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

Thèmes abordés

Media General Inc., Marshall Morton, MEG's newspaper division, Warren Buffett, Berkshire Hathaway Inc., .S. Newspaper industry, credit agreement, merger and acquisition, loan, penny warrants, analysis

Résumé du document

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.

Extraits

[...] 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. [...]

[...] 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. MEG's CEO Marshall Morton best option would be to accept Buffett's offer, even if the deal appears to be at MEG's expense. [...]

[...] Furthermore the comparable return for CCC+ bonds is calculated based on a maturity of 10 years whereas the loan has one of 8 years. This should also decrease the required return rate since the principal is paid back in a shorter amount of time. Assuming a credit rating of CCC+ for a restructured MEG and discounting the return rate due to shorter payback of principal with per year (cf. exhibit 11) a return rate of 9,86% seems reasonable. According to this return rate Buffett derives value amounting to $ 60.05 million (cf. [...]

[...] 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. The analysis focuses on the term loan and the penny warrants, because these are the only quantifiable sources Buffet can derive from. Term-loan analysis: Because the term loan is offered at a discount of 11.,5% MEG receives $354 million in cash in June 2012 and has the obligation to pay $400 million in June 2020 (cf. [...]

[...] 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. [...]