Buffett’sBid for Media General’s Newspapers Case Solution & Answer

Buffett’sBid for Media General’s Newspapers Case Solution

Is MEG’s newspaper division worth $142 Million?

After the NPV analysis of MEG’s whole newspaper division, excluding Tempa Tribune, MEG’s newspaper division is not $124 million, therefore Berkshire must not pay more than $90 Million for MEG’s newspaper division, however this analysis is performed on the basis of forecasted data and on certain assumption which could vary in future but, the current assumptions and forecasted free cash flows are generating NPV of $90 Million.which does not justify the bid price. (Refer NPV workings).

Critical Assumptions for Making MEG’s NP Division $142 Million or More

Cash flow forecasts are not reasonable as through these cash flow forecasts,MEG’s newspaper division does not prove its worth of $124 million.

These cash flows must include the factor of the increase in revenue and the reduction in cost when more emphasis would be put for e-news rather than the newspaper for capturing the market. The G.P margin after the implementation of this strategy will increase due to the reduction in cost as well as the increase in sales which would be due to the increase in advertisement income from web pages.

The implementation of the e-news strategy will reduce the working capital requirement, and therefore the reduction in level of debt financing further lead to reduction in financial gearing and cost of debt. Moreover, reduction in cost of debt will reduce WACC and the cash flows will be discounted on reduced WACC, which will result in higher NPV, hence making the investment beneficial.

Furthermore, the reduction in the use of U.S news print and pulp, the assets used for printing could be sold for cash inflow or a higher depreciation charge could be made on them as they would be obsolete. The depreciation charge will increase the relevant cash flows, which, in turn, will help in making MEG’s NP division worth $142m ormore.

Also, if a new asset would be purchased (i.e. computers, servers and IT infrastructure), then the capital allowances could be claimed on them, making relevant cash flows much higher.

With the combination of all factors described above, the newspaper division of Media General may be worth $142 million or probably more.

Refinancing Of $225 MillionAs a Current Lender.

As a current lender (banking institution or debenture/secured notes holder), the chances for the refinancing proposal to the media general would be minimal, as the current lender already knows about the MEG’s financial condition along with the newspaper market condition. The current lender is already facing problems in recovering the previously lent loans and media general does not have any payment plans or successful strategy to payback these loans. Therefore, due to the probable foreseen bankruptcy/going concern issue of media general, the current lenders will be unwilling to refinance media general.

As a New Lender.

As a new lender, the chances of media general to get refinancing would be much higher.

New lender would also know the current condition of MEG, however the chances of getting higher interest rates (i.e. more than 11.25%term loan holder as compared to the current percentage of 11.25%) will motivate them to lend $225 Million…………………..

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