1-What are Buffett'sgoals in trying to buyMEG?
2-Is the newspaper division of MEG worth $142 million? Explain, supported by appropriate justifcation.
3-Howmuch value, for Buffett, is in the credit agreement? This is a tricky question because you have no analytic model designed for this question. Look carefully at the yellow-highlighted case exhibits for some guidance. Think of arbitrage. Think of the difference between borrowing and lending rates.
4-As an existinglender to MEG, explain whether or not you would refinance the $225 million term loan coming due. Think of the analytic modelingyou might do to answer, whether you do it or not.
5-As a new lender, explain the same question posed in #4 above. The same analytic modeling applies here too.
6-What are Morton's options? Advise him.
The two short articles in the panels below, aboutBuffett'snotorious Goldman-Sachs deal, instructs about Buffett'sdeal-making prowess.
Buffett’s Bid for Media General’s Newspapers 9-213-142 R E V : A P R I L 1 4 , 2 0 1 5 B E N J A M I N C . E S T Y A L D O S E S I A Buffett’s Bid for Media General’s Newspapers We’ve come to understand that most investors do not view the publishing sector as a place to generate the best returns on their capital. — Marshall Morton, CEO of Media General, 20111 With few exceptions, when a manager with a reputation for brilliance tackles a business with a reputation for poor economics, it is the reputation of the business that stays intact. — Warren Buffett, Chairman of Berkshire Hathaway, 19812 On May 17, 2012, Warren Buffett’s Berkshire Hathaway announced an offer to buy 63 newspapers from Media General Inc. for $142 million in cash and provide debt financing to the struggling firm. The announcement intrigued media analysts, but also raised many questions. For example, what did Buffett, the “Oracle of Omaha,” see in the declining U.S. newspaper industry that others did not? Was this a reasonable price for the papers? And, how would the deal affect Media General, a highly leveraged and diversified company whose revenues had fallen 31% in the past four years and whose stock price had fallen more than 90% in recent years? Facing a looming covenant deadline, CEO Marshall Morton had to decide quickly whether to accept the Berkshire offer. U.S. Newspaper Industry The U.S. newspaper industry, once the dominant source of news and information, saw most of its competitive advantage erode over the course of the 20th century as new technologies altered the landscape, beginning with the radio in the 1920s, television in the 1950s, cable news in the 1980s, and the Internet in the 2000s. As news and information became available in real time, if not on demand, readers looked to more immediate channels to stay informed. Declining circulation started in the late 1980s, continued into the 1990s, and then accelerated in the 2000s. After peaking at 63 million in 1973, daily circulation of newspapers fell to 44 million in 2011 (see Exhibit 1 for a history of circulation numbers). Falling circulation reflected the fact that more and more people were using digital sources to get their news and information. In 1990, there were more than 1,600 daily newspapers in the U.S.; by 2009, that number had fallen to around 1,300. And by early 2012, there were even fewer. Professor Benjamin C. Esty and Senior Researcher Aldo Sesia of the Global Research Group prepared this case. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School, and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2013, 2014, 2015 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800- 545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. For the exclusive use of E. Dione, 2020. This document is authorized for use only by Edouard Dione in FINA 6224-ON Summer1 2020 taught by NEIL GOODMAN COHEN, George Washington University from May 2020 to Jun 2020. 213-142 Buffett’s Bid for Media General’s Newspapers Newspapers were national, urban, or community publications. Nationals included USA Today and the Wall Street Journal. Some urban newspapers such as the New York Times and the Washington Post had national circulations, while others such as the Los Angeles Times relied on regional readership. Community newspapers had daily or weekly circulations ranging from 5,000 to 15,000 copies, served local markets, and made up the bulk of newspaper titles. According to a 2011 survey, 74% of people living in towns and small cities read a local newspaper at least once a week, and of those readers, over 80% relied on newspapers for local news and information.3 Among those with Internet access, 32% had visited the websites of local newspapers, up from 20% in 2005. Of those who had visited the websites, 6% said they had hit a “paywall”—a system that prevented access to web content unless the user paid a fee—suggesting paid online business models were still relatively new and unproven.4 When asked, 70% of survey respondents said it was very unlikely they would pay for content; 5% said it was very likely they would pay.5 Declining Profitability and Bankruptcy Newspaper revenues came from two sources: advertising (ad) and circulation, representing approximately 80% and 20% of revenue, respectively. Ad revenue came from classified advertisements (e.g., help wanted, real estate