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.
[...] 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. [...]
[...] Also, looking at the average leveraged ratio of Belo and Gannett ( 20.5 that interval is considered a reliable target. So, the Beta is relevered according to two scenarios, one with a D/V of 20% (and a D/E of and one with a D/V of using the following formula (again without considering taxation benefits): βU = (βE + / Where: βU= βD= 0.25 in scenario 0.6667 in scenario 2. The βE for scenario 1 is 1,71, while the βE for scenario 2 is 2,067. [...]
[...] ● Fourth, he can try to issue new equity. Issuing new equity can help the firm recapitalize towards a more optimal capital structure. But considering the very low share price of the firm (the stock price was trading $ 3.14 before Warren Buffett announcement), this method is not optimal to get additional funding. A very large amount of share issuance would be need. ● Finally, he can declare bankruptcy, MEG can file for Chapter 11 bankruptcy but it is a costly and time-consuming option. [...]
[...] ● 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. [...]
[...] Finally, higher Cash Flow Estimates lead to higher Enterprise Value. Net debt adjustments are not considered in the valuation since it is assumed that the Newspaper business is bought as an asset, which is leveraged from first operating year onwards How much value, if any, does Buffett derive from the credit agreement? There are four aspects of the credit agreement: the term loan, the revolving credit facility, the “penny-warrants” and the MEG board seat for a representative from Berkshire Hathaway. [...]
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