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

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

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!