Buffet’s Bid for Meg Analysis

BUFFET’S BID FOR MEG ANALYSIS

Q1. Potential financing benefits

1. Probability of community newspaper

  Even the internet has a great impact on the traditional information, newspaper dominance in the community news. As the number of community newspaper companies is decreasing in the past few years, there may occur monopolistic newspaper company in one city. Currently, advertising contributes nearly 80% of most community newspaper companies' revenue (Morton, J., 2007). As the customer loyalty of community newspaper is relatively high, if the company is under good operation, it may generate stable and higher-than-expected return on investment.

2. Tax shield

  Since the revenue of newspaper industry has declined in recent years, the market value leverage ratio of newspaper industry has largely increased to 20%-40%. However, the debt-to-total ratio of Berkshire Hathaway (BH) is not as high as the Media General (MG), which means the leverage ratio of BH would decrease after acquisition. The increment of debt leads to the increment of interest payable, which is tax deductible and effectively reducing the net obligation of BH (Wrightsman, D., 1978). As a result, the increment of debt will produce tax shield and add the market value of BH.

3. Increase in value generation, market share and cost efficiency

  One of the obvious benefits is the cost efficiency. After BH makes an offer to buy 63 newspapers of MG, as the new and bigger company is formed, the joint company is able to create economics of scale which result in cost efficiency (Hitt, M.A., 2001). Such move will also lead to revenue enhancement and create more market shares for the joint company.

4. Side benefit.

  As Media is provided with a $400 million term loan and a $45 revolving credit facility, Berkshire would receive 19.9% share outstanding of Media General. It’s worth noting that the quarterly interest rate is as high as 10.5%, which means that when the loan due at 2020, if Media General pay the interests on schedule, Berkshire would recoup the capital outlay of $400 million.

Q2.

1. Whether the cash flow forecast is reasonable?

  In my opinion, the cash flow forecast is unreasonable. Over the decades of online era, with the invention of radio, television and computer, newspaper industry has faced huge challenges. Compared to the traditional print newspapers, the information provided by Internet is way more timely and accurate. (Herndon, K., 2012) As shown in Exhibit 10, the actual results of newspaper revenue for MG’s entire newspaper division has been decreasing during the period from 2007 to 2011. Although the absolute value of revenue growth rate has decreased throughout the five years, the prospect of newspapers industry is not promising. Therefore, we can draw a conclusion that the growth rate of 2% is unreasonable. The figure of cash flow forecasts for MG newspaper division is on Appendix 1.

  However, the cash flow forecast is rely on the results of growth rate and WACC. As the growth rate of 2% is unreasonable, we may draw conclusion that the cash flow forecast is unreasonable as well.

2. Assumptions:

  In the excel calculation part, I made some assumptions as follow:

Selected companies

  First of all, we have to select some comparable companies. Within these six companies, I choose A.H. Belo Corp. (A.H.) and Gannett Co. (Gannett). These two are pure newspaper company while the others may have some operation related to broadcasting, publishing or operating radio. Only when the company focus on newspaper field that they can be selected.

Debt-to-total ratio and asset beta

  As the market value leverage ratio of newspaper industry has largely increased to 20%-40% recent years, I assume the weighted average value of the selected companies is 30%. Under this assumption, the proportion of these two companies (A.H. and Gannett) is different. Through calculation, the weight of the A.H. is 11/41 while the weight of Gannett is 30/41, and this weight should be used as well when calculating beta. Under the formula of (11/41)*(calculated asset beta of A.H.) + (30/41)*(calculated asset beta of Gannett), the calculated asset beta of the industry is 1.40. The figure of calculated beta of A.H. and Gannet is on Appendix 2.