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Merger and acquisition - Buffett's bid for Media General's newspapers

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case study
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21 pages
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  1. Why does Warren Buffett want to buy MEG's newspaper division?
  2. Is MEG's newspaper division worth 142 million dollars?
  3. How much value, if any, does Buffett derive from the credit agreement?
  4. As a current lender to MEG, would you refinance the 225 million dollars term loan that is coming due? Would you refinance the term loan as a new lender?
  5. What should MEG's CEO Marshall Morton do? What are his options?

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. [...]


[...] Taking the current rating of CCC+ for MEG into account Buffett derives $51,2 million in value for the term loan since he receives a higher return than the rating of MEG would suggest (cf. Appendix L). This rating may not correctly reflect the risk of the term loan since MEG will have a new debt-to-equity structure, since it does not include the newspaper business anymore. Thus the risk of the business declines and a lower return may be more appropriate. [...]


[...] Secondly, by exercising the penny warrants for 4.65 million Class A common shares at $ and considering the share price stable at $ Buffett makes an immediate gain of $ 19.4 million. The credit agreement appears to be very expensive for Media General. However, conditions of refinancing are unfavourable for the company. Media General had very little time to make a decision on accepting or not the deal. The company had to repay $225 million of the term loan within eight days to avoid a default on the loan agreement. [...]


[...] They have a large base of readers who are loyal of people living in towns and small cities read a local newspapers). Further motivation for bidding comes from possible synergies and economies of scale, which can be achieved between newspapers of Berkshire Hathaway, such as operational synergies (e.g. centralizing administrative departments) and financial synergies (e.g. lower cost of debt). Furthermore, the Tampa Tribune is excluded from the purchase agreement, which fits Buffett's investment strategy, as it is the largest newspaper in the MEG portfolio (size comparable to the Buffalo News), whereas Buffett wants to focus on local newspapers. [...]

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