On Wednesday, Graham Holdings Co. (NYSE:GHC) announced that Berkshire Hathaway Inc. (NYSE:BRKA)(NYSE:BRKB) will acquire WPLG-TV, a wholly owned subsidiary of Graham Holdings. Berkshire will trade approximately 1.6 million shares of Graham Holdings stock for the television unit, some additional cash, as well as some Berkshire stock owned by Graham Holdings in a deal valued at about $1.1 billion.
At first blush, the deal is a little convoluted. Why this stock-for-stock exchange and not simply an outright purchase? Berkshire certainly has the cash, and there’s every reason to believe that Graham Holdings stock will continue to grow in value. Graham Holdings, once called the Washington Post Co., is the former owner and publisher of the Washington Post. The company changed its name when the publication was purchased by Amazon.com Inc. (NASDAQ:AMZN) founder and CEO Jeff Bezos in August. Shares are up about 70 percent over the past 52-week period and up 8.15 percent year to date in a market (S&P 500) that has increased just 2 percent over the same period.
Buffett’s position in the company also carries a lot of baggage, and some of it is ostensibly sentimental. Buffett purchased his 1.7 million shares of then-Washington Post Co. stock in 1973 for $10.6 million. He held the shares through a market that dramatically undervalued them — “What we had thought ridiculously cheap a year earlier had become a good bit cheaper as the market, in its infinite wisdom, marked WPC stock down to well below 20 cents on the dollar of intrinsic value,” Buffett told shareholders in his 1985 letter — and through his stake in the company became a longtime adviser and friend to then-CEO Kay Graham, in addition to serving on the board twice.
Buffett’s initial investment of $10.6 million has grown to be worth more than $1 billion, making it one of his most successful, but it looks like the time has finally come for Berkshire to move on. “I am sure this is a mutually beneficial transaction for both companies,” Buffett commented in the press release announcing the deal. “While this transaction will greatly reduce our position in Graham Holdings, our admiration for the company and its management is undiminished.”
“Warren Buffett’s 40-year association with our company has been extremely good for our shareholders. Naturally, the deal that we have put together is one that will be good for both companies,” said Graham Holdings Chairman and CEO Donald Graham. The deal would leave Graham Holdings shareholders with a larger ownership share of their own company — Buffett’s stake is about 23 percent — as well as allow both parties to avoid costly corporate tax fees associated with traditional acquisitions.
The unit that Buffett is buying, WPLG-TV, is a Miami-based television station affiliated with the American Broadcasting Company that serves the southeast coastal region and the Keys. The purchase appears in line with a pro-local news argument that Buffett has made fairly consistently throughout his career. Buffett has gobbled up dozens of local newspapers over the past few years despite dramatic declines in newspaper readership, circulation, and profitability.
In his 2012 letter to shareholders, Buffett argued that although the outlook for the local news industry appears weak, there is a fundamental value that local news organizations posses that can’t be easily duplicated. Given his recent purchase, it appears he believes this extends beyond print and into the realm of local TV news.
Buffett explained in the letter: “If you want to know what’s going on in your town — whether the news is about the mayor or taxes or high school football — there is no substitute for a local newspaper that is doing its job. A reader’s eyes may glaze over after they take in a couple of paragraphs about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbors will be read to the end. Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents.”