During 2012, billionaire investor Warren Buffett put in a bid to buy a United States newspaper in the southeast. This was a mere three years after he mentioned that Berkshire Hathaway, his most influential holding company, no longer had any interest in investing in newspapers “at any price.” “Very smart people looked at Buffett’s offer and wondered what he saw in the declining industry that others did not,” notes Benjamin Esty, professor at Roy and Elizabeth Simmons, along with Aldo Sesia, the senior case researcher of “Buffett’s Bid for Media Generals Newspapers,” which is a case study that is part of Esty’s first-year finance course.
The motivation of Warren Buffett is one of the factors that Marshall Morton, CEO and president of Media General has to determine as part of the case. With only eight days left to pay a $225 million loan that could trigger a serious default on a loan agreement that was amended, Morton needed to take a serious long look at trends in the industry, other strategic considerations, the overall numbers, the interests of shareholders, a number of different financing options that could help him come up with a plan to save his business.
Since Jeff Bezos of Amazon.com fame recently acquired the Washington Post, as well as John Henry – sports mogul – acquiring the Boston Globe, there’s been a tremendous amount of speculation regarding well-positioned investors making big bets on print media and its future. Esty believes this case is more powerful as a teaching tool as opposed to its topical appeal. “When asset values are declining as fast as they have been in the newspaper industry,” explains Esty, “you have to make a bet on the future: Do you have a viable business strategy, and if so, is it one of growth, of maintenance, or of decline? Given your beliefs about the future, you then need to design a financial strategy that supports your business strategy. Media General is a real-life example of topics that we cover in our finance curriculum such as valuation, financing, and risk management, and it brings together financial strategy and business strategy, a confluence that has long been a focus of my own research.”
This particular study outlines all of the various events that led to Morton considering Buffett’s offer to purchase 63 newspapers from the company that is highly leveraged, which also experienced a decline in revenue by 31% over the last four years and a stock price that plunged 90%. The summary also includes the diminished curriculum of it newspapers in the United States as well as advertising revenue over a ten-year stretch, as readers began tapping into more immediate new sources like the Internet instead of relying on print. Couple this with rising costs of paper, labor and printing, the decreasing revenues and increased leverage throughout the industry while creating falling margins.
By the time 2011 came to a close, Media General, who also has interests in digital media and TV broadcasting, had a high level of debt regardless of capital expenditure cuts and a deep workforce. It found itself in a situation that led the company CFO to doubt that Media General would be able to comply with its loan covenants. The company’s decision to sell its newspapers – that provided the ability to deliver the cash needed to comply with a time sensitive refinancing agreement – was announced to the world during February 2012.
“The company’s difficult circumstances brought to mind one of my favorite Buffett quotes,” shares Esty. “He once said: ‘With few exceptions, when a manager with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.’ That sentiment made his Media General bid even more intriguing as a case study topic.”
The offer made by Warren Buffett consisted of an asset agreement that would pay Media General $142 million for its daily and weekly newspapers as well as real estate holdings, plus a $400 million term loan credit agreement. When speculating about Buffett’s change of heart regarding the ownership of newspapers, Esty shows us that Buffett excluded the Tampa Tribune, the largest newspaper owned by Media General. “In retrospect, his targeting just the smaller papers is a big clue about his forecast for the industry. Unlike regionals or big-city newspapers, small-town newspapers don’t have a lot of competition or good substitutes.”
Even Buffett himself quipped during the time of the Media General deal (which did transpire) was announced, “In Grand Island, Nebraska, everyone is interested in how the football team does. They’re interested in who got married. They’re maybe even more interested in who got divorced.”