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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...

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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.

Answered Same Day Jun 23, 2021

Solution

Kushal answered on Jun 25 2021
119 Votes
Question 1
The reason Wa
en Buffet wants to buy the Media General business for $142 million in cash, is due to the sustainable demand of the newspapers in the local and regional areas. Recently Mr. Wa
en Buffet has invested in Omaha newspaper and regional newspapers like Iowa and Ne
aska. The industry has been changing at a very rapid pace and the consumer behavior over the period of time has changed significantly. The consumers are moving towards the digital media and print media has been dying a slow death. Even though their environment for the industry is not exactly favorable and Mandy companies have declared for the bankruptcies in the last 4 to 5 years after the global financial crisis, Wa
en Buffet has been optimistic around this business and believes that a sustainable revenue stream will ensure the profitability remains at the stable levels in the industry. The $142 million cash offer does only include assets and ignores all the pension liabilities and bank liabilities too.
On top of this, the Media General has to pay around $250 million in bank loans within a few days and they are cu
ently in the need of an immediate financing. This has provided Berkshire Hathaway another opportunity to get profitable terms by charging a very high interest rate on loans and extending a credit agreement to Media General. This will include a $400 million loan with a quarterly interest payment of 10.5 percent interest rate annually. This interest rate is higher than the other CCC+ corporate bonds. The loan will be issued at a discounted price of 11.5 percent and that will around $ 354 million cash will be provided.
Apart from this, Berkshire Hathaway will receive penny wa
ants which will be exercised, after a certain period of time, with a discounted price. We believe that Berkshire Hathaway's offer of $142 million is below the ideal market price and Mr. Wa
en Buffet will be acquiring this at a very low price with a huge discount. Since Tampa tribune is excluded from this agreement, the risk is lesser for Berkshire Hathaway as well.
These are the reasons why Mr. Wa
en Buffet wants to buy this business of Media General. The business is anyways on the verge of bankruptcy and hence, Berkshire Hathaway can extract a better price from a dying business.
Question 2
The worth of MEG business without Tampa Tribune
We can perform the valuation of the business by incorporating the DCF method and then subtracting the pension liabilities and the value of the Tampa Tribune.
We calculated the weighted average cost of capital. We used the capital asset pricing model for the cost of equity. Cost of debt was calculated by calculating the interest rate on the loan provided by Mr. Buffet
Pre Tax cost of debt = ( 1+ 10.5%/ 4)^4 - 1= 10.92%
Beta = 2.29
Cost of equity = risk free rate + beta * market risk premium
= 1.76% + 2.29 * 5%
= 13.2%
Risk free rate is the rate on 10 year government bond.
    WACC
     
    Pre Tax Cost of Debt
    10.92%
    Tax Rate
    35%
    Post tax Cost of Debt
    7.10%
    Cost of equity
     
    Beta
    2.29
    Market Risk Premium
    5%
    Risk Free Rate
    1.76%
    Cost of Equity
    13.2%
    WACC
     
    D/V
    84%
    E/V
    16%
    WACC
    8.08%
    Growth Rate
    2.5%
FCFF = EBIT * (1 – tax rate) – Capex – change in net working capital + Depreciation
This FCFF is calculated for the forecasted 5 years and then we have calculated the terminal value using the terminal growth rate and the WACC assumption.
Terminal Value = FCFF (2017 ) / (WACC – growth Rate )
= 29.7 * (1 + 2.5%)/ ( 8.08% - 2.5%)
= 545.66
We calculated the net present value of all this,
This comes around 482.77 million
Subtracting the value of the pension liabilities which is 223 million and 30 million of the Tampa tribune, we still get 229 million which much above the value paid by Wa
en Buffet.
     
     
    Forecast Results for the Year Ending 12/31
     Item
     
    2012F
    2013F
    2014F
    2015F
    2016F
     
     
     
     
     
     
     
    Newspaper Revenues
     
    $287.1
    $282.5
    $288.1
    $293.9
    $299.8
    Operating Profit (EBIT)
     
    $14.2
    $13.7
    $21.3
    $28.1
    $30.0
    Taxes
     
    0
    0
    0
    0
    0
    (-)Change Net working Capital
     
    -$0.6
    -$0.2
    $0.3
    $0.3
    $0.3
    (-) Capital expenditure
     
    $5.0
    $5.5
    $5.9
    $6.0
    $6.0
    (+) Depreciation
     
    $20.0
    $16.0
    $12.0
    $9.0
    $6.0
    Free Cash Flow to Firm
     
    $29.8
    $24.4
    $27.1
    $30.8
    $29.7
    Terminal Value
     
     
     
     
     
     $ 545.66
    Total Cash flows
     
    $29.8
    $24.4
    $27.1
    $30.8
    $575.4
    Firm Value
     
    $482.77
     
     
     
     
     
     
     
     
     
     
     
    Pension Liabilities
     
    $223.13
     
     
     
     
    Tampa Tribune Value
     
    $30.00
     
     
     
     
    Net Value
     
    $229.63
     
     
     
     
The intrinsic value of the assets purchased by Wa
en Buffet is around $230 million and he is extracting a great value out of it by only paying...
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