Buffett Bid for Media Gen

Newspaper
Rajiv Bhutani
IIM Raipur
2018
Buffett’s Bid for MEG Newspapers
 Learning Objectives
• DCF Valuation: This case analyzes a declining
industry where firms shrink: Reduction in
NWC become a source of cash
• Finance & Business Strategy: Link between
finance & Strategy – Firm might transition to
new distribution channel and production
format, thereby generating different CF, TV
and growth rates
• Financial Distress: Financing Challenges & its
costs for highly leveraged firms on edge of
 Questions to Analyze
• Why Buffett want to purchase this? How will
he make money?
• Is MEG's newspaper division worth $ 142 mm
– Value using DCF: Steps include calculating
WACC, FCF, TV and NPV
• Value Credit Agreement
• What are the Options before the CEO?
• What Happened and what lessons can be
learnt
 Buffett’s Motivation – Financial
• Penny Warrants: 4.65 MM MEG shares worth
19.9% of company. Gain of 4.65*(4.18-0.01) =
19.4 MM
• More upside possible
• Providing liquidity to a struggling firm
• 400 MM loan at 11.5% discount, so MEG
receives 354 MM for this
 Buffett’s Motivation – Qualitative
• News generation will never disappear entirely
• Proverbial Fourth pillar of democracy
• Buffett says: “There are still a lots of things
newspapers can do better than any other
media”
• Demand for local newspapers covering local
news
• He owns other newspapers viz Washington
Post, Buffalo News, Omaha World Herald – So,
he understands the dynamics
Buffett – How will he make money?
• Deal could be about Credit Agreement – “Feat
of Financial Engineering”
• He could be buying at Fire-Sale prices – He is
buying at 4X EBITDA (142 MM offer/34.2 MM
EBITDA in 2012)
• He has left large pension obligations
• Maybe be he expects actual circulation and
expected cash flows will be better than
expected
• He also gets real estate which will provide a
Buffett – How will he make money?
• Devil’s Advocate:
• Circulation is declining rapidly even in Buffett’s
newspapers
• Median public newspaper is losing money
with many bankruptcies
• Newspapers assets have been losing value
rapidly – Philadelphia Enquirer and
Philadelphia News went from 515 MM in 2006
to 55MM in 2010
• It has outmoded distribution strategy and high
 Value the Asset Agreement
• What exactly is Buffett buying, what is he not
buying?
• Answering will help us find appropriate
comparable firms and an appropriate asset
beta
 Value the Asset Agreement
• Points to Note:
– Valuing an asset not equity. So, don’t subtract
Debt from NPV
– Projections in Exhibit 10 include Tampa Tribune’s
cash flows but Buffett is not buying them
– So, must subtract $ 30 MM from NPV
– Deal will close in mid-2012: how to handle half-
yearly cash flows and half-yearly discounting
– We assume that deal closes in January 1
– How should MEG value losses on the sale of
newspaper division (assuming BV > 142 MM offer)
 Value the Asset Agreement –
WACC
• Lets Compute WACC
• Select Comparables
• Exhibit 12 gives details about 6 firms, their
business description, leverage and equity beta
• Gannett Revenues of 5.2 Bn Vs 300 MM for
MEG
• Can we simply use information for leverage
and asset beta for MEG??
 Value the Asset Agreement –
WACC
• Using MV leverage ratio, equity beta, and an
assumed debt beta of 0.2, lets compute asset
beta for the comparable firms
• Average for Belo and Gannett is 1.41
• 2 methods to calculate WACC = 11.07%
• Round off to 11.1%
• Sensitivity Analysis for WACC as a function of
assumed leverage ratio and asset beta
• Ranges from 10-12%
 Value the Asset Agreement – FCFs
• Two Important Questions:
– Who prepared these forecasts?
– Why they prepared them?
• In this Case:
• Analyst, not the seller and were done for
valuation purposes - to price MEG's equity in
sum-of-parts method
• So, forecasts are probably less biased (less
optimistic) than if they came from MEG
• However, since these are from an outsider,
 Value the Asset Agreement – FCFs
• Questions about the Forecasts:
• Revenues fall initially, but begin to grow in
later years…….Why??
• Industry is declining – Are local papers truly
different from urban papers?
• Also, circulation has been falling
• Maybe, with online subscription based model,
forecasts seem reasonable
• Aim: See relationship between business
strategy, operations and financials
 Value the Asset Agreement – FCFs
• Operating Margins increase from 4.9% to 10%
• Historically, margins were around 11%
• Economics of online publishing might improve
over-time, which would lead to fewer PPE
costs
• Fuel costs, newsprint, distribution all will
decline
• CapEx has been cut drastically to 16.3 MM
 Value the Asset Agreement – TV
• What is reasonable TV growth rate
assumption?
• TV = FCF*(1+g)/(WACC-g) =
(19.2*(1+g))/(11.1%-g)
• Now compute NPV
• Reverse-Engineer: What TV growth is needed
to justify 142 MM valuation? -0.8%
• So, if long term growth is > -0.8%, Buffett will
make money
• Sensitivity Analysis
 Value the Asset Agreement –
Credit
• 45 MM revolving Credit facility
• Term loan of 400 MM
• Penny warrants
• Board Seat
 Value the Asset Agreement –
Credit
• If Term loan is priced correctly at 10.5%, it has
a value of 46 MM ( 400-354)
• Is 10.5% right risk-adjusted value on this loan?
• Remember: Loan will be made to a
restructured MEG
• Bond Rating for 10yr corporate bonds.
Currently CCC+ is at 10.26%
• Buffett is getting 10.5% (this has 5 MM value)
• Does it make sense to use CCC+ since it
reflects risk of a diversified company with
 Should MEG Accept?
• It rallied 33% on day of announcement
• Credit agreement is very expensive
• Might not be able to repay Buffett
Should MEG Accept? - Alternatives
• Find Another Buyer: Time and still will need to
refinance the loan
• Sell other Assets
• Restructure Existing Loans: Existing creditors
just renegotiated loan few months ago
• Sign a New Loan: Time limit and Adverse
Selection
• Sell Equity: Co will have to sell 75 mm shares
• Restructure Operations: Takes time. Co has
already laid off 40% people, cut
 What Happened?
• Deal happened!!