x multiples. Anyways, the business looks robustly cheap. And finally, probably on the minds of all readers: now a small section on Berkshire’s debt.
Debt
On January 29, 2020, Lee Enterprises (LEE) announced a deal to acquire 31 newspapers from Berkshire Hathaway’s BH Media group for $140 million. This deal was financed by issuing a 25-year $576 million 9% note to Berkshire Hathaway, which refinanced all of LEE’s existing debt. The terms of this debt are beneficial for LEE’s equity. Warren Buffet helped LEE to restructure its debt and supported the company’s digital transformation efforts.
LEE currently has $462.6 million in debt at a fixed rate of 9% and $15.7 million in cash, for a total of $446.9 million in net debt. This debt is owed entirely to Berkshire Hathaway, which agreed to refinance LEE’s higher cost debt when LEE purchased BH Media. The debt has no covenants and Buffet is supportive of LEE’s media business. If necessary, it is believed that Buffet would be willing to make adjustments to the debt in order to avoid pushing LEE into bankruptcy, given his reputation and desire to not take back BH Media. A cash sweep function is in place that uses any cash above $20 million to reduce the debt, and LEE has made $113.4 million in amortization payments since the refinancing.
The 25-year term of the debt has significantly increased LEE’s ability to transition and is expected to reduce the risk of bankruptcy, as long as the company continues to make interest payments and gradually reduce its debt.
Activism
Brief overview of recent hedge funds that hold or have held LEE:
Alden takeover In November 2022, Alden offered shareholders 141 million in a takeover bid. After shareholder (Preatorian Capital) and union resistance, the offer was declined.
Cannell Capital Hedge fund Cannell Capital LLC owns about 9% of LEE, see their 2021 write-up: Cannell Thesis
Preatorian Capital A contrarion hedge-fund by an investor known as “Hkuppy” owns roughly 7%, see what is probably his VIC write-up: Hkuppy write-up
In the recent history of the sector, there have been multiple buy-outs. Gannett acquired New Media Investment Group for 1400 million or 8x EBITDA. In 2021 Alden took over Tribune Publishing Company for 670 million or 7x EBITDA, currently LEE trades at roughly 1x TTM EBITDA.
Risks
In my opinion, in order from most prominent to least prominent.
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Takeover for low ball price
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Can be a 0 in a doom advertising downturn scenario
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Management capital allocation not focused on profitable growth, so we never return to positive FCF
Disclaimer
All information in this document is solely based on LEE SEC filings, VIC write-ups and hedge fund write-ups. I (Gert Lek) do not hold this security in my portfolio, but can change my mind without updating this blog. None of the calculations and forecasts are written here, please do your own DD.