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

Introduction

            This paper attempts to value the Media Generals newspapers divisions. Media General had been in the newspaper industry and over the years the company had been enjoying considerable success. The company is now a mature company and has its business in a range of areas which include the digital business, television broadcasting and newspapers. The company has been serving the US market with around 64 newspapers and 18 TV stations. However, over the past few years, the US newspaper industry’s sales had been falling and the number of the newspapers in circulation has fallen significantly. During the 2000s, the internet had gained significant popularity among the masses.

 As a result of this, the newspaper market was slowly and gradually eroding and the profits of the industry were declining. The advertising revenue in the newspaper industry was the main source of revenue for the companies and this had been falling significantly by 57% between 2000 and the year 2010. The costs of the business especially the costs of the workforce were consistently increasing and the revenues of the companies were consistently falling. This all had a significantly negative impact upon the profit margins of the companies. Due to the decline in the overall industry, the performance of Media General had also deteriorated and its revenues had fallen from $983 million to $616 million over the past five years.

Problem Diagnosis

            The deteriorating position of the Media General had forced the management of the company to out the company on sale. As a result of this, the management of the company had received a number of offers. However, the most surprising offer came from the Warren Buffet’s Berkshire Hathaway when they had announced the offer to buy the Media General newspaper division for $ 142 million. Along with this asset purchase agreement, the company would also be providing the required debt financing to the company. However, as soon as this deal was announced, the company got mixed reactions from the analysts of the industry and the investors of the company.

 Some considered this investment as the feat of financial engineering while some of the investors were considered with this announcement. Some of the investors also said that Buffet was making this decision with his heart and not his head as he was also a paperboy at the time of his youth. Overall, all the investors and analysts were interested to know what Buffet had seen in the declining newspaper market of US. Therefore, the main problem in this case is to value the Media General newspaper division and evaluate the deal and also evaluate the range of the alternatives that are available to the management of Media General for whether to accept the deal or choose other alternative.

Analysis

            The consideration that was offered by the management of Berkshire Hathaway to the owners of Media General newspaper division comprised of two inseparable parts. These two parts were the purchase of the assets of the company and the second part comprised of the credit agreement under which Berkshire Hathaway was to provide the financing to Media General to overcome its debt issues and repay its outstanding bank loan.

Buffet’s Bid for Media General’s Newspapers Case Solution

Valuation of MEG Division

            The valuation of the company has been performed on the basis of the Discounted Cash Flow Method. The financial projections for the Media General newspaper division have been provided in exhibit and using that information the net operating profit after tax has been calculated for the subsequent five years from 2012 to 2016. The tax rate has been provided in the case which stands at 35%. After calculating the net operating profit after tax for all the years, the depreciation expense has been added back as it is a non-cash expense.

 Furthermore, the incremental capital expenditure investment and the incremental investment in net working capital has also been deducted to arrive at the free cash flow for each of the years. The terminal value for the years 2017 and on wards assuming that the Media General newspaper division would continue for the foreseeable future once it has been acquired by the management of Berkshire Hathaway has been assumed to be 2%. This is a modest assumption which has been assumed by looking at the ability of Berkshire Hathaway of turning other acquired newspaper companies from declining performance to profitable performance. All of the cash flows have then been discounted at the division’s weighted average cost of capital to calculate the division value........

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