Buffett's Bid for Media General's Newspapers

Intermediate Financial Management (FIN 632)
Professor Ajay Patel
Yiyun Zhang
Due December. 7th, 2020
Buffett’s Bid for Media General’s Newspapers
Executive Summary
Through careful analysis and detailed valuation of the newspaper division of Media General
(MEG), $243.61 million (without Tampa Tribune), we concluded although the offered price of
$142 million is lower than what it was worth, considering the urgent nature of the loan repayment
and declining profitability and poor performance of MEG and the newspaper industry this is a
proper deal under current situation. Few people are willing to invest in newspaper industry and
Buffett is one of them. This offer allows Buffett to acquire 63 newspapers and their real estate
holdings with a low price and to gain an interest revenue beside the $400 million loan principal.
MEG, on the other hand, can avoid a default of loan repayment and focus on the broadcasting and
digital media divisions.
Case Problem
Being in a declining industry, MEG experienced significant decrease in revenue of newspaper
division at 43% and overall operating losses for the recent four years. With increasing tendency of
several important costs like wage and distribution, future of newspaper division is dim. Another
threat is the high debt-to-value ratio of 84%. A total of $658 million debt and $225 million of them
need to be paid within eight days. Berkshire Hathaway (BH) offered $142 million for 63
newspapers and a $400 million term loan with several other credit agreements. MEG need to
evaluate the value of newspaper division to decide is the offering price acceptable and its ability to
cover the interest and repay the loan. Possible other options should also be analyzed.
Case Context
Widely used digital equipment and the development of technology changed the prosperity of
newspaper industry. More than 300 newspapers disappeared, and daily circulation dropped which
led to a declining revenue. As revenue declined, costs increased due to higher labor expenses and
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Intermediate Financial Management (FIN 632)
Professor Ajay Patel
Yiyun Zhang
Due December. 7th, 2020
increasing in oil price and raw materials. Industry level operating margin fell, and leverage
increased. MEG was also facing these problems. BH on the other hand, after Buffett claimed
newspapers have value and acquired several newspapers in Iowa and Nebraska, offered $142
million for 63 newspapers of MEG. Most of them are community newspaper and has competitive
advantage of local news and information which is a match with BH’s acquisition strategy. For
MEG, significantly dropped revenue of newspaper division and capital expenditure cut in recent
years made selling the newspaper division an option to repay loans. Detailed reasons to accept this
offer and analysis of other options for MEG will be elaborated in following sections.
Case Analysis
BH’s offer consists two part: asset purchase agreement and credit agreement.
First part is the acquisition of 63 newspapers and their real estate holdings at $142 million. This
acquisition not only expands BH’s investment in newspaper industry with newspapers of same
category, but also brings real estate in 63 cities and towns. Estimated value of these 63 newspapers
is calculated and compared with the offer price of $142 million. Discounted cash flow method was
used, and several key assumptions are made. 10 years U.S. treasury yield of 1.76% is chosen as the
risk-free rate. Considering newspaper industry is declining, but according to Buffett it has
irreplaceable value, 10 years will be an appropriate time constraint. Since debt beta and risk
premium are given by MEG, a cost of debt can be calculated using CAPM method of 2.96%. As
for debt-to-value ratio, only data given is the firm level debt-to-value ratio of 84%. Considering
recent industry situation of high leverage and most U.S. newspapers have a debt-to-value ratio
above the industry historic level of 20%-40%, a 50% debt-to-value ratio is assumed and a
sensitivity analysis is conducted to test WACC under different assumptions. An equity beta is
calculated using comparable companies. Two companies that are unrelated with newspaper
industry, Beasley Broadcast Group and Saga Communications, are excluded. Equity beta of the rest
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