Buffet’s Bid for Meg Analysis

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Growth rate

In Question 2 part b, assuming the cash flow forecast in Exhibit 10 is reasonable, since the data in Exhibit 10 shows that the growth rate of the forecasts results of cash flow of MG remains 2%, I use 2% as growth rate.

When I use 2% as the growth rate, the calculated NPV of news division is 179.5, which is higher than 142. In order to get the NPV result of 142, I use trail-and-error method to figure out the value of NPV. The NPV is slightly above 142 when using growth rate of -1.16% and the result is slightly below 142 when using -1.17%, therefore, the growth rate is somewhere between -1.17% and -1.16%. In other words, when growth rate is around -1.16%, NPV equals to 142. The graphs are on Appendix 3.

Therefore, we can draw the conclusion that when the growth rate is somewhere between -1.17% and -1.16%, the newspaper division is worth $142 million, if the growth rate is larger than -1.16%, the value of newspaper division is larger than $142 million.

Q3. The amount of money that Buffet drives from the credit agreement.

There are two parts of value that Buffet drives from the credit agreement, which is loan repayment, and the option. Here I will calculate these two values separately.

1. Loan repayment

There is a term loan agreement between BH and MG, BH would provide MG with a $400 million term loan. Since the discount of face value is 11.5%, BH’s initial payment of cash to MG is $354 million. However, the security interest is equal to the company’s existing senior secured notes. According to the figure of corporate bond yields (which is shown on Appendix 4), the annual yield of CCC+ bond is 10.26%, which means the quarterly yield is (10.26%/4)=0.02565%. Since there is a maturity of eight years, the number of repayments is 8*4=32. In the view of BH, the initial investment is $354 million, and there are 31 following repayments with the amount of each one is $10.5 million (400million*10.5%*1/4). However, the last repayment is $410.5 million. When calculating NPV of BH, I input these data in excel and used NPV formula to calculate the NPV of BH. The calculation process is on Appendix 5. Through calculation, the net present value of BH is $49.92 million.

2. Option

Compared to receive the money in the future, it is also profitable to get the money right now. Therefore, the warrants for MG’s shares exercisable right now. As MG’s stock price jumped from $3.14 to $4.18 on the day of the announcement, the money that Buffet drives from option can be calculated under the formula that ($4.18-$0.01)*4.65 million=$19.39 million. Therefore, the money Buffet drives from option is $19.39 million.

Overall, the total amount that Buffet drives from the credit agreement can be calculated as $49.92 million + $19.39 million=$ 69.31 million.

Reference:

Morton, J., 2007. Buffeted: newspapers are paying the price for shortsighted thinking. American Journalism Review, 29(5), pp.76-77.

Wrightsman, D., 1978. Tax shield valuation and the capital structure decision. The Journal of Finance, 33(2), pp.650-656.

Hitt, M.A., Harrison, J.S. and Ireland, R.D., 2001. Mergers & acquisitions: A guide to creating value for stakeholders. Oxford University Press.

Herndon, K., 2012. The decline of the daily newspaper: How an American Institution lost the online revolution. Peter Lang.

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Appendix 1: Cash Flow Forecasts for MG Newspaper Division

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Appendix 2: Calculated beta of A.H. and Gannet

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Appendix 3: Trail-and-error Method for Growth Rate Calculation

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Appendix 4: Corporate Bond Yields

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Appendix 5: Calculation Process of NPV

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