Media General is a mature company which has a lot of business including newspapers, television broadcasting and digital businesses primarily serving the southeastern U.S. (Over 18 TV stations and 64 newspapers). While because of the popular of Internet from the 2000s, more than 300 daily newspapers disappeared and daily circulation of newspapers fell to 44 million in 2011, the U.S. newspaper industry is dropping. With the decreasing market, the profitability of newspaper industry is declining. Newspaper revenues came from two sources: advertising and circulation representing approximately 80% and 20% of revenue, respectively.
But between 2000 and 2010, annual newspaper advertising revenue declined by 57%, from $49 billion to $21 billion. Although advertising revenue from newspaper websites was growing, it fell far short of the decline in print advertising. And Craigslist.org, a network of mostly free classified-advertising websites, makes a big negative function in newspaper advertising.
At this time, as revenues decreasing, the costs of printed newspaper were increasing, such as wages, distribution expenses, equipment and other raw materials. The price of a ton of wood pulp is also higher than a ton of newspaper. The declining revenue and rising costs led to falling margins and increasing leverage, the EBITDA, EBIT, net income margins only were 16%, 11% and -2% in 2011, but the market value leverage ratios well above their historic levels of 20% to 40%.
As the result, eight major U.S. newspaper companies filed for bankruptcy. Within this declining market, Media General’s performance is also deteriorating, the total revenues fell from $983 million in 2006 to $616 million in 2011, and company lost money in each of the next four years. The company also faced to a large number of debts which the maturity dates is nearby. In this situation, Warren Buffett’s Berkshire Hathaway offered to buy 63 newspapers from Media General Inc. for $142 million in cash and provide debt financing to the struggling firm. Support-quant and QUAL analysis:
Terminal rate=2.0%
PV of Terminal=62.91
Total=67.11+62.91=130.01 million
From DCF model, we calculated the value of company, it is about $130.01 million. Then, we need to forecast the value of the offer.
Berkshire’s offer consisted of two inseparable parts, an asset agreement and a credit agreement. Total value of the offer is $142 million.
Solution & Decision
Strategy 1: Accept the Berkshire’s offer
From the part 2 calculated, we can see that the value of company is about $130.01 million, and Berkshire’s offer is about $142 million higher than the value of company. The offer’s Credit Agreement can cover the current debts of company, and its Asset Purchase part also provide $142 million cash which can make the company has a better operation and reduce the managers’ pressure. So the managers of Media General can accept this offer.
Strategy 2: Looking for other investor and restructure the company’s business
In this strategy, Media General’s managers need to find other investors, use the new debt to cover the current bank loan. Then restructure the business of company, developing the digital business such as electronic newspaper and news website, making the printed newspaper as local newspaper which should include more local news and information. As the result, this strategy will decrease the costs and increase the profit.
Strategy 3: Sell some parts of business
The managers can sell the printed newspaper part of business’ asset to cover the current debt, and develop its digital business. Restructuring the company and make it becomes an online newspaper company.
Strategy 4: Waiting for bankruptcy
Do nothing, just waiting for bankruptcy. Then the asset of company will be sold, the owner of company can get some money. In my opinion, I prefer the strategy 1.
