Buffet's Bid for Media General's Newspapers

Hung Hoang

FNAN 498

Buffet’s Bid for Media General’s Newspaper

1. Why does Warren Buffett want to buy MEG’s newspaper division?

• The reason for Mr. Buffett to buy MEG’s new paper division was due to several reasons:

• Media portfolio enrichment, users base acquisition: Since 2011 fiscal year, Buffet’s company – Berkshire Hathaway has been investing their capital into owning acceptable amount of newspaper agency under their subsidiarity (BH Media). Making him one of the largest publishers in the US. By the time he bought MEG’s newspaper division, Berkshire has controlled about 63 newspaper. Most their ownerships are small town newspaper which they are likely to face less competition than other major city papers. Also, small town newspaper influence power and normal amount of readers. That could be a long-term investment strategy which allow Buffet to acquire his readers base and transform them to another platform such as digital media; where he can increase their revenue and eventually make profit in the future.
• Cheap acquisition: Analytics concern that his recent purchase was base to his “heart”. However, on the financial stand point, Buffet’s acquisition greatly benefit his firm since majority of the newspapers were acquired at a very cheap cost (~$2.25m each).

2. Is MEG’s newspaper division worth $142 million?

                a. Start by valuing the newspaper division, assuming the cash flow forecast in Exhibit 10 is reasonable. For the purposes of this analysis, assume a market risk premium o f6%, a debt beta of 0.20, a closing date for the transaction of January 1, 2012 (you can ignore half-year discounting), and a reduction of $30 million in your valuation of the entire newspaper division to reflect the fact that the The Tampa Tribune is excluded from the purchase agreement.

• MEG’s total newspaper for this deal is valued at $219.97m, excluding the Tampa Tribune. The total value of the firm, which including the Tribune and other division would cost about $249.97.
• Using the 2 stage DCF & FCFF model, MEG’s Weighted Average Cost of Capital is 7.88% (calculation showed below), assuming and 11.5% cost of debt and 15.5% cost of equity (Using CAPM function with beta = 2.29, risk-free rate = 1.76, and market risk premium = 6% (Damodaran). Firm target debt to value was 95%.

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• For the firm valuation, terminal growth rate has been forecasted to -0.04% as the firm revenue is declining during the last several year. Firm value calculation showed as below

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                b. Are the cash flow forecasts reasonable? What are the critical assumptions you need to make for the newspaper division (again, less The Tampa Tribune) to be worth $142 million? To be worth more than $142 million?

• Considering under a financial standpoint, those cash flow forecasts are no longer reasonable since traditional newspaper outlet is not generating enough revenue to be worth exactly as calculated. Therefore, the $142 million offer was a good offer from Buffet to MEG.
• Critical assumptions

• MEG’s revenue has been plunging over 5yrs periods due to the declining consumption of print’s newspaper. The domination of digital media is shifting the industry to extreme competitive for MEG’s media to compete. Also, MEG’s own newspapers have faced declining circulation since 2001 (exhibit 5).

3. How much value, if any, does Buffett derive from the credit agreement?

• Debt: $400 million loan that Buffett is about the lend to MEG alongside with $45 million credit facility will allow BH’s Media a reasonable amount of interest. The interest rate for of 10.5% would create a NPV about $59.44 million.

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4. As a current lender to MEG, would you refinance the $225 million term loan this is coming due? Would you refinance the term loan as a new lender?

• As a current lender to MEG, I would refinance the $225 million term under those requirements:

• MEG has to create a short term & long term strategy to restructure their cost of capital.
• Manage to cover the substantial losses due to the declining of print media.

• As a new lender, I would not refinance the term loan since their capital structure isn’t fitting for a new loan.  

5. What should MEG’s CEO Marshall Morton do? What are his options?