Buffet’s bid for Media General Harvard Case Solution & Analysis

Buffet’s bid for Media General Case Study Solution

Answer Number one:

Although the revenues and profits of the newspaper industry are declining but it doesn’t mean that there is no market for the newspaper. The decrease in the revenues does not means that the whole industry will go extinct. It can be said that newspaper industry is currently generating revenues more than many industries which provides Warren Buffet with a lucrative opportunity. It can be argued that his potential acquisition target is generating losses which can make the acquisition meaningless. However, by implementing appropriate strategies and policies, the losses can be converted into the profits as well and the revenues can be grown if the operations and strategic issues are properly managed. (Kitonyi, 2016)

In addition to this, the profit margins of the industry are expected to increase in the future because of the expected advancement of the technologies and reducing paper and other operating costs due to the anticipated reduction in the oil prices. It can be said that the Media General’s newspaper division will start to make profits after the couple of years which would enhance the idea of Buffet that this industry have some financial charm. Furthermore, the sales of the Media General’s regional newspaper are also expected to increase in the future as well which can make Buffet to take advantage from high profit.Moreover, some of the regional newspapers have high profit margins as compared to the national newspapers which can make the investment of Buffet financially feasible. (Das, 2014)

As Buffet have some investments in other newspaper companies as well and is targeting the Media General newspaper which can allow the management of the combined company to achieve significant economies of scale. Substantial financial savings will be achieved by combining the administrative, accounting and operational departments of those newspapers which can drastically increase the amounts of profits. Furthermore, the Media General have many investment properties which can provide buffet with large gains at the time of disposal thus, making the investment in Media General more justified. (Rushe, 2012)

Answer Number two:

The WACC of Media General is 4.81%, the WACC is calculated by adding the product of cost of equity and cost of debt multiplied by their respective weights. The total value of the Media General is 628.09 million and the value of media general after deducting the value of Tampa Tribune is $598.09 million. However, the valuation is based on certain critical assumptions and on the financial projections proposed by the management, little fluctuation in the assumptions can change the valuation analysis of Media General, the assumptions are as follows:

  • It is assumed that the financial projections made by the management are based on reasonable assumptions.
  • Market risk premium is assumed to be 6%.
  • It is also assumed that the terminal growth rate would be 2%
  • Debt Beta is assumed to be 0.20

Answer Number Three:

Penny Warrants:

It can be said that if Warren Buffet exercise the Penny Warrants, it would give him 4.65 million common stock of Media General which equals to almost 20% of the ownership stake in the company. As per the Black Scholes option pricing model, the value of each penny warrant is $1.19. On the other hand, the price of each warrant is likely to increase because of the fact that revenues and profits of the company is likely to increase after the acquisition of Media General by Berkshire Hathaway.

Loan Agreement:

Furthermore, the Berkshire Hathaway will also provide the Media General with a $400 million term loan and $45 million revolving loan, the loan proceeds will be used to repay the bank loan which is currently owed by Media General. 11.5% discount will be given by the Media General on the term loan which will make the effective loan receipts $354 million. The interest rate on the term loan would be 10.5% which can be considered very high and the interest will be paid in four times in a year, total 32 payments will be made in terms of interest by the Media General. The NPV of the term loan is $169.78 million if there would be no prepayments.............

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