Buffett's Bid for Media General's Newspapers
Posted: 30 Apr 2015
Date Written: April 15, 2015
On May 12, 2012, Warren Buffett’s Berkshire Hathaway announced an offer to buy Media General’s (MEG) newspaper division for $142 million in cash and provide debt financing to the struggling firm. Reactions from investors and industry analysts varied: one called it “a huge surprise,” another wondered if Buffett was investing with his heart rather than his head (he was a paperboy as a child), and a third said it was a “feat of financial engineering.” Virtually all of them wondered what the so-called Oracle of Omaha saw in the declining U.S. newspaper industry that others did not.
Media General’s CEO Marshall Morton had to decide whether to accept the offer and under what terms. As the head of a highly leveraged company whose revenues had fallen 31% in the past four years, whose stock price was down more than 90% off its high, and whose falling profitability left it perilously close to violating key debt covenants, he had to move quickly.
Although this case was written for an introductory corporate finance course, it is also appropriate for advanced corporate finance, mergers & acquisitions, and valuation courses. The case has four learning objectives. First, it provides a compelling and contemporary setting to value a business unit using discounted cash flow (DCF) analysis. The twist here is that the target industry (newspapers) is declining and changing (going online). Second, and relatedly, it illustrates the link between business strategy and finance. The particular challenge is to calculate cash flows and an appropriate terminal value given the industry dynamics. Third, it illustrates the financing challenges (and potential distress costs) facing managers of highly leveraged firms, and the role played by liquidity providers such as Warren Buffett. Finally, it provides a comprehensive review case for a wide range of topics including valuation analysis, optimal capital structure; bank lending; option and bond pricing; and risk management (hedging).
Keywords: Mergers and Acquisitions (M&A), Valuation, Capital Structure, Financial Distress, Financial Strategy, Risk Management, Bank Lending, Bond Pricing, Option Pricing, Cash Flow, Newspapers, Media & Broadcasting, Corporate Restructuring, United States, Warren Buffett, Berkshire Hathaway
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