Lee Enterprises: Emerging from the Shadows of Bankruptcy

Lee Enterprises: Emerging from the Shadows of BankruptcyThe story of Lee Enterprises, Incorporated (NYSE:LEE) is as interesting as an investigative piece reported by the local newspaper in town. Recently emerged from a prepackaged Chapter 11 bankruptcy in January 2012, it is now a newspaper publishing company trading at a minuscule market size of US$77.3 million and carries close to a billion dollars in debt.

In April, the market was blindsided as famed value investor Warren Buffett was reported by the Wall Street Journal to have purchased US$85 million worth of Lee Enterprises’ loans at about 65 percent of the loan’s original principal value. Subsequently, the Securities Exchange Commission dropped a bomb on the investing world in June as it denied Buffett’s holding company, Berkshire Hathaway, from withholding the fact that the investor had also simultaneously amassed 1.66 million shares of Lee in the first quarter of 2012. Today, Berkshire has doubled its stake in the company and controls more than ten percent of the company’s equity stake.

What does a US$200 billion company like Berkshire Hathaway see in a US$77 million company like Lee Enterprises?

In Kapitall Wire’s continued discussion on the newspaper industry, we explored in our latest article the trends of The New York Times Company– a newspaper that targets the broader national market. In contrast, Lee Enterprises is a collection of 51 newspapers in small and mid-sized markets that altogether have an approximate 1.3 million readers daily. Its major markets include the Midwest, Mountain West, and West regions of the United States.

Similarly to the broader newspaper industry, the Company is experiencing a severe decrease in its revenue from newspaper advertising. However, while some industry players have been able to recoup their loss of advertising income from expanding its circulation through digital products, Lee Enterprises has been struggling to meet the challenge with both declining advertising and circulation revenues.

Lee Enterprises: Emerging from the Shadows of Bankruptcy

In the last five years, advertising revenue has decreased significantly by US$328.6 million while circulation revenue has also dropped by US$22.5 million. Although circulation has taken on a higher proportion of its revenue base (as evidenced by the graph below), Lee Enterprises is still geared more towards generating revenue through advertising than its industry peers such as the New York Times (circulation at NYTimes is 52% of total revenuecompared to 24% at Lee Enterprises).

Lee Enterprises: Emerging from the Shadows of Bankruptcy

Luckily for its long suffering shareholders, the Company has been busy making up loss ground and recently updated investors that they have introduced digital subscriptions in 36 markets. Furthermore, it is also planning to charge a digital access fee for all its newspapers by the end of the year. Here is a brief selection of digital access plans that have already been put in place:

Lee Enterprises: Emerging from the Shadows of Bankruptcy

However, as evidenced in the table above, most local market newspapers provide free online access included in home subscriptions and therefore do not generate any revenue from online content. In addition to this, electronic access is for the large part confined to online access meant for PCs and do not create content specifically for ease of use on tablets or phones. With this in mind, one might venture to say that these local market newspapers are currently unable to transition into the digital market. They do not have the resources to create attractive online content, not to mention content that is exclusive to the online format.

If the majority of these local newspapers begin to charge for online access, their limitations would severely restrict its practical use and would conceivably fail to generate a significant amount of revenue. In contrast, the New York Times is able to generate a noticeable amount due to its attractive formatting for various types of devices and its exclusive online content. This includes videos, blogs, interactive content, and updated versions of previously published articles.

In conclusion, while Buffett has found Lee Enterprises to be an interesting addition to his growing collection of newspaper companies (Washington Post, Omaha World Herald, and 60+ others bought from Media General), an individual investor might not be wise in following the footsteps of the Oracle of Omaha in owning a share of this business.

It is true that local newspapers are probably the best poised to survive the digital age due to the specific and niche nature of their reporting coverage, and it is also not inaccurate that Lee Enterprises generates one of the highest EBITDA margins (23% in FY2011) in the industry. However, the heavy indebtedness of the company coupled with bankruptcy agreements that require it to divert any excess cash flow into repaying debt mean that it might be some time before shareholders will get to reap any reward from the business.

Lee Enterprises: Emerging from the Shadows of Bankruptcy

This article is written in a Kapitall Wire series about the U.S. newspaper industry. The next installment in the series will be an exploratory piece on the McClatchy Company, a NYSE-listed newspaper publishing company that owns 30 daily newspapers including the Miami Herald and The Sacramento Bee.

1. The New York Times Company (NYTEarningsAnalystsFinancials): A global, multimedia news and information company that includes newspapers, digital businesses, investments in paper mills and other investments. Market cap at $1.3B

2. Gannett Co., Inc. (GCIEarningsAnalystsFinancials): Operates as a media and marketing solutions company in the United States and internationally. Market cap at $3.88B

3. The McClatchy Company (MNIEarningsAnalystsFinancials): Operates as a newspaper publisher in the United States. Market cap at $224.64M

4. Media General, Inc. (MEGEarningsAnalystsFinancials): A provider of local news and information over multiple media platforms principally in small and mid-size communities throughout the Southeastern United States. Market cap at $95.45M

5. The E. W. Scripps Company (SSPEarningsAnalystsFinancials): Operates as a diverse media company with interests in television stations, newspapers, and local news and information Web sites. Market cap at $586.63M

6. Lee Enterprises Inc. (LEEEarningsAnalystsFinancials): Incorporated provides local news, information and advertising in midsize markets, with 49 daily newspapers and a joint interest in four others, nearly 300 weekly newspapers and specialty publications in 23 states. Market cap at $77.91M

7. A. H. Belo Corporation (AHCEarningsAnalystsFinancials): Operates as a news and information company primarily in the United States. Market cap at $108.7M

Compare analyst ratings for these publicly traded newspaper companies:

Lee Enterprises: Emerging from the Shadows of Bankruptcy

This article was originally written by SiHien Goh, and posted on Kapitall.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!