Buffet’s Bid for Media General’s Newspapers Harvard Case Solution & Analysis

Introduction

            The valuation of the Media General’s newspaper division has been performed in this paper. Media General newspaper had enjoyed considerable success over the years within the newspaper industry. The major businesses of the company within the newspaper industry include newspapers, television broadcasting and digital business. The company has just now entered into its maturity stage. There are around 18 TV stations and 64 newspapers of the company and with this rapid growth, the company has been serving the US market. However, the situation has now been worsening for the company and the numbers of the newspapers in circulation have fallen significantly and the sales in the newspapers industry have also fallen significantly. This was because by the year 2000, most of the popularity had been gained by the internet among the masses.

            As the sales of the industry were declining therefore, the profit potential of the industry was declining and the companies were losing market share in the US newspaper industry. The main source of the revenue for the companies in the newspaper industry is the advertising revenue and this had been falling for the industry by around 57% from the year 2000 to 2010. The revenues were continuously falling and the labor costs in the market were increasing which were eroding the profits of the companies. Due to this huge downfall of the US newspaper industry, the performance of many companies had been falling and over the period of past five years the revenues of Media General had fallen from $983 million to $616 million.

Diagnosis of the Problem

            The owners of the Media General were losing their position from the market and their profit margins were deteriorating significantly. Therefore, looking at this situation, the management of the company had put the company up for sale and there were many offers that had been received by the company to buy the newspaper division of Media General. However, when Warren Buffet’s Berkshire Hathaway had announced that it wanted to purchase division for a price of $ 142 million it was quite surprising. The company would be paying this purchase price and also provide the necessary financing to the company in a credit agreement. As soon as the announcement for this deal came into market the majority of the analysts got shocked and the company got mixed reactions from the market analysts.

            Some of the investors considered this investment as a surprise for them and some said that the decision to purchase the Media Newspaper division was being made by Buffet’s heart and not his mind. This was because of his close affection with the newspapers as at the time of his youth he was a paper boy. On the other hand, some of the analysts considered this deal as the feat of financial engineering. Overall, everyone wanted to know what was seen by Warren Buffet in the declining market performance of the US newspaper market. The main issue in this case is the valuation of MEG and performs an evaluation of the deal. A range of alternative strategies will also have to be analyzed, which could be opted by the management of Media General.

Analysis

            The purchase consideration that had been decided by the management of Berkshire Hathaway comprised of two parts. One was the purchase of the assets of the company and the second part was to provide the external financing to the company through a credit agreement. Through this credit agreement, the management of Berkshire Hathaway would provide the necessary financing to the management of Media General to repay the outstanding bank loan and overcome all the debt issues faced by the company.

MEG Division Valuation 

            Discounted cash flow method has been used in order to perform the valuation of the MEG division. The net operating profit after tax has been calculated for the company for the period of five years from 2012 to 2016. The financial projections for the MEG newspaper division have been provided in the exhibits. The tax rate of 35% as provided in the case has been used to calculate this. Once NOPAT has been calculated for the subsequent years, all the non cash expenses such as the depreciation have been added back...........................

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