listings, and job listings), local retail ads, and national ads. Between 2000 and 2010, annual newspaper ad revenue declined by 57%, from $49 billion to $21 billion. Ad revenue from newspaper websites, in contrast, was growing, but it fell far short of the decline in print advertising (see Exhibit 2 for a history of ad revenue). Craigslist.org, a network of mostly free classified-advertising websites, had contributed to the sharp decline in newspapers’ classified-ad revenue. Circulation revenues came from both subscriptions and sales of single newspapers. As revenues declined, the most important costs were increasing. Wages, approximately 30% of revenues, continued to rise, despite the fact firms had laid off thousands of workers and outsourced news generation to larger organizations such as the Associated Press.6 In addition to rising wages, many firms also had large underfunded pension obligations. At 25% of revenues, distribution expenses were the second-largest cost and had risen with increases in oil prices. Purchases of newsprint (blank paper), equipment, and other raw materials were roughly 20% of revenues. Newsprint alone was expected to be 9% of industry revenue in 2012. The world price of wood pulp, the primary input to newsprint, had been volatile and rising in recent years (see Exhibit 3 for newsprint prices). The combination of declining revenue and rising costs led to falling margins and increasing leverage. Of the 11 publicly traded newspaper companies, the median EBITDA, operating (EBIT), and net income margins were 16%, 11%, and –2%, respectively, in 2011.7 In recent years, most U.S. newspapers had inadvertently become highly leveraged due to operating losses and asset write-offs, and had market value leverage ratios (debt-to-total value) well above their historic levels of 20%– 40%. This level of debt corresponded to an “A” debt rating from S&P. High leverage plus declining profitability soon led to bankruptcies. In fact, eight major U.S. newspaper companies filed for bankruptcy between 2008 and early 2010 (though nearly all emerged as reorganized companies), while hundreds of smaller papers went out of business or moved to web-only publications.8 The bankruptcies included: the Tribune Group, which owned the Chicago Tribune, the Los Angeles Times, and the Baltimore Sun; Philadelphia Newspapers LLC, publisher of the Philadelphia Inquirer and Philadelphia Daily News; and the Journal Register Company, which owned 20 daily and 159 other newspapers, including many community papers. By 2012, the value of many large newspaper companies had fallen dramatically, as illustrated by the Philadelphia Inquirer and Daily News. These 2 For the exclusive use of E. Dione, 2020. This document is authorized for use only by Edouard Dione in FINA 6224-ON Summer1 2020 taught by NEIL GOODMAN COHEN, George Washington University from May 2020 to Jun 2020. Buffett’s Bid for Media General’s Newspapers 213-142 papers had been sold three times in recent years: they sold for $515 million in 2006, $139 million in 2010, and only $55 million in early 2012.9 Media General Inc. Media General entered the newspaper business in 1850 as the Richmond (Virginia) Dispatch. Over time, it acquired a portfolio of other newspapers and diversified into television (TV) broadcasting and digital businesses (i.e., interactive coupon websites) primarily serving the southeastern U.S. (see Exhibit 4 for its geographic markets). As of 2012, it operated 18 TV stations and published 64 newspapers. Based on circulation, the largest newspapers were the Tampa Tribune, Richmond Times- Dispatch, and Winston-Salem Journal. The company also published smaller community papers (both daily and weekly) such as the Goochland Gazette, Culpepper Star Exponent, Hickory SuperBuzz, and other niche publications such as Gotcha!, which covered crime news and contained mug shots of criminals. (Exhibit 5 shows circulation data for Media General and its largest newspaper, the Tampa Tribune.) For much of the company’s history, the Bryan family ran the business and held a majority stake. J. Stewart Bryan, the fourth-generation owner, became CEO in 1990 and chairman in 2000. As of 2012, Bryan still held a controlling interest in the paper through the company’s Class B shares. The company’s 22.55 million Class A shares were listed on the New York Stock Exchange (NYSE). Its 0.55 million Class B shares were not publicly traded. Although the Class B shares had greater voting rights, they had similar cash flow and dividend rights as the Class A shares.10 Bryan, and the entire senior management team, received compensation consisting of a base salary, annual incentives, and long-term incentives, including stock options. (Exhibit 6 shows stock options granted to senior executives in recent years.) In 2011, the company’s top seven executives earned $6.1 million in compensation, while officers and directors held 2.42 million A shares and 0.47 million B shares.11 Media General’s performance started to deteriorate in 2007 as the industry began to change. After peaking at $983 million in 2006, total revenues fell to $616 million in 2011. But the decline varied by line of business. Whereas broadcasting was down 17% from 2007 to 2011, the newspaper division was down 43%. After a modest