Merger and acquisition, Warren Buffett, Berkshire Hathaway Inc., Media General Inc., MEG's newspaper division, Marshall Morton, U.S. Newspaper industry, credit agreement, loan, penny warrants, analysis
The U.S. Newspaper industry has faced, since the late 1980s, significant challenges due to competition of other source of news and information, and saw a progressive and constant decline of daily circulation. Media General Inc., a company that entered the newspaper business in 1850, is no exception to the rule. In 2012, it operated 18 TV stations and published 64 newspapers. Although the shares are publicly traded, the Bryan family still ran the business and held a majority of shares. The company's operational and financial troubles started in 2007. Most of the lines of business saw a decline in revenue, especially newspaper one: revenues fell from 524.8 million dollars to 299.5 million dollars in only five years. The high financial leverage of the firm (with a debt to value ratio of 84%), generates difficulties for MEG to meet his reimbursement obligations.
[...] The acquisition price ($142 million) only represents five times the 2011 newspaper division EBITDA. The credit agreement and the penny warrants of 4.65 million Class A common share were another way for Buffett to make substantial gains. MEG's newspaper division is worth $142 million considering a WACC rf 30 years of and a growth rate of - Other scenarios have been considered making different assumptions: WACC rf 10 years ( 10.00 WACC rf 20 years ( 10.53 a range of growth between - and and target debt to value ratio from 20% to 40%. [...]
[...] First reason of Warren Buffett bidding for MEG is that he has a personal relationship with newspapers dated back to the 1940s when he was a paperboy. However, it seems not to be the main reason of his offer. Warren Buffett has a history of investing in newspapers: He bought the Washington Post in 1973 and the Buffalo News in 1977. More recently, Berkshire focused on local newspapers by acquiring the Omaha World- Herald and also several newspapers in Iowa and Nebraska for $200 million. [...]
[...] In the worst case MEG can sell other assets than the newspaper business in order to meet its debt requirements. As a contra argument for refinancing the term loan of $225 million it can be put that MEG has the worst credit rating of CCC+, which highly advocates disinvestment. In addition to bad solvency MEG faces $455 million in pension obligations, of which $132 million are underfunded, which poses further credit risk. The industry in which MEG is operating has negative growth and no innovations, new strategies or indicators for a turnaround to sustainable growth can be identified for MEG. [...]
[...] Selling those divisions is not the best option because broadcasting and digital media are considered to be growth areas. As stated before, MEG should hold on to these segments. Third, he can try to restructure the debt. MEG has a total debt of $658 million, which represents 95% of its capital structure. A refinancing process has just occurred in February 2012 and the company has to raise $225 million prior to May 25. The company's debt is also rated CCC+, which corresponds to speculative bond rating. [...]
[...] Calculation details can be found in Appendix A. The free cash flows for the five coming years are as follows: Table 1 It may be argued whether these Cash Flows can be considered reasonable or not, as there is no indication of change in strategy or an indication of increasing demand for newspapers, which has been decreasing constantly through the last 10 years: the newspaper division proved to be the most unprofitable one with revenues falling by 43%. However, one may argue that the new management could modify the business model and increase the stream of cash flows turning around the business model (i.e. [...]
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