Warren Buffett’s Media General Warrants Shine

As LIN Media and Media General work towards merging together in order to form the second-largest TV broadcasting company in the United States, Berkshire Hathaway continues to make a considerable amount of money off of a newspaper deal that it made with the company back in 2012.

In 2012 during the month of May, Berkshire Hathaway purchased 63 newspapers from the media conglomerate for a total of $142 million in cash. It also agreed to provide a $400 million term loan to the TV broadcaster and a revolving credit line worth $45 million. The company needed this in order to help repair its balance sheet.

As part of the purchase of this newspaper and the Media General loan, Berkshire Hathaway was the recipient of penny warrants for approximately 4.6 million of the company’s Class A shares, which equated to roughly 20% of their outstanding stock at the time.

Berkshire’s 10.5% interest rate loans, as well as the warrants, paid off very quickly.

During the third quarter of 2012, Berkshire Hathaway converted its Media General penny warrants into common stock, based on SEC filings.

During August 2013, Young Broadcasting and Media General came to an agreement for a merger that refinanced the outstanding debt of the company at much lower interest rates than the Berkshire Hathaway deal. As part of the refinancing, Media General took out at $885 million loan on a seven-year term with an interest rate of LIBOR plus 3.25% with a 1% LIBOR floor. They also took out a $60 million revolving credit facility for five years.

This deal looks to have cut the financing costs of Media General by roughly 50%, and it paid off nicely for Berkshire Hathaway as well.

The company used this refinancing to repay revolving loans worth of $30 million plus $301.5 million in term loans that were outstanding under the Berkshire Hathaway deal. It also provided Berkshire Hathaway with a $43.8 million prepayment premium. Berkshire still retained its common stock in Media General as well. The warrants themselves have paid off quite nicely, and continue to rise in value as the company continues to consolidate in the merger announced with LIM Media this past Friday.

At this time, Berkshire Hathaway is the fifth largest investor in Media General, and Berkshire has not sold any of it shares since picking them up in May 2012 through the warrant agreement. This stake, which probably came at very little cost to Berkshire Hathaway, is worth roughly $85 million.

When the company came to the financing agreement and newspaper sale with Berkshire Hathaway, their shares were trading just below four dollars each. Shares are currently trading at $18.44, after going up more than 400% in 2013 as the company continued to pursue lower-cost financing and consolidation.

Berkshire Hathaway is now a significant investor in Media General. They even acquired a TV station based out of Miami for $365 million as part of a Graham Holdings stock swap that might allow Berkshire Hathaway to exit its investment in The Washington Post without having to pay any taxes.

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