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Buffett Ups Berkshire's Bet on Struggling Hometown Papers (Update 1)

Updated with Warren Buffett quotes on newspaper business

NEW YORK ( TheStreet) -- After betting on America's banking system during the financial crisis and unveiling a new position in General Motors (GM) that backs a resurgent U.S. auto industry, Warren Buffett is adding to one of his favorite "old school" America bets, buying into another struggling local newspaper company.

On Thursday, Berkshire Hathaway (BRK.A) said it is buying most of the newspapers of Media General (MEG - Get Report) for $142 million or a near 100% premium to the company's market cap as of Wednesday trading. While the deal is obviously not the $22 billion acquisition that Buffett recently revealed had been under consideration earlier in the year -- nor is it a shot of Berkshire's M&A "elephant gun" -- it is an unequivocal bet on the newspaper industry and the ability of locally based papers with a long-time audience to generate profits and withstand the digital news onslaught.

Warren Buffett

The move follows Berkshire's acquisition of the Omaha World-Herald in late 2011 and its long-time top share stake in The Washington Post (WPO).

Berkshire Hathaway is buying Media General's 63 daily and weekly newspapers throughout southeastern states like Virginia, North Carolina, South Carolina and Alabama and will provide a $400 term loan and $45 million in revolving credit to the company, which has lost over 90% of its value in the last five years on waning earnings and a growing debt burden.

With the loan and credit line, Media General will be able to repay its existing bank debt due in March 2013 and refinance into arrangements that expire in 2020, the company said in a statement. Shares of Media General surged over 40% in Thursday afternoon trading.

A subsidiary of Berkshire Hathaway, BH Media Group, will purchase all of the newspapers owned by Media General, with the exception of its Tampa-based operations, and will take warrants for roughly 20% of the company's outstanding shares.

"In towns and cities where there is a strong sense of community, there is no more important institution than the local paper," said Warren Buffett in a statement announcing the deal. "The many locales served by the newspapers we are acquiring fall firmly in this mold and we are delighted they have found a permanent home with Berkshire Hathaway."

Already, Buffett has lent his hand to support the struggling newspaper industry. Last November, Berkshire bought the Omaha World-Herald for $200 million, buying up Buffett's hometown newspaper. About the deal, Buffett was quoted by the World as saying, "I wouldn't do this if I thought this was doomed to some sort of extinction."

Buffett newspaper experience grew from a childhood paper route to a multi-decade service on The Washington Post's board that ended in May 2011. He also owns The Buffalo News. Although the "Oracle of Omaha's" investments may be clouded by respect for America's fourth estate, [his parents met while working at <i>The Daily Nebraskan</i>] he may still be targeting "moated" business with a top market presence that's proven to be a winning formula for Berkshire Hathaway.

" The Washington Post is a local newspaper... This kills people in the news business -- the most important news in the newspaper are the ads," Buffett told Vanity Fair in a recent profile. In buying shares in The Post in the early 1970s and his recent print acquisitions, Buffett is targeting local print market leaders. The challenge will be helping The World and his newly acquired Media General papers build sustainable revenue in the digital market, where most content is free.

"I don't know of any business plan that has sustained itself that charges in one version and offers the same version free to people," Buffett said earlier in May at Berkshire Hathaway's annual meeting.
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