Buffett’s Bid for Media General’s Newspaper Harvard Case Solution & Analysis

Buffett's Bid for Media General's Newspaper Case Study Solution

Question 1- Why does Warren Buffet want to buy MEG’s newspaper division?

Warren Buffet who is also known as Oracle of Omaha, has shown interest in the newspaper firm leading to intense speculations in the business world as to what the investing mogul has seen in the rapidly depreciating MEG. It can be said that the investing tycoon is planning on gaining the advantage from the firm by analyzing the areas which will give him more return than his initial investments. The probable which he can obtain from the acquisition have been discussed in more detail throughout the case outlined below.

Question 2- Is MEG’s newspaper division worth $142 million?

As the profits and the stock prices of the company have fallen, then so has its ratings. The constant fall in the profits have led to fall in investors’ interest hence leading to low capital being available for expenditure. This have caused the firm’s assets to decrease both in size and value leading to the fall in the overall business value of the company. Currently MEG’s value is estimated to stand at $53 million while the amount proposed for take-over is $142 million which is way higher than the current actual worth of the company.

Exhibit 1: Comparison between actual value of the firm and the proposed bid.

Question 3- Deriving Value from Credit Agreement.

Determining value from credit agreement is one of the most complex problem associated with this bid. This is because the company is operating in the industry which usually do not attract investors and this company would have been the same, except for the fact that it got attention of one of the leading investors of this era. This contradictory information has led to creation of various speculations about what interest does the leading business tycoon have in the firm and what does he seeks to obtain from this venture. However if we look at the value that can be derived from the credit agreement we can conclude that there is a very slight gain for the investor. The NPV derived from the credit agreement stands at $144 million which is $2 million above than the proposed bid of $142 million. So this $2 million higher value can be said to be the gain from the acquisition.

Buffett’s Bid for Media General’s Newspaper Harvard Case Solution & Analysis

Exhibit 2: Value derived from credit agreement

Question 4- The $225 millionLoan Term and The Refinancing Option.

Given that the profitability and share price of MEG has taken a downward spiral the new lease of life available to the newspaper firm can be said to be the loan agreement included in the proposed bid. The possible default of the company’s upcoming loan repayment of $225 million would result in the debt crisis for them. On the other side the loan which can be obtained in case of the proposed bid stands at $400 million payable in 32 installments at the rate of 11%. The NPV of the loan stands at $232 million, meaning that the loan agreement is highly favorable to the flailing firm. Furthermore the firm has also been provided with the option of the 11.5% discount.

MEG will find it hard to refinance the loan because of falling profits and stock prices which will impact the investor base of the company adversely. In this situation, if the penny warrants option, proposed in the bid, is exercised then the company will gain some leverage and be some flexibility in the face of probable debt crisis that may arise from default.

Question 5- Options available to MEG’s CEO Marshal Morton.

With rapidly falling profits and stock prices the CEO of MEG faced an uphill task of getting back the company on track either by accepting the proposed bid for take-over or by implementing dramatic changes to turnaround the flailing situation of the company. Given that the company has fallen into dire conditions, the most suitable course of action for Morton would be to accept the proposed bid. The profitability has fallen and the investors’ interest is dwindling fast resulting in no financial back out for the company. It will be unable to refinance the looming debt and there is a huge risk that it will trigger a debt crisis.

The CEO will have to declare bankruptcy in case of default. Furthermore he will have to depend on equity financing which will be very hard to obtain due to fall in the stock prices of the company. Restructuring the debt cycle would not be feasible for him due to lack of funds. This means that he will have to sell his newspaper and broadcasting divisions to the bidders.

On the other side the bid proposed by Warren Buffet has created ripples in the financial world, who are speculating the main reason which attracted the leading investor’s interest. For Morton the current options include either refinancing the debt by taking more loans, which will be hard to obtain given the situation of the company. The other option would mean a complete strategic and structural up-gradation of the firm which would again be costly and require financing. Furthermore the company has managed to gain the interest of one of the leading investors and should avail the option of going through with the deal of selling itself to the investing mogul....................

